Krugman "On the edge"

Paul Krugman is a Nobel prizewinning economist, who teaches at Princeton University and writes a column over at the New York Times. Here is Krugman's latest column on how the U.S. economy will continue to burn as Washington politicians dither:

A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.

It’s as if the dismal economic failure of the last eight years never happened — yet Democrats have, incredibly, been on the defensive. Even if a major stimulus bill does pass the Senate, there’s a real risk that important parts of the original plan, especially aid to state and local governments, will have been emasculated.

Somehow, Washington has lost any sense of what’s at stake — of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.

It’s hard to exaggerate how much economic trouble we’re in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world.

Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now. Developers of commercial real estate, watching rents fall and financing costs soar, are slashing their investment plans. Businesses are canceling plans to expand capacity, since they aren’t selling enough to use the capacity they have. And exports, which were one of the U.S. economy’s few areas of strength over the past couple of years, are now plunging as the financial crisis hits our trading partners.

Meanwhile, our main line of defense against recessions — the Federal Reserve’s usual ability to support the economy by cutting interest rates — has already been overrun. The Fed has cut the rates it controls basically to zero, yet the economy is still in free fall.

It’s no wonder, then, that most economic forecasts warn that in the absence of government action we’re headed for a deep, prolonged slump. Some private analysts predict double-digit unemployment. The Congressional Budget Office is slightly more sanguine, but its director, nonetheless, recently warned that “absent a change in fiscal policy ... the shortfall in the nation’s output relative to potential levels will be the largest — in duration and depth — since the Depression of the 1930s.”

Krugman then brings up a major worry that, as Americans continue to pull back from spending, the U.S. economy could go into a deflationary spiral, where decreases in prices lead to lower production of goods, which leads to lower wages and employment, which leads to lower demand for goods, leading to further decreases in prices. Krugman believes that the U.S. economy is on the edge of a deep, deflationary cliff. We have certainly seen how the housing bust has forced millions of Americans to lose their homes, the plummeting stock market has wiped out a quarter of the value of Americans' retirement plans, and how Americans have quickly cut back on their spending. Companies have slashed their prices during the holiday season, only to see a "red" Christmas. And we have seen how companies have cut almost 3 million American jobs over the past year, as they have gone into a survival mode of production--or non-production, as they've attempted to slash inventory off their shelves. If a deflationary trend continues, the U.S. economy could become a walking zombie from a George Romero movie.

And the Washington politicians fail to grasp the severity of deflation as they continue to bicker over President Obama's economic stimulus plan.

Krugman also writes:

Would the Obama economic plan, if enacted, ensure that America won’t have its own lost decade? Not necessarily: a number of economists, myself included, think the plan falls short and should be substantially bigger. But the Obama plan would certainly improve our odds. And that’s why the efforts of Republicans to make the plan smaller and less effective — to turn it into little more than another round of Bush-style tax cuts — are so destructive.

So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.

It’s time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation’s future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.

Krugman believes that, while the Obama stimulus plan may not be perfect, the plan is good enough to keep the U.S. from plunging over the deflationary cliff. Krugman is angry that the Obama administration has spent too much time playing bipartisanship with the Republican congressmen, only to see that the Republicans demand that Obama eviscerate the stimulus plan for more GOP tax cuts that Krugman believes will fail to stimulate the U.S. economy. Krugman then slams MSNBC's Joe Scarborough, saying that the Senate vote on Arizona Sen. John McCain's alternative stimulus plan, based entirely on tax cuts that the Republicans supported, saying that the GOP plan was "completely crazy." From ThinkProgress:

Today on MSNBC, the Morning Joe team — many of whom have been having a tough time with the facts of the economic recovery plan — hosted Nobel Prize-winning economist Paul Krugman to discuss the bill. Krugman began by emphasizing the severity of the current economic crisis. “This is not your father’s recession,” Krugman said. “This is your grandfather’s recession. This is something that is closer to what we went through in the 30s.”

Krugman criticized opposition to the “pork” in the recovery plan, calling the obstruction “irresponsible” and “ludicrous. He noted that it’s “a few billion dollars in a $900 billion plan. …They’re picking out small punctuation errors and saying ‘oh this whole thing is wrong.’” Krugman added, “This is the kind of situation where you try to build a bridge across an economic chasm and if you build half a bridge it doesn’t work.”

Yesterday, the Senate defeated (but most Republicans voted in favor of) an alternative plan offered by Sen. John McCain (R-AZ) that centered mainly on massive tax cuts. Krugman called the plan “completely crazy” and an indication of a failure of bipartisanship:

KRUGMAN: Look at what just happened, we had a proposal I think it was McCain’s proposal for an economic recover package, his version of it which was all tax cuts, a complete, let’s do exactly what Bush did, have another round of Bush-style policies. After eight years which that didn’t work and we got 36 out of 41 Republican senators voting for that which is completely crazy. So how much bipartisan outreach can you have when 36 out of 41 republican senators take their marching orders from Rush Limbaugh?

And here is the video of Krugman slamming Joe Scarborough, via YouTube:



More to come on this economic stimulus debate.