Tuesday, August 31, 2010

Paul Krugman's Optimism

Via eschaton, Why Paul Krugman Is Perhaps The Biggest Economic Optimist There Is.
If his premise is correct -- that basically we're suffering from a demand slump, but that there's no fundamental, structural economic flaw -- then, folks, we have a very solvable problem on our hands. The bond market certainly isn't an imminent impediment to our spending, and the Fed will scarf up whatever it needs to on the debt side.

Bottom line: Paul Krugman thinks the solution to the economic malaise is fairly simple, and thus he can't think the slump is fundamentally that bad. He's an optimist.
But that optimism raises a few questions:
  1. Is it desirable to go back to the status quo ante? Is our future really best served by relying upon the nation's wage earners spending every cent that they earn, and then some, in order to consume goods increasingly produced overseas? Shouldn't we consider laying a more reliable foundation for the nation's economic future?

  2. Is it sustainable to return to the status quo ante? Aren't we simply setting ourselves up for another crash, once the world's economic machine turns back to sating the American consumer, demand for oil spikes, oil futures skyrocket, and gas goes back to $4+/gallon? Even if we assume that we can go back to the way things were for a few years or decades, what then?

  3. Is it possible to go back to the status quo ante? With due respect to people like Robert Samuelson who seem to believe that the nation's only problem is a lack of consumer confidence ("What, me worry?"), and we can "fix" the world's problems by dropping the typical consumer's savings rate back to about 0%, where will consumers get the kind of money they were spending before the crash? Are lenders again going to be profligate? Are we going to reinflate the housing bubble? Will the significant population of displaced workers with marginal job skills to be absorbed back into the job market by a revitalized economy, or should their continued plight be viewed as irrelevant to recovery?

It may be that in the short term, going back to "the way things were" is the best way to get the economy moving, but we had better start developing and implementing a long-term strategy. (Yes, I expect to be saying that right up to the point something unpleasant hits the fan and we have to act.)

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