I am dee-lighted to inform the 17 people who still read here that it appears that Paul Krugman has gotten a second clue about what happened (and continues to happen) to the U.S. economy. You may recall that I wrote the original post Paul Krugman Gets A Clue! near the end of 2012. And here it is, less than a year later, and Paul is dazzling us with astonishing insight once again. I may have to revise my opinions about the man. This second clue occurs in his recent New York Times column A Permanent Slump?
Mr. [Larry] Summers went on to draw a remarkable moral: We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles.
I’d weigh in with some further evidence. Look at household debt relative to income. That ratio was roughly stable from 1960 to 1985, but rose rapidly and inexorably from 1985 to 2007, when crisis struck. Yet even with households going ever deeper into debt, the economy’s performance over the period as a whole was mediocre at best, and demand showed no sign of running ahead of supply.
Looking forward, we obviously can’t go back to the days of ever-rising debt. Yet that means weaker consumer demand — and without that demand, how are we supposed to return to full employment?
Again, the evidence suggests that we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing.
How many times did I tell you this stuff? Lots of times. For example, see my post Economic Growth Fanatasies. But enough about me. I am nothing, insubstantial, of no consequence, a hapless man of no distinction. On the other hand, Paul Krugman is a colossus of contemporary economics!
FYI, we are now in the 18th year of The Bubble Era.
Now, it matters not that Paul goes on to completely misunderstand why this is happening. Nor does it matter that Paul stole this new clue from Larry Summers.
Rome wasn't built in a day
If you want even more insight, it is worth watching Aaron and Henry discuss Larry and Paul's "thesis" at Has The U.S. Economy Entered a 'Permanent Slump'? And I quote—
Where is the money supposed to come from to drive spending?
It doesn't come from wages, and it doesn't come from government handouts ...
And ... it doesn't come from consumers borrowing...
and if we're not borrowing enough money, we can't have economic growth!
Precisely. Where the fuck is the money supposed to come from?
Well, if you blow a bubble or two (or seven), you can create the appearance of a healthy economy in which wealth and income are growing, at least for a short while until the shit hits the fan once again.
Dave, I read the article and puzzled over what he was trying to say. It seems like he is trying to accept what is going on, but he brain is still wired incorrectly and he cannot truly understand. I mean here he is, saying that flat may be the new normal, but he still hasn't repudiated his concept of needing debt to grow, then needing growth to pay back the debt. Who'd a thunk a Nobel Prize winner could lack any common sense?
Posted by: John D | 11/19/2013 at 11:01 AM