Krugman On the Economy

http://www.nytimes.com/2012/01/23/opinion/krugman-is-our-economy-healing.html?_r=1&nl=todaysheadlines&emc=tha212

***************

"Some of my best thinking has been done by others!" (John C. Maxwell)

***************

I've been waiting for Krugman to weigh in on some of the positive numbers that are coming out on the economy. I'm guessing he's picked now to talk about this because the President's "State of the Union" message is tonight.

Krugman characterizes the state of the economy as "terrible." Three years after President Obama's inauguration and two and a half years since the official end to the recession, unemployment is "painfully" high.

(Most recently, the Texas unemployment rate broke below 8% to, roughly, 7.8%. Anything down is progress and I'm happy to see it.)

Krugman goes on to say that the two great problems at the root of the slump - the housing bust and excessive private debt - are finally easing.

The housing bubble (2000 thru 2006) began deflating almost 6 years ago and prices are back to 2003 levels. So, why don't people buy? Answer: because the current depressed state of the economy leaves many people who would normally be buying homes unable to afford them or too worried about job prospects to take the risk.

Krugman suggests the implication that there may be a "virtuous cycle" in store: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further and so on. And, there's some support for that: home sales are up, unemployment claims are down, and builders' confidence is rising. Private debt has declined in dollar terms, and declined substantially as a percentage of GDP since the end of 2008.

Krugman refers to a recent report from the McKinsey Global Institute (MGI) that tracks progress on"deleveraging" (the process of bringing down excessive debt levels). It documents substantial progress in the United States which it contrasts with failure to make progress in Europe. And, as Krugman carefully points out, European policy makers have been worried about the wrong things; in particular, the European Central Bank has been worrying about inflation - even raising interest rates in 2011, only to reverse course later in the year - rather than worrying about how to sustain an economic recovery.

Back to the U.S. situation: Krugman's guarded optimism is just that: "We have already suffered enormous, unnecessary damage because of an inadequate response to the slump. We have failed to provide significant mortgage relief..." when we could have. Both Krugman and Warren Buffet pointed out at the very beginning of the worldwide economic crisis that not enough money was being thrown at the problem here in the U.S.

Any optimism is better than no optimism at all. Thank you Paul Krugman.