Krugman has two perspectives for us this week that are worth a few minutes of our time.
In "Averting the Worst" (copy attached), Krugman's point is that what kept us from a second Great Depression was "Big Government". He qualifies his position about us being "saved" with an emphasis that I have continued to espouse in this blog: the economic situation remains "terrible". The U.S. has lost 6.7 million jobs since the recession began - if you include a growing working-age population, we are probably 9 million jobs short of where we should be. And, the job market hasn't turned around - that slight dip in the measured unemployment rate last month was probably a statistical "fluke". What we can celebrate, as Krugman points out, is that things are "...getting worse more slowly."
With that as a "qualifier", Krugman goes on to point out that what saved us is the very different role played by "government"..."Probably the most important aspect of the government's role in this crisis isn't what it has done but what it hasn't done: unlike the private sector, the federal government hasn't slashed spending as its income has fallen (State and local governments are a different story). Tax receipts are way down, but Social Security checks are still going out; Medicare is still covering hospital bills; federal employees...are still being paid."
He goes on to point out that "All of this has helped support the economy in its time of need, in a way that didn't happen back in 1930, when federal spending was a much smaller percentage of GDP. And, yes, this means that budget deficits - which are a bad thing in normal times - are actually a good thing right now." This parallels a point made by Krugman's fellow Economics Nobel winner Joseph Stiglitz last week on CNN, and referenced in a prior post here, that "deficits" are sometimes needed, especially if they can create "assets" useful to the economy.
Last, Krugman points out that, while he has consistently argued that the Obama stimulus plan is not enough (and we have logged that here), he feels that "reasonable estimates" suggest around a million more Americans are working now then would have been employed without that plan. So, "big government" has made a difference.
In our second attachment, we reference a double book review by Krugman in Sunday's (8/9) NY Times. While some would argue that we don't need another book on the financial crisis, Krugman sees Justin Fox's "Myth of the Rational Market" as different because it focuses not on the errors and abuses of the bankers but on the "professors" who enabled those abuses under the banner of the financial theory known as efficient-market hypothesis. Krugman's review is a refreshingly brief but relevant perspective on the growth of financial theory in the academic world including the critical voices of Robert Shiller (who has become famous for predicting both the Internet crash and the housing bust) and Lawrence Summers (now a senior official in the Obama administration) who began a paper thus: "THERE ARE IDIOTS. Look around."..."And a whole counterculture emerged in the form of 'behavioral finance', which argued that investors are irrational in predictable ways." But, the sheer scope of "efficient markets hypothesis" allowed it to brush off these challenges. Krugman's review, alone, is worth the "read" let alone the book he refers to.
Krugman's second review is on "The Sages" by Charles Morris and he connects the two books thru the successes of Warren Buffet, George Soros and Paul Volker described in the Morris book. After reading both books, Krugman concludes that little will change on Wall Street where there has always been an appetite for complex strategies that sound clever. So, the myth of the "rational market" isn't going away anytime soon. My guess is that Krugman's review is better than the books he was "reviewing" but I'm fascinated by his support for Fox on his position that those professors, who were lavishly paid (for their "credibility") to design complex financial strategies, played such a crucial role in the worldwide financial crisis. For me, it would make the Fox book worth reading.
Today (August 14, 2009), the NYT reported some good news and some bad news.
ReplyDelete(1) all that massive government debt spending did not cause a rise in inflation, consumer prices held steady for July
(2) on the other hand, unemployment numbers were revised to 14.5 million unemployed, i.e. the "why" inflation is flat
Professor Hazzard was totally correct in his assessment that last months dip in unemployment numbers was a statistical fluke. Actually, it was a sampling error, bad math.
We need to stop pointing fingers and start developing long term solutions.
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