Krugman v. Summers

Felix Salmon has published an interesting summary of a debate in Canada last night featuring Paul Krugman and Larry Summers (more here, herehere and here).  The question presented was whether “North America faces a Japan-style era of high unemployment and slow growth.” Krugman thinks so while Summers does not.  As described by Salmon, the heart of the dispute was as follows.

They both quoted Keynes as diagnosing “magneto trouble” — the engine of the economy is broken, and it needs to be fixed. Summers has faith that, in Churchill’s phrase, “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities” — the right thing, here, being to fix the magneto with expansionary fiscal and monetary policy. Krugman, by contrast, sees political gridlock as far as the eye can see, and says that it doesn’t matter how innovative or philanthropic or demographically attractive the U.S. is — if you don’t fix the magneto, the car won’t start, and America’s magneto ain’t gonna get fixed any time soon.

Not surprisingly, I think they’re both wrong and think that David Rosenberg (who was aligned with Krugman for the purposes of the debate) is much closer to the truth than his partner is.  Krugman remains convinced that a the problem with the stimulus implemented so far is that it wasn’t nearly extensive enough.  In his view, much greater borrowing and spending would fix what ails the economy (to be fair, I agree with Krugman that political gridlock will make any solution requiring a political contribution likely to fail). As he wrote in The Return of Depression Economics and the Crisis of 2008, “A recession is normally a matter of the public as a whole trying to accumulate cash (or, what is the same thing, trying to save more than it invests) and can normally be cured simply by issuing more coupons.” 

The question, then, is if this time is “normal” or if the problem is so severe that a few “coupons” won’t do the trick.  Rosenberg is in the “so severe” camp.  He thinks that we’re at the beginning of a massive and worldwide deleveraging that will be necessary before we see substantial economic improvement.  In his view (and that of people like Ken RogoffSteve Landsburg, McKinsey and me), you can’t fix an over-indebted economy by piling even more debt onto it. 

We simply cannot expect people to start spending more when (a) they’re trying to get themselves out of hock; (b) they continue to perceive themselves as financially at risk; (c) the house they have (which may be underwater) cannot be expected to appreciate nearly enough to bail them out; and (d) they keep hearing and seeing why they need to be saving more for the future (especially for retirement) rather than spending.

The News is Bad

The monthly jobless report came out this morning and was weaker than expected.  Unemployment held steady at 9.1% and no net new jobs were created in August.  Crucial questions going forward will include what President Obama’s jobs plan/speech will offer next week, what (if anything) the Fed might do now (or soon), and what (if anything) the Fed can do. Surely, the economic news remains lousy.

Did the stimulus work?

Ezra Klein took a look at the best research on the subject to take a look at whether the federal economic stimulus plan worked as advertised.  Klein concludes that the evidence suggests that the stimulus helped somewhat.  But that conclusion is not clear and unequivocal.

Did the Stimulus Work?

Generation Vexed

The front page of the Business section of Sunday’s Los Angeles Times featured an noteworthy story on the challenges facing young adults today, which the Times calls “Generation Vexed.” Amidst so much economic uncertainty, many are rethinking career plans, putting off marriage and avoiding the stock market.