Krugman agrees with Larry Summers that we may be in a permanent slump:
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.
Why might this be happening? One answer could be slowing population growth. A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off. America’s working-age population rose rapidly in the 1960s and 1970s, as baby boomers grew up, and its work force rose even faster, as women moved into the labor market. That’s now all behind us. And you can see the effects: Even at the height of the housing bubble, we weren’t building nearly as many houses as in the 1970s.
Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away.
Why does all of this matter? One answer is that central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt, which run along the lines of “It may not be a problem now, but just wait until interest rates rise.”
More broadly, if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics — in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off — for a long time.
I know that many people just hate this kind of talk. It offends their sense of rightness, indeed their sense of morality. Economics is supposed to be about making hard choices (at other people’s expense, naturally). It’s not supposed to be about persuading people to spend more.
But as Mr. Summers said, the crisis “is not over until it is over” — and economic reality is what it is. And what that reality appears to be right now is one in which depression rules will apply for a very long time.
Interesting article; an unusual combination of bullseyes and total misses.
Bullseye – “…And what that reality appears to be right now is one in which depression rules will apply for a very long time…”
Yup. Read a couple of columns by James Howard Kunstler, John Michael Greer, or Herman Daly. Call it what you will – the long emergency, ‘a world made by hand’, a plea to adopt policies of a steady state economy. Provided that you draw your resources from a finite world – if you start drawing down your resource capital, as opposed to the “interest” on your resource base – you will eventually reach a point where contraction must occur.
Total miss – “…Why might this be happening? One answer could be slowing population growth…”
No, no, and no. The reason this is happening is because the “growth”, powered by $ 10-20/barrel oil, is gone forever. All the trips into suburbia to build all those houses was fired up by cheap petroleum, a practically forced “need” to buy a car and drive it forever and ever to get from strictly residential areas to some “zone” where commerce was allowed to happen, and do it over and over again.
The cheap oil is gone. The world you could create as long as oil was $ 10/barrel cannot even be sustained, and certainly not expanded upon, when oil goes to $ 90-100/barrel.
More people “demanding” more houses at prices their beaten down wages cannot afford, in locations too scattered to be at all realistic given today’s reality, is not an answer at all.
In a finite world of finite resources, when you exhaust your resource base – in some cases known as “Nature” – what goes up must come down.
And we’re heading down, like it or not, until a new balance is restored between resource base and demand.
How long has it taken for the Industrial Revolution taken to use enough of the resource base to arrive at this point? About 200 years. How long will the decline continue? About 200 years – if we are incredibly lucky – and things like the Fukushimas of the world do not act on their own to further exacerbate resource destruction.
But the Fukushimas of the world will likely do just that. So, maybe turn that 200 years into 2000 or 20,000 years given the various toxic nuclear penalties we’re going to impose on ourselves.