The myth of spontaneous economic recovery

[Kurt_and_Hunter]

Shorter version: Bubble induced down-turns are not business-cycle events that correct themselves. Bubbles are deflation-inducing and depression-making events requiring active and ginourmous responses

Slumps and spontaneous remission

So, how does this all end?

I’ve been saying for a long time that this isn’t your father’s recession — it’s your grandfather’s recession. (I actually used the phrase about the last recession, too.) That is, it isn’t something like the 1981-82 recession, which was brought on by the Fed to control inflation, and ended when the Fed decided that we had suffered enough. Instead, it’s like the 1929-33 recession — or the recession of 1873-1879 — a slump brought on by the collapse of an investment and credit bubble. And monetary policy, at least in its conventional form, has already reached its limits.

Now, the Great Depression was ended by massive fiscal expansion, in the form of World War II. Maybe that will happen again; but so far policy seems inadequate to the task, and the political environment raises concerns about whether we’ll be able to do much more.

So we may end up waiting for the economy’s ills to go into spontaneous remission. Which raises the question, how does that happen?...

...Well, as we’ve now learned the hard way, a sufficiently severe bubble-bursting pushes you into the liquidity trap, and makes the aggregate demand curve more or less vertical...

http://krugman.blogs.nytimes.com/2009/02/17/slumps-and-spontaneous-remission-wonkish/

[Kashka-Kat]

1. its NOBODY's recession - as Thom Hartmann is fond of pointing out

in the past we had enough of a manufacturing base that when the bubble burst there was something left to revive. In the last 10-20 yrs weve had an economy based not even on services but fantasy financial transactions based on... nothing (derivatives market est at 60 x the gross natl product of the entire freakin world) There is no bailout possible for a collapse of that magnitude.

I think I got the jist of what Thom H sez - pls correct me if Ive mischaracterized.

[enough]

2. Krugman's next paragraphs seem to be saying something different.

As I read it, he's saying he thinks there WILL be spontaneous recovery, but not for the reasons usually stated. He does not refer to the "myth of spontaneous recovery."

quote from the article>

Instead, recovery comes because low investment eventually produces a backlog of desired capital stock, through use, delay, and obsolescence. And eventually this leads to an investment recovery, which is self-reinforcing.

And what do we mean by use, delay, etc.? Calculated Risk had a nice piece on auto sales, which I find helps me to think about this concretely. As CR pointed out, at current rates of sale it would take 23.9 years to replace the existing vehicle stock. Obviously, that won’t happen. Even if the desired number of vehicles doesn’t rise, people will start replacing vehicles that wear out (use), rust away (decay), or just are so much worse than newer models that they’re worth replacing to get the spiffy new features (obsolescence).

As autos go, so goes the capital stock. In the long run, we will have a spontaneous economic recovery, even if all current policy initiatives fail. On the other hand, in the long run …

end quote>

[Kurt_and_Hunter]

3. Yes, but that is offered with some irony (as to what 'recovery' connotes)

The point is that absent intervention recovery from this kind of event comes only in the form of people replacing essentials that wear out... that demand for cars, for instance, will be created by old cars ceasing to run.

It is offered as a bitter and somewhat ironic thing... that the natural mode of "recovery" would take decades, not reach former highs and is generally something none of us think of as recovery.

Thus the bitter jest at the end, playing on the old observation that we are all dead "in the long run"

[mikekohr]

4. A HISTORY OF RECESSION IN THE UNITED STATES 1950 TO 2008

Written by: mike kohr 2/12/2008

There is a pattern here that is plain to all but the most partisan. Ten of the last eleven recessions have occurred under the direction of Republican economic policy. And history does repeat itself. Look at the three greatest slowdowns in US economic history, 1929*, 1982, 2008, all three were attributed to poor economic and tight credit policy, all three featured deregulation and lack of oversight of the financial markets, and all three were presided over by a Republican President.

Recession/Depression of 2008 George W. Bush(R) Greatest downturn since 1929, blamed on lack of regulation of financial markets and collapse of credit markets

Recession of 2001 George W. Bush(R) Began in April of 2001, marked the beginning of greatest deficit spending in all of recorded human history

Recession of 1990-1991 George H.W. Bush(R) Deregulation of Savings and Loan industry led to a collapse and panic, which led to election of Bill Clinton, who produced the greatest increase in jobs and wealth in all of recorded human history

Recession of 1981-1982 Ronald Reagan(R) At the time, the most severe contraction of economy since the Great Depression, massive deficit spending/deregulation of markets, and tight fiscal policy in an effort to kill inflation were blamed for this downturn **

Recession of 1980 2nd & 3rd quarters Jimmy Carter (D) Shortest and least severe slow down, generally attributed to Iranian Revolution and increase in oil prices, led to the election of Ronald Reagan

Recession of 1973-1975 Richard M Nixon(R) OPEC’s increase in oil prices and massive spending in the escalation of war in Vietnam led to stagflation, the second economic crash of Nixon’s administration

Recession of 1969-1970 Richard M. Nixon(R) Credited to Nixon’s escalation of and massive spending in Vietnam War and OPEC’s increase in price of oil

Recession of 1960 -1961 Dwight D. Eisenhower(R) Noted for high unemployment, low GDP, high inflation JFK ended the recession by stimulating the economy 10 days after taking office

Recession of 1957-1958 Dwight D. Eisenhower(R) Eisenhower achieved the dubious distinction of achieving a second economic downturn on his watch, a record later matched by Richard M. Nixon, and George W. Bush

Recession of 1953 Dwight D. Eisenhower(R) Increased outlays to National defense and restrictive credit policies blamed for this downturn
---------------------------------------------------------------------------------------------------------------------------------------------------------------

*The Great Depression of 1929 Herbert Hoover(R) Lasted for 10 years, blamed on Hoover’s economic policy and lack of regulation of financial markets
** “The Reagan Recession” which ran from the 4th quarter of 1981 thru the 1st quarter of 1982 is often categorized as starting under Carter’s watch during the 2nd & 3rd quarters of 1980. By the end of the 3rd quarter of 1980 that brief recession had rebounded. Starting in the 4th quarter of 1980, 3 of the next 4 quarters produced increased GDP. Reagan’s tight fiscal policy and massive deficit spending contracted the economy again in late 1981, producing unemployment of 10.8% and prime interest rates that hovered between 15% and 20.5%

http://recession.org/history
http://en.wikipedia.org/wiki/List_of_recessions
http://www.sjsu.edu/faculty/watkins/rec1980.htm
http://en.wikipedia.org/wiki/Economic_history_of_the_United_States#Deregulation:_1974.E2.80.931992


NOTE RECESSION OF '60-'61. Kennedy is credited with ending it 10 days after taking office by increasing spending to stimulate the economy. Great Depression ended by FDR's stimulus of economy.
The current stimulus bill also is focussing resources aimed to develope alternate sources of energy that would reduce or eliminate our dependance on cheap foriegn energy, a partial or primary cause of the '69-'70, '73-'75, '80, and 2008 recessions.

[Beetwasher]

5. Love Krugman, And He's Playing His Role NICELY, HOWEVER

His points would be absolutely spot on IF there were no more stimulus coming. There will be, count on it. There will be the omnibus/spending bills that are part of normal government business, that's an opportunity for MORE stimulus. There will be healthcare reform; more stimulus. There will be transportation bills, there will be the mortgage relief bill, etc.

I believe Obama is fully cognizant of what Krugman is saying an he KNOWS more is needed, but the political reality is you can't get it ALL done immediately. This bill is the immediate, emergency stop gap w/ more coming.

Krugman's impatience is understandable, and may in fact be an "act" of sorts. He's the pressure coming from reality land (and he's smart enough to know that); someone running around with their hair on fire. And we need that. Obama needs that to USE when he's negotiating w/ the Clowns on the hill. Don't think for a second O's NOT aware of what Krugman is saying and NOT dropping the name of the Krugman the Nobel Laureate to the Fools on the Hill.

[grantcart]

7. I agree 100%. His appearence on countdown seemed a more reasonable

political tact.


Obama is using the largely consensual agreement that most economists have that strong and sustained stimulus is what is needed.

[grantcart]

6. BTW Krugman's last appearence on Countdown was very interesting

He seemed to address the point that we have been discussing, that politically there are limits on how much you can ask for in the initial stimulus package. More will be needed (again he doesn't give an exact number) somewhere in the neighborhood of 500 billion of true stimulus.

His evaluation of the stimulus bill as being 90% (?%) stimulus was also interesting. His tone seemed to have changed.

[Beetwasher]

8. It's A LEAN MEAN BILL

Which I think means it will be MORE effective than people are giving it credit for. There is pretty much NO PORK in it, which is pretty much UNHEARD OF!! And as long as there is effective oversight of the funding, contracting etc., it should be very effective.

[Kurt_and_Hunter]

10. He seeks to retain maximum influence

It is equally reasonable to suppose that Krugman does not accept the entirety of the supposed political realities and believes the thing was badly mishandled but once the vote is held there's no point dwelling on the thing.

Bitching about any aspect of stimulus 1.0 after it is passed would merely reduce his influence. He only criticizes Obama in ways that have the potential to alter future developments. (Though his most recent blog entry suggests he is nearing the end of his rope so that might change.)

He wants team-Obama to desire to quiet him (via policy shifts) but not to alienate them. It's a fine line. I appears to me that he publicly under-stated his thinking about the size of the stimulus for months to keep about 400 billion ahead of the evolving Conventional Wisdom. It was clever and quite useful. Had he come out in September with his unvarnished opinion of at least 1.5 trillion (which I believe he held at least as early as September) it would have sounded wacky and reduced his influence on the actual package. So he kept shading it... he developed a narrative of the stimulus in his columns that was quite effective in maintaining constant upward pressure.

The refrain "Krugman doesn't understand politics" is an irony since everything he does in the blog, op-ed and TV world is cleverly and transparently political. He's quite good at it, right down to the "awe-shucks, I'm just an academic" bit, suggesting that he is not politically shrewd. (And some buy it at face value, for some reason.)

[grantcart]

11. I agree that he is trying to have maximum influence on public dialogue

and he takes positions that are designed to move the debate ala Fredrick Douglas and Lincoln.


Your understanding of his political strategy is the most charitable possible, which doesn't make it incorrect.


I find the 'all or nothing - now or never' irritating and undermining a more objective analysis.


The initial stimulus package isn't going to be the last one and if Obama shows that he used the initial money with real effect and real jobs he can count on getting one more Senator and passing more.


There are also other ways that the government can stimulate the economy besides a stimulus bill, and all will be needed because your projection of damage done is not understated. Bringing back the troops from Iraq will, as one example, have a significant stimulus effect. His energy package will be almost entirely stimulus in nature. Krugman seemed to be of the opinion that all of the stimulus had to be wrapped up into a single bill.

[Life Long Dem]

9. They were in the Great Depression when they needed to vote out the Republican's...

to get anything passed. And we know how that could be.

I think the control we have today is a clear advantage over the Great Depression. Besides we waited long enough as it is.