Krugman yesterday, and I’ve been thinking this for a while:
Too much of the economic commentary I’ve been reading seems to assume, however, that that’s really all we’ll need — that once a burst of deficit spending turns the economy around we can quickly go back to business as usual.
In fact, however, things can’t just go back to the way they were before the current crisis. And I hope the Obama people understand that.
The prosperity of a few years ago, such as it was — profits were terrific, wages not so much — depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the pre-crisis years isn’t coming back either.
This is what the broader public doesn’t understand. The party’s over - though Krugman does suggest that there are roads back:
A few months ago a headline in the satirical newspaper The Onion, on point as always, offered one possible answer: “Recession-Plagued Nation Demands New Bubble to Invest In.” Something new could come along to fuel private demand, perhaps by generating a boom in business investment.
But this boom would have to be enormous, raising business investment to a historically unprecedented percentage of G.D.P., to fill the hole left by the consumer and housing pullback. While that could happen, it doesn’t seem like something to count on.
A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on U.S.-produced goods, we could get to full employment without a boom in either consumption or investment spending.
The problem there is twofold; first, as Krugman notes, export growth has stalled because of the rise of the dollar. But there’s another reason it’s stalling: the possibility of protectionism.
I’m not opposed at all to the idea of protectionism here at home, though of course U.S. protectionism triggers protectionism everywhere else.
