Pump, Baby, Pump
January 9, 2009
Speaking of today’s NY Times, Paul Krugman’s op-ed just begs for a comment.
[Actually, I haven't spoken of the NY Times, because the article where I mention it hasn't been written yet. But you've already read that article that I haven't written, because postings on blogs are displayed in reverse chronological order, so that article appears before this one. Wait, I'm getting dizzy. I'd better sit down.]
Anyway, the piece concerns Krugman’s belief that Obama’s proposed stimulus package is a good start, but is woefully short of what’s needed by the economy. I think what he’s really saying is we have to reinflate the bubble.
I read Paul Krugman even though many times I don’t agree with him. He’s an eminent economist, his writing is lucid, and I usually learn something new every time I read his stuff. I do wish he’d stick with economics and avoid the purely political rants.
And I get impatient if he has too many columns in a row where he just whines without offering a specific solution. But none of those problems arose today.
Here’s where I fall off the wagon:
Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.
And the Obama plan is nowhere near big enough to fill this “output gap.”
Yet by his own admission, Krugman believes that the economy that we had a year or two ago was an unsustainable balloon. To quote:
The fact is that the U.S. economy’s growth over the past few years has depended on two unsustainable trends: a huge surge in house prices and a vast inflow of funds from Asia. Sooner or later, both trends will end, possibly abruptly.
So our national output rose to meet a demand that is unnatural. Our ability to produce has outstripped our natural ability to consume. Why, then, is he suggesting we try and ramp demand up to that pre-crisis level?
Our problem isn’t that the pump needs to be bigger. It’s that the balloon we’re trying to reinflate is too large. You don’t grow the economy to a level that’s an aberration without suffering contraction as things revert to the mean. There’s no pain-free recession.
Now maybe I’m missing something. If so, somebody explain. Maybe that $15 trillion/year figure was less than our pre-crisis demand, and so Krugman’s large suggested figure is OK. But it still seems to me that his remedy would simply set us up for some rather painful oscillations somewhere down the road.
And that assumes at least a modicum of fiscal stimulus is a good idea. Others disagree. For me, the jury’s out on Keynes. But as I said recently in “Tiny Bubbles“, to try and pump that balloon all the way up again is a recipe for disaster.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Entry Filed under: Market, Miscellaneous. .
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by Michael Mauboussin
1.
Pat, Westport CT | January 10, 2009 at 1:10 pm
I think the real fallacy in the economic stimulus plan is the belief that we should be producing more of the same things we did before – that no one is consuming. Has anybody suggested we put some stimulus dollars into innovation? – or are we relegating that role to universities and post graduate geeks who put up a laboratory in thier garage?. Maybe we need to give stimulus money to parents of engineers and bio-scientists so they can encourage thier kids to work at home and create NEW. How about giving a stimulus package to teachers so we can have bright young people offering “services” that the rest of the world actually wants – instead of attitude that no one wants.
To me its less about re-inflating the bubble than what bubble we are trying to reinflate.
2.
Flora | January 12, 2009 at 1:02 pm
I think Krugman has addressed this apparent contradiction in at least one other column. If I understand him correctly (and maybe I don’t), he believes that the current economic situation is so dire that we have no choice but to to do whatever we can to increase spending (that is, re-inflate the bubble). If we don’t do this short term, he believes we could face an economic disaster. Long term, however, he advocates deflating the bubble slowly and trying to get away from bubble-based economics.
3.
Scott Berry | January 13, 2009 at 2:13 pm
Pat,
Good comments. Clearly we need new and different things (one reason for the encouragement of fuel efficient cars and renewable energy investment). But much of what you suggest is not going to bear fruit for some time, as useful as it might be.
I think Obama’s going to find an awfully tricky balancing act between immediate relief and longer-term investment, whether in traditional industries or some new paradigm.
4.
Scott Berry | January 13, 2009 at 2:20 pm
Flora,
If that’s true, I’m a little more relieved. But I’d still like to see some projections of the worst case/best case damage under several scenarios. Perhaps that’s thought to be too complicated for the average joe, I don’t know.
If we “under rescue” now, how much worse and how much longer does the economy stay down? Is there a severity vs. length tradeoff? If so, let’s see it spelled out so we can make an intelligent decision about it. We might be better off with a longer, less severe recession. Or maybe the reverse is better.
Or maybe, as Krugman seems to be saying, that if it get’s TOO severe it’ll pass some theshold and become much longer lasting as well?
Like I said, I’d like to understand the possible projections that he and others have–knowing, of course, that none of these forecasts are likely to be accurate anyway. But somehow I’d feel better about the debate if I knew the underlying assumptions.