Roots of evil (wonkish)

The problem is that the support for this growth is very cheap energy. Cheap oil is history. Those who see infinite growth as sustainable are delusional. You are much smarter than I am but even “slack capacity” won’t help this situation. We are headed for a total transformation in the way we live our daily lives.

B-

Yes, real GDP has a unit root, but the rate of growth does not, meaning that whatever rate of growth we had, in the past we have still recovered towards that average. If history is any guide, we will recover.
And, well, unemployment, too, does have a unit root (at least on postwar data), that is we have seen periods of persistent unemployment. There is no tendency for unemployment to magically disappear (same with capacity utilization, which is jus the same as unemployment, just inverted –plot it).
But what’s important is that unit roots have no forecasting content besides “if history is any guide…”. In particular, econometrics does not tell us when we will recover. Don’t ask the CBO: they have no vision beyond 2014 (or 2013), so they assume we will go back to the baseline…

Out of curiosity, why do you define 73-95 as slow growth? These years look no different on a chart of GDP growth as a percentage than the other years other than they have are relatively stable years without wild fluctuations. If anything, I would group ’83-’99 together. In those years, there was only one garden variety recession with regular growth rates.

Wonkish – My point is if I were to integrate percentage growth over that time period, I would bet that the growth would be similar to other periods while also being more uniform and less taxing to the average worker.

I mean this as a serious question from a layman.

Paul, is it always true that unemployment has to revert to old levels? Maybe the new world economy requires specialized labor, and the current unemployed workers would not be able to fill those jobs because they don’t have the required education. If so, it could take many years (or maybe forever) for unemployment to fall, and GDP would not show rapid rebound growth…

Yes Dr. Krugman, but both you and Mankiw ignore the real world facts that in the future there will be higher taxes, and huge budget deficits to finance which will raise interest rates. Both of these facts, as opposed to theoretical debates (root-schmoot who really cares?) will depress our economic growth in the future making the probability of fast growth in the future less likely, even with the excess capacity waiting on the sidelines.

First, as I see it, we have no alternative to the stimulus and the Geithner financial plans. They have the least damaging unintended consequences.

But as to the recovery, and Republican disingenuousness notwithstanding, I don’t see a zooming recovery either. Not unless we accelerate some kind of domestic manufacturing and business development model.

When we came out of the Great Depression, we were gearing up for manufacturing of all kinds of consumer durables that would turn the postwar period into the longest stretch of economic growth until Clinton.

I don’t see how a nation that has no manufacturing can make a dynamic recovery. At the very least we should have a market tax. A “pay-to-play” tax–if you want to take materials abroad, make products and bring them back into the country, into the most lucrative market in the world.

A modest entry tax on all these products across the board would raise about $145 billion which could be used to develop new industries and jobs that could not be outsourced.

If we accelerated the retrofitting of American vehicles, expanded hybrid and plug-in manufacture and alternatives to corn-based ethanol and “clean coal” techniques, we would have a start on reinventing our industrial base.

Otherwise, it is going to be a long, long recovery. The financial sector does not employ large numbers of the kinds of people who grab their lunch buckets and wash up before driving home.

I am a total lay-person in these matters, but this post is effectively taking on something that David Brooks wrote in his column today, right? Brooks feels that Obama’s budget is much too optimistic in it’s prediction of economic growth over the next two years, but you and Mankiw feel that it’s probable?

As a liberal with a small skeptical streak, I’m predisposed to believe Brooks assertion, but I’d love to know that it’s likely to be wrong.

Gotta put those assets to use somehow. When people are ready to buy what that capacity will produce, it will all even out. Even if the new economy requires that capacity to produce something different. The conversion cost to produce that something different may be the very thing standing in the way if our growth it seems.

That fast growth could seemingly be accelerated if Americans’ sorely lacking economic education were countered by chalk-board sessions with President Obama and a Nobel Laureate – sessions helping people make economic decisions that get the most macro-bang for their spendable bucks. Since half the U.S. population was born after 1976 they have no frame-of-reference that does not include the tax-cutting, supply-side, “voo-doo” economics which has so spectacularly failed.

The mind-set that exists in many business commentators, who usually give themselves away by saying “Obama” in one sentence, then “President Bush” in the next, cannot be counted on to do such economic education. They have descended into axe-grinding rants, wanting an RTC-type facility that would wipe the slate clean at the banks, and provide low-hanging fruit for hedge funds to pluck. They are blinded to the fact that the S&L crisis had actual hard assets to dispose of – this time Wall Street has created a virtual mountain of paper with synthetic values on which to calculate virtual profits used to extract cold hard cash bonuses. There are very few hard assets to put into an RTC-type facility, which means the solution will be different this time, and will take time to un-wind.

Dollars are indeed on the side-line and will come back in when confidence is restored, which will cause home prices to stop declining. Americans know they have been lied to and fleeced and have seen the hard-won 1990’s once-in-a-lifetime budget surplus squandered. Until it is as least as hard to register as a hedge fund manager as it is to get the Nevada Gaming Commission to license a craps dealer in a Vegas casino, investors will know where their money is safest.

A noted psychologist, Abraham Maslow, wrote, in Toward a Psychology of Being, “capacities clamor to be used.” In the model recovery cited most often as support for a variety of arguments, the United States came roaring back from the Great Depression on the strength of manufacturing capacity, as well as ability to ramp up the capacity to wartime levels. Our *man*power capacity was not so great; hence the great opportunity granted to women — Rosie the Riveter. Our materials capacity was not so great; hence the enormous recycling on the household level, of oils and metals. Our industrial capacity was not, as now, capable of both wartime and peacetime production.

After WWII my family did not have any excess capacity, as my father lost his job designing aircraft, and the riveting jobs were also gone, for my mother. That is to say, there was a wrenching shift from wartime economy to civilian economy, aided by women staying home, education of surviving soldiers, and the growth of advertising, producing a fairly stable decade in the fifties.

The contribution of the Great Depression programs were primarily in maintaining workforce capability — the ability of men to work at government projects, maintain self-esteem, and nourish the habit of work. Women — more than recognized, I believe — also worked, at far smaller hourly wages than men, creating the capacity for women to become defense industry workers (riveters and others) during WWII.

My argument, then, is first that there was less excess capacity at the onset of WWII than we might think, so that excess capacity now will not “clamor to be used” in a WWII-like recovery.

Second, I would argue that the mechanism of adjusting the capacity of the workforce by the call to women to join the workforce in WWII, and the equally strong call for women to return to the home, following the war, is somewhat less likely to be successful today. At least I hope so.

How does an excess-capacity model apply to global and U.S. recovery today? I am reminded of a model of the way the housing bubble crippled development of other kinds of industry, and an analogous view that there is a “government-bailout bubble” propping up bad companies and crippling more stable companies in the process.

It seems to me that excess capacity — e.g., a glut of already built houses — does not bring us out of depr/ecession. To do so, we need innovative uses for the capacity we have, and the ability to ramp up vocational and post-secondary education to meet the demand for retraining for new jobs — to make potential capacity actual. Otherwise, economics remains a dismal science.

In the end, Maslow’s theory indicated that capacities that clamor to be use follow a developmental path that came to be called self-actualization — and then got popularized and bastardized and what all.

An outline, Dr. Krugman, of what the world (or United-States) developmental path toward the actualization of the capacity would be helpful.

Thanks in advance.

Sigrid Peterson, PhD Counseling/Clinical Psychology
PhD Academic Study of Religion

Paul-

Perhaps excess capacity could produce the kind of GDP numbers of which you are speaking, but with so much money going to the government in taxes, and later on interest, how’s this capacity to be tapped? Isn’t there an offsetting crowing out effect?

The best I can see out of this discussion is to discover who is less wrong; not to intriguing.

Thomas A. Coss
Mission Viejo, CA

If this were a bunch of factories closing down then capacity exists that can be restored. Banks closing down with worthless assets as collateral don’t have capacity to revive. Their wealth was not productive capital, it was debt derivatives. Once the collateral is gone, they are pieces of paper with no claim on productive capital. The wealth tied to those enterprises has been destroyed and is irrecoverable.

You can inflate it back so people have paper money to equal their old bank accounts, you tax the rich until there are no more rich people, but you cannot recover the wealth that was lost.