Friday, October 17, 2008

Krugman: Economic slump "nasty, brutish — and long"

by Bill McBride on 10/17/2008 09:30:00 AM

Nobel prize winning economist Paul Krugman writes: Let’s Get Fiscal

Just this week, we learned that retail sales have fallen off a cliff, and so has industrial production. Unemployment claims are at steep-recession levels, and the Philadelphia Fed’s manufacturing index is falling at the fastest pace in almost 20 years. All signs point to an economic slump that will be nasty, brutish — and long.

How nasty? The unemployment rate is already above 6 percent (and broader measures of underemployment are in double digits). It’s now virtually certain that the unemployment rate will go above 7 percent, and quite possibly above 8 percent, making this the worst recession in a quarter-century.

And how long? It could be very long indeed.
And Krugman argues for more government spending:
[T]here’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.

And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case.
At the start of the Depression, President Hoover kept trying to balance the budget - by cutting spending and raising the top marginal taxes from 25% to 63% - while the economy kept getting worse. It's unlikely that balancing the budget will be a priority in 2009.