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Sunday, January 02, 2011

Krugman: Deep Hole Economics

by Calculated Risk on 1/02/2011 11:59:00 PM

From Paul Krugman in the NY Times: Deep Hole Economics

If there’s one piece of economic wisdom I hope people will grasp this year, it’s this: Even though we may finally have stopped digging, we’re still near the bottom of a very deep hole.

Why do I need to point this out? Because I’ve noticed many people overreacting to recent good economic news. ...

Jobs, not G.D.P. numbers, are what matter to American families. ... Growth at a rate above 2.5 percent will bring unemployment down over time.

Suppose that the U.S. economy were to grow at 4 percent a year, starting now and continuing for the next several years. Most people would regard this as excellent performance, even as an economic boom; it’s certainly higher than almost all the forecasts I’ve seen.

Yet the math says that even with that kind of growth the unemployment rate would be close to 9 percent at the end of this year, and still above 8 percent at the end of 2012.
Even though I'm more optimistic about 2011 than 2010, I still think that growth will be sluggish relative to the slack in the system - and that the unemployment rate will stay elevated for some time. There is definitely a danger of becoming too optimistic.