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Krugman writes: "The next four years are likely to be much better than the last four years - unless misguided policies create another mess."

Portrait, New York Times columnist Paul Krugman, 06/15/09. (photo: Fred R. Conrad/NYT)
Portrait, New York Times columnist Paul Krugman, 06/15/09. (photo: Fred R. Conrad/NYT)


Cleaning Up the Economy

By Paul Krugman, The New York Times

07 September 12

 

ill Clinton's speech at the Democratic National Convention was a remarkable combination of pretty serious wonkishness - has there ever been a convention speech with that much policy detail? - and memorable zingers. Perhaps the best of those zingers was his sarcastic summary of the Republican case for denying President Obama re-election: "We left him a total mess. He hasn't cleaned it up fast enough. So fire him and put us back in."

Great line. But is the mess really getting cleaned up?

The answer, I would argue, is yes. The next four years are likely to be much better than the last four years - unless misguided policies create another mess.

In saying this, I'm not making excuses for the past. Job growth has been much slower and unemployment much higher than it should have been, even given the mess Mr. Obama inherited. More on that later. But, first, let's look at what has been accomplished.

On Inauguration Day 2009, the U.S. economy faced three main problems. First, and most pressing, there was a crisis in the financial system, with many of the crucial channels of credit frozen; we were, in effect, suffering the 21st-century version of the bank runs that brought on the Great Depression. Second, the economy was taking a major hit from the collapse of a gigantic housing bubble. Third, consumer spending was being held down by high levels of household debt, much of which had been run up during the Bush-era bubble.

The first of these problems was resolved quite quickly, thanks both to lots of emergency lending by the Federal Reserve and, yes, the much maligned bank bailouts. By late 2009, measures of financial stress were more or less back to normal.

This return to financial normalcy did not, however, produce a robust recovery. Fast recoveries are almost always led by a housing boom - and given the excess home construction that took place during the bubble, that just wasn't going to happen. Meanwhile, households were trying (or being forced by creditors) to pay down debt, which meant depressed demand. So the economy's free fall ended, but recovery remained sluggish.

Now, you may have noticed that in telling this story about a disappointing recovery I didn't mention any of the things that Republicans talked about last week in Tampa, Fla. - the effects of high taxes and regulation, the lack of confidence supposedly created by Mr. Obama's failure to lavish enough praise on "job creators" (what I call the "Ma, he's looking at me funny!" theory of our economic problems). Why the omission? Because there's not a shred of evidence for the G.O.P. theory of what ails our economy, while there's a lot of hard evidence for the view that a lack of demand, largely because of excessive household debt, is the real problem.

And here's the good news: The forces that have been holding the economy back seem likely to fade away in the years ahead. Housing starts have been at extremely low levels for years, so the overhang of excess construction from the bubble years is long past - and it looks as if a housing recovery has already begun. Household debt is still high by historical standards, but the ratio of debt to G.D.P. is way down from its peak, setting the stage for stronger consumer demand looking forward.

And what about business investment? It has actually been recovering rapidly since late 2009, and there's every reason to expect it to keep rising as businesses see rising demand for their products.

So, as I said, the odds are that barring major mistakes, the next four years will be much better than the past four years.

Does this mean that U.S. economic policy has done a good job? Not at all.

Bill Clinton said of the problems Mr. Obama confronted on taking office, "No one could have fully repaired all the damage that he found in just four years." If, by that, he meant the overhang of debt, that's very much the case. But we should have had strong policies to mitigate the pain while households worked down their debt, as well as policies to help reduce the debt - above all, relief for underwater homeowners.

The policies we actually got were far from adequate. Debt relief, in particular, has been a bust - and you can argue that this was, in large part, because the Obama administration never took it seriously.

But, that said, Mr. Obama did push through policies - the auto bailout and the Recovery Act - that made the slump a lot less awful than it might have been. And despite Mitt Romney's attempt to rewrite history on the bailout, the fact is that Republicans bitterly opposed both measures, as well as everything else the president has proposed.

So Bill Clinton basically had it right: For all the pain America has suffered on his watch, Mr. Obama can fairly claim to have helped the country get through a very bad patch, from which it is starting to emerge.

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+16 # C.H.Winslow 2012-09-07 22:58
I believe Paul Krugman has given us a good summary of the current economic moment. He says that the Obama administration did not take pushing the housing recovery very seriously. He seemed to have been convinced to rescue the "engines of growth" rather than victims of the housing bubble. What say you?

Did householders consume beyond their ability to pay and, therefore, need (realistically) to be forced to pay the piper, i.e., constrained from restarting the "bubble"? I don't know.
 
 
+41 # grandone@charter.net 2012-09-07 23:17
Paul,
While I usually agree with you, I have to weigh in on this one. The Baby Boomers have already bought everything they need. The housing industry has not adjusted to the smaller population growth of the Echo Boomers and they have built far too much housing. Given the depressed demand of those two realities and given that even FDR could not climb out of the Great Depression without WWII, we have placed Great Expectations on President Obama. The "Great Recession" is deeper than we can climb out of in four years. How many terms did FDR have? Did we have a recession after WWII? Yes. So, the Republicans are placing unrealistic expectations, not to mention treasonous obstructionism, on this recovery.
Tell me I am wrong.
 
 
+19 # soularddave 2012-09-08 07:58
Quoting grandone@charter.net:
The Baby Boomers have already bought everything they need.


We "boomers" are also "empty nesters" and moving away from big houses (selling at depressed values). Accumulated wealth took a big hit, so we're looking at buying less of what we don't really need as we finish paying off mortgages. Some of us are looking to maintain employment until we're 70, just to wring a bit more financial security, including health insurance, from working and increased Social Security and pension payouts.

This means we're not going to provide an opportunity for a young person to take our place in the economy like was provided to us back in the '60s.

Are we being "wise" to the detriment of the whole economy? I hope not, but worry about the kids leaving formal education and hoping to take their rightful place in the economy. I feel that we've been backed into a corner, and certainly we can't go running to daddy & mommy for help anymore.
Cuts to S.S. and Medicare will exacerbate this situation, but Universal health care would "free up" a lot of resources and maybe let us go ahead and retire. Then, again, we don't HAVE to stop working at 70, if what we're doing is rewarding.
 
 
+1 # Carbonman1950 2012-09-08 22:58
Quoting grandone@charter.net:
[G]given that even FDR could not climb out of the Great Depression without WWII


I know I'm addressing this question to the wrong person, but still I think it needs asking.

How is the Federal deficit spending that was done to fund WWII different from the Federal deficit spending his administration did before the US entry into WWII?

Seriously. It seems to me that government deficit spending is government deficit spending regardless of whether it is, for example, creating jobs by paying artists to paint and perform plays or creating jobs by paying farm boys to go to Europe and shoot at people or creating jobs by having young women build B-29s in Renton, Washington.

IMO the fact that much of FDR's deficit spending was for "lend-lease" and to prepare the nation for a war that seemed to be approaching (like the $1.5 million appropriation to repair and upgrade New Jersey's then dilapidated Picatinny Arsenal) makes it impossible to draw any reasonable distinction between FDR's pre and post 1941 spending.
 
 
+6 # Carbonman1950 2012-09-08 23:22
Quoting grandone@charter.net:
[G]given that even FDR could not climb out of the Great Depression without WWII


I know I'm addressing this question to the wrong person, but still I think it needs asking.

How is the Federal deficit spending that was done to fund WWII different from the Federal deficit spending his administration did before the US entry into WWII?

Seriously. It seems to me that government deficit spending is government deficit spending regardless of whether it is, for example, creating jobs by paying artists to paint and perform plays or creating jobs by paying farm boys to go to Europe and shoot at people or creating jobs by having young women build B-29s in Renton, Washington.

IMO the fact that much of FDR's deficit spending was for "lend-lease" and to prepare the nation for a war that seemed to be approaching (like the $1.5 million appropriation to repair and upgrade New Jersey's then dilapidated Picatinny Arsenal) makes it impossible to draw any reasonable distinction between FDR's pre and post 1941 spending.

I'm thinking that IF Congress and the American people had been willing to spend the $296 billion (that's $4.1 trillion in 2011 dollars) it spent on WWII (1941-45) to create jobs in 1930, it's very possible that the Great Depression could have been ended in 1935 and there would never have been a WWII.
 
 
+29 # soularddave 2012-09-07 23:32
Jobs - so everyone can earn their own money. They'll spend it and get the economy going, or they'll pay down their debt - also good; just like saving

"Job creators" harumph! They're sitting on their money and making a recovery impossible. They don't need tax cuts when they can borrow money for next to nothing already.

Tax financials as they change hands. That ought to slow them down as they just extract value for the traders. It's a little revenue, but it'll cause the transactors to think a bit more before trading a million shares to benefit by a fraction of a cent. Best thing: it'll allow us to count the transactions.

Now we're back to jobs - the only way to really create wealth.
 
 
+3 # barbaratodish 2012-09-07 23:36
Instead of political PERFORMANCES in the upcoming debates, we need communication EXPERIENCES from the candidates.
 
 
+39 # fhunter 2012-09-08 00:11
This country is blessed having the two greatest Nobel priced economists of the 21st Century, Stiglitz and Krugman. I have never understood why does President Obama follows the advise of his dull minded, self serving advisers instead of the greatest minds in Economy.
 
 
+18 # natalierosen 2012-09-08 12:14
Totally agree. Just sent the WH an email. If there is a second term and Geithner is gone which he will be then KRUGMAN and his entourage should be in!! I wish they were four years ago.

I wish the president in the summer of 2010 sold his healthcare bill to the American people so they understood it instead of Republicans buying off the town hall meetings and message spewing hatred for something that actually helps them, the low information voters.

Gain some knowledge middle America, Romney and the Republicans singing group's song is NOT about most of you even though they tell you that it is. It isn't. They lie ALL the time!
 
 
+30 # pbbrodie 2012-09-08 00:59
This article fails to mention that President Obama almost surely didn't even bother trying to have more thorough and serious recovery bills introduced in Congress, knowing full well that the Republicans were going to stifle anything he even proposed.
 
 
+34 # LLOYDEKP 2012-09-08 03:20
Why doesn't anyone ever mention the fact that but for the refusal of an obstructing republican house to pass or even take up the jobs act, the economy would be booming now?
 
 
+49 # Barbara K 2012-09-08 05:47
You don't put the party back in charge that blew up the economy in the first place. All the money in the world shouldn't buy our country. We are not selling it. We have a good President now, and it will take more than 4 years to clean up the mess left to him by the Rs. How dare they think he can clean it up that fast. We now have someone with some experience and who has plans to make it better. We just need to give him a cooperative Congress, and dump the ones who would do nothing for the past 4 years, while the President worked tirelessly to save us from total collapse.

OBAMA/BIDEN 2012

The alternative is unbearable.
 
 
+19 # soularddave 2012-09-08 08:09
Don't forget that a lot of American wealth was carted home from Iraq as corporate profit, or left burning in the desert.

This folly has NOT been paid for, except by our Veterans and those soldiers who came home in pieces.
 
 
+13 # doneasley 2012-09-08 14:53
Quoting soularddave:
Don't forget that a lot of American wealth was carted home from Iraq as corporate profit, or left burning in the desert...


The thing I can't forget about Iraq, dave, is the $12 Billion in CASH that disappeared during L PAUL BREMER'S watch. And who was his chief adviser during that time? You guessed it, Rmoney's chief adviser, DAN SENOR, another neocon candidate for a 9x9 cell. Besides his lying spins on Iraq, I believe he and Bremer have a chunk of that money stashed away. They want you to believe the Iraqi's stole the stash, but that money's keeping company with Rmoney's millions somewhere in a CAYMAN ISLANDS BANK. This God-fearing, never-lying, ever-so-patriot ic group of men are TRUE THIEVES.

But I digress. I certainly hope that President Obama gives some thought to replacing his economic team during his 2nd term.
 
 
+32 # Ralph Averill 2012-09-08 05:48
"the fact is that Republicans bitterly opposed both measures, as well as everything else the president has proposed."
That is why the Republicans can take no credit; none, for whatever progress has been made. Democratic challengers for congressional seats need to shout this from the rooftops.
It's all about Congress in 2012!
 
 
-51 # jojo5056 2012-09-08 05:53
Little history of mine--prior to Obama admin, I used to read Crooks and liars site.Only the Republicans were evil. Once the Democretes came into power--still the remains of the repugs were evil--crooks and liars.. After reading Paul's shamefull piece here it reminds me of Crooks and liars--he fits the bill to the T. Paul is one author that needs to revise his speciality in writing into cooking and sewing. He is full of **it
I sense he is paid hack--drumming up the Israel business--vote Demo--nothing is better than Repugs. Get lost Paul--both parties are the same animal but with two heads. Obama has done nothing to put away the crooks and liars in the money changers racket--your types. Smoke that one Krudman

This site must be a sister site of C&L
 
 
+11 # CAMUS1111 2012-09-08 11:59
with all due respect (which is none),you're much more of a yo-yo than a jojo
 
 
0 # reiverpacific 2012-09-11 10:37
Quoting CAMUS1111:
with all due respect (which is none),you're much more of a yo-yo than a jojo

Heh-heh! Good one.
 
 
+3 # reiverpacific 2012-09-08 20:05
Quoting jojo5056:
Little history of mine--prior to Obama admin, I used to read Crooks and liars site.Only the Republicans were evil. Once the Democretes came into power--still the remains of the repugs were evil--crooks and liars.. After reading Paul's shamefull piece here it reminds me of Crooks and liars--he fits the bill to the T. Paul is one author that needs to revise his speciality in writing into cooking and sewing. He is full of **it
I sense he is paid hack--drumming up the Israel business--vote Demo--nothing is better than Repugs. Get lost Paul--both parties are the same animal but with two heads. Obama has done nothing to put away the crooks and liars in the money changers racket--your types. Smoke that one Krudman

This site must be a sister site of C&L

So what's YOUR solution.
I have proposed mine twice on RSN and to the powers that be but all I hear is the dead hand of pessimism and negativity at work.
So give us the magic formula, or at least some ideas; -or sink back into the mire of the sluggard.
 
 
+40 # szq5777 2012-09-08 06:00
I was blown away by President Clinton's speech on Wednesday night. Krugman is right, the republicans opposed anything that President Obama proposed. I blame the republicans and the "tea party" for our economic ills today. Obama inherited an unbelieveable mess from Bush II and we would be in much better shape today if he had been able to do everything he wanted to clean it up.
As a poor person I know that republicans are my enemy. Romney and his party will destroy this country just like Bush almost did! Vote Democrat all the way!
 
 
+16 # RLF 2012-09-08 06:00
Problem is he is bailing everything out using Supply side policies like reagan would have and not changing the things that caused this preview. The very business model that Romney comes from is cannibalistic and should not even be legal, much less subsidized by tax policy. It has been controversial since Michael Milkin and Obama hasn't touched it or any of the other Ivy league, conventional wisdom business practices dragging this country down.
 
 
+29 # Susan1989 2012-09-08 06:36
The biggest challenge our country faces is to keep the Republicans from power. Their policies and ideology is punative, negative, and disrespectful of humanity.
 
 
-8 # RobertMStahl 2012-09-08 07:08
Ah, being an accessory to murder, if you are commander, the commandant, is NOT the same as murder, huh? Doesn't anyone think we should evolve past the Old Guard for the sake of the commonwealth? Poor Abdul-Rahman Al-Awlaki. Just which alter we build to sacrifice our children are okay? The Charlie Manson money used to erect Children's Hospital in Birmingham, Alabama while revamping the message of the artist insidiously for the obelisk in front of the IMAX, there, that the NSA directly or indirectly destroyed before the Iraq war? Where is Indira Singh? Rudolf Steiner said the biggest evil (which is denial) is a 50/50 proposition. Ignorance is no excuse for the law (of Gaia) and we have lost already, for the extinction on the horizon, or doesn't structure get any headlines for the news of the fields, strawberry fields?
 
 
0 # RobertMStahl 2012-09-08 07:10
Boy, oh boy. Then, there is this. Happy, yet?

http://truth-out.org/news/item/11319-no-accountability-for-torturers
 
 
+10 # RobertMStahl 2012-09-08 07:11
And, Romney is worse!
 
 
+10 # bobis me 2012-09-08 08:00
"Their policies and ideology is punative, negative, and disrespectful of humanity" and I would add very mean spirited. When it comes to uplifting people, the Republicans have become the party of NO, NOT, NEVER and worse. Independents should form an actual THIRD party!
 
 
+12 # labman57 2012-09-08 08:04
One name, more than any other, is responsible for the complete and utter stagnation that has become the daily norm in the Senate ... and I think we all know who it is:
Phil E. Buster

Meanwhile, the House has been on an Ahab-esque quest to "kill Obamacare" while simultaneously trying to pass pointless legislation that spotlights their socially-regres sive ideology.

Perhaps they have forgotten why Obama was elected. The Bush/Cheney regime took a colossal economic and foreign policy dump on the United States during their 8 year reign, and Obama pledged to spend his first term in office undoing the damage.

So what exactly is the GOP's gripe? Well, some right-of-center folks bemoan that they can still smell the stench, essentially complaining "Haven't you finished cleaning up our mess yet?", while the more diehard, staunch conservatives indignantly cry out "That is our crap. We like it the way it was. It's un-American to mess with it. Leave it alone!"
 
 
+17 # wwway 2012-09-08 09:34
Yes, we are better off and we'll improve only if we get Republicans out of office. I want cooperation from congress, but Republicans have claarly dug in their heels without any regard to the needs of Americans. They've proved it in every proposed legislation and in their refusal to sit down and work. As a tax payer I'm furious! As a business woman I'd fire every single Republican holding up my business!
I'd rather trust Democratic led Senate, House and President to hammer out solutions because clearly, Repbulicans have proven that they are NOT GOOD FAITH actors in our democracy.
 
 
-20 # Bobolink57 2012-09-08 11:05
Nothing was said about the wasted $500+ million on the solar company and the recovering funds that ended up making jobs overseas! We are not better off with 23000000 unemployed and $16000000000000 in debt. The blockage of the pipeline efforts and the lies about the US oil reserves. Also, what about Obama involement in Fast & Furious!!!! He is not to be trusted!!!
 
 
+9 # mjc 2012-09-08 11:38
Think it would be a great idea to have Paul Krugman and perhaps Steglitz join Obama on the campaign trail and explain exactly how we are better than we were 4 years ago and will be better if given a chance.
 
 
+1 # HerbR 2012-09-08 15:18
Dear Prof. K,
when oh when has the "Economy" ever been "clean"? What does this concept even mean ?
 
 
0 # John Steinsvold 2012-09-08 19:50
An Alternative to Capitalism (since we cannot legislate morality)

Several decades ago, Margaret Thatcher claimed: "There is no alternative". She was referring to capitalism. Today, this negative attitude still persists.

I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:

http://evans-experientialism.freewebspace.com/steinsvold.htm

John Steinsvold

“Insanity is doing the same thing over and over and expecting a different result."~ Albert Einstein
 
 
-8 # JGross001 2012-09-09 09:09
Capitalism works, so of course the lefties want to change to some other system. The key concept is the "Utopian Fantasy". Offer something impossible to the people, they will give you the power to make it happen, then you forget the impossible dream and hang on to the power. This was the formula for most Communist takeovers. Are you really going to fall for that again? Don't you pay any attention to history?
 
 
+4 # ABen 2012-09-09 11:31
You really need to get out of the Fixed Noise bubble more often.
 
 
+3 # ABen 2012-09-09 11:30
By any reasonable, rational criteria, the economy is doing significantly better than it was four years ago, just check the facts--all the facts. It certainly is not doing as well as the general populace or the Obama Admin would like, but the data is there and it is clear. If the 'just say "No"' air-heads on the right would drink something other than Fixed News koolaid, perhaps out political discourse would improve along with the passage of more efficacious legislation.
 
 
+3 # Scottford 2012-09-09 12:54
Lack of confidence is only due to failure to punish the biggest criminals in history. Thousands of bankers and others have to go to jail for a long time, and the biggest ones be tried for treason. There is no reason for anyone to have confidence in the economy if these fraudsters get away with it, and in fact are babied by the people we elect into office.
 
 
+3 # tonywicher 2012-09-09 18:35
Why did the big banks have to be bailed out? I think there should have been no such thing as "too big to fail", they should have been put through chapter 7 or 11 (and not General Motors). This would have broken the power of the big banks. The Federal Reserve could then have been used as a National Bank to finance a recovery. Furthermore, I don't believe Krugman's rosy picture of the future, because those same big banks continue to be "bailed out" in opaque ways, sucking money and credit out of the economy and preventing a normal recovery. But with the likes of Tim Geithner as Obama's treasury secretary, Obama is a very long way from any possibility of really taking on Wall Street. It appears from this column that Krugman is unwilling to do this either.
 
 
0 # C.H.Winslow 2012-09-18 15:46
I agree with those who hold that GOP and Blue Dog congressional opposition kept Obama from taking stronger measures to stimulate the economy. The Krugman and Stiglitz approaches (broadly speaking) might be easier to follow in an Obama second term, even if these two notables might not be the best choices for cabinet positions. The most popular views here seem to be those that are more partisan than analytical. Ordinary citizens can make bad decisions, can overspend, and can cheat on the public well being just as bankers and investors can. Although I believe by far the greater blame should be directed at those who gambled at the Wall Street Casino, I believe all of us, as consumers, must pay the piper as well. It may be that not rescuing the housing industry was the bill that the 90% had to pay (given the realities of GOP opposition).
 

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