The Lame-Duck Economy By PAUL KRUGMAN
Tom Davos
November 21, 2008
Op-Ed Columnist
The Lame-Duck Economy By PAUL KRUGMAN
Everyones talking about a new New Deal, for obvious reasons. In 2008, as
in 1932, a long era of Republican political dominance came to an end in
the face of an economic and financial crisis that, in voters minds, both
discredited the G.O.P.s free-market ideology and undermined its claims of
competence. And for those on the progressive side of the political
spectrum, these are hopeful times.
There is, however, another and more disturbing parallel between 2008 and
1932 namely, the emergence of a power vacuum at the height of the
crisis. The interregnum of 1932-1933, the long stretch between the
election and the actual transfer of power, was disastrous for the U.S.
economy, at least in part because the outgoing administration had no
credibility, the incoming administration had no authority and the
ideological chasm between the two sides was too great to allow concerted
action. And the same thing is happening now.
Its true that the interregnum will be shorter this time: F.D.R. wasnt
inaugurated until March; Barack Obama will move into the White House on
Jan. 20. But crises move faster these days.
How much can go wrong in the two months before Mr. Obama takes the oath of
office? The answer, unfortunately, is: a lot. Consider how much darker the
economic picture has grown since the failure of Lehman Brothers, which
took place just over two months ago. And the pace of deterioration seems
to be accelerating.
Most obviously, were in the midst of the worst stock market crash since
the Great Depression: the Standard & Poors 500-stock index has now fallen
more than 50 percent from its peak. Other indicators are arguably even
more disturbing: unemployment claims are surging, manufacturing production
is plunging, interest rates on corporate bonds which reflect investor
fears of default are soaring, which will almost surely lead to a sharp
fall in business spending. The prospects for the economy look much grimmer
now than they did as little as a week or two ago.
Yet economic policy, rather than responding to the threat, seems to have
gone on vacation. In particular, panic has returned to the credit markets,
yet no new rescue plan is in sight. On the contrary, Henry Paulson, the
Treasury secretary, has announced that he wont even go back to Congress
for the second half of the $700 billion already approved for financial
bailouts. And financial aid for the beleaguered auto industry is being
stalled by a political standoff.
How much should we worry about what looks like two months of policy drift?
At minimum, the next two months will inflict serious pain on hundreds of
thousands of Americans, who will lose their jobs, their homes, or both.
Whats really troubling, however, is the possibility that some of the
damage being done right now will be irreversible. Im concerned, in
particular, about the two Ds: deflation and Detroit.
About deflation: Japans lost decade in the 1990s taught economists that
its very hard to get the economy moving once expectations of inflation
get too low (it doesnt matter whether people literally expect prices to
fall). Yet theres clear deflationary pressure on the U.S. economy right
now, and every month that passes without signs of recovery increases the
odds that well find ourselves stuck in a Japan-type trap for years.
About Detroit: Theres now a real risk that, in the absence of quick
federal aid, the Big Three automakers and their network of suppliers will
be forced into liquidation that is, forced to shut down, lay off all
their workers and sell off their assets. And if that happens, it will be
very hard to bring them back.
Now, maybe letting the auto companies die is the right decision, even
though an auto industry collapse would be a huge blow to an already
slumping economy. But its a decision that should be taken carefully, with
full consideration of the costs and benefits not a decision taken by
default, because of a political standoff between Democrats who want Mr.
Paulson to use some of that $700 billion and a lame-duck administration
thats trying to force Congress to divert funds from a fuel-efficiency
program instead.
Is economic policy completely paralyzed between now and Jan. 20? No, not
completely. Some useful actions are being taken. For example, Fannie Mae
and Freddie Mac, the lending agencies, have taken the helpful step of
declaring a temporary halt to foreclosures, while Congress has passed a
badly needed extension of unemployment benefits now that the White House
has dropped its opposition.
But nothing is happening on the policy front that is remotely commensurate
with the scale of the economic crisis. And its scary to think how much
more can go wrong before Inauguration Day.