#Krugman: The Phantom Menace
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Op-Ed Columnist
The Phantom Menace
By PAUL KRUGMAN
Published: November 22, 2009
A funny thing happened on the way to a new New Deal. A year ago, the only
thing we had to fear was fear itself; today, the reigning doctrine in
Washington appears to be “Be afraid. Be very afraid.”
What happened? To be sure, “centrists” in the Senate have hobbled efforts
to rescue the economy. But the evidence suggests that in addition to
facing political opposition, President Obama and his inner circle have
been intimidated by scare stories from Wall Street.
Consider the contrast between what Mr. Obama’s advisers were saying on
the eve of his inauguration, and what he himself is saying now.
In December 2008 Lawrence Summers, soon to become the administration’s
highest-ranking economist, called for decisive action. “Many experts,” he
warned, “believe that unemployment could reach 10 percent by the end of
next year.” In the face of that prospect, he continued, “doing too little
poses a greater threat than doing too much.”
Ten months later unemployment reached 10.2 percent, suggesting that
despite his warning the administration hadn’t done enough to create jobs.
You might have expected, then, a determination to do more.
But in a recent interview with Fox News, the president sounded diffident
and nervous about his economic policy. He spoke vaguely about possible
tax incentives for job creation. But “it is important though to
recognize,” he went on, “that if we keep on adding to the debt, even in
the midst of this recovery, that at some point, people could lose
confidence in the U.S. economy in a way that could actually lead to a
double-dip recession.”
What? Huh?
Most economists I talk to believe that the big risk to recovery comes
from the inadequacy of government efforts: the stimulus was too small,
and it will fade out next year, while high unemployment is undermining
both consumer and business confidence.
Now, it’s politically difficult for the Obama administration to enact a
full-scale second stimulus. Still, he should be trying to push through as
much aid to the economy as possible. And remember, Mr. Obama has the
bully pulpit; it’s his job to persuade America to do what needs to be
done.
Instead, however, Mr. Obama is lending his voice to those who say that we
can’t create more jobs. And a report on Politico.com suggests that
deficit reduction, not job creation, will be the centerpiece of his first
State of the Union address. What happened?
It took me a while to puzzle this out. But the concerns Mr. Obama
expressed become comprehensible if you suppose that he’s getting his
views, directly or indirectly, from Wall Street.
Ever since the Great Recession began economic analysts at some (not all)
major Wall Street firms have warned that efforts to fight the slump will
produce even worse economic evils. In particular, they say, never mind
the current ability of the U.S. government to borrow long term at
remarkably low interest rates — any day now, budget deficits will lead to
a collapse in investor confidence, and rates will soar.
And it’s this latter claim that Mr. Obama echoed in that Fox News
interview. Is he right to be worried?
Well, spikes in long-term interest rates have happened in the past, most
famously in 1994. But in 1994 the U.S. economy was adding 300,000 jobs a
month, and the Fed was steadily raising short-term rates. It’s hard to
see why anything similar should happen now, with the economy still
bleeding jobs and the Fed showing no desire to raise rates anytime soon.
A better model, I’d argue, is Japan in the 1990s, which ran persistent
large budget deficits, but also had a persistently depressed economy —
and saw long-term interest rates fall almost steadily. There’s a good
chance that officials are being terrorized by a phantom menace — a threat
that exists only in their minds.
And shouldn’t we consider the source? As far as I can tell, the analysts
now warning about soaring interest rates tend to be the same people who
insisted, months after the Great Recession began, that the biggest threat
facing the economy was inflation. And let’s not forget that Wall Street —
which somehow failed to recognize the biggest housing bubble in history —
has a less than stellar record at predicting market behavior.
Still, let’s grant that there is some risk that doing more about double-
digit unemployment would undermine confidence in the bond markets. This
risk must be set against the certainty of mass suffering if we don’t do
more — and the possibility, as I said, of a collapse of confidence among
ordinary workers and businesses.
And Mr. Summers was right the first time: in the face of the greatest
economic catastrophe since the Great Depression, it’s much riskier to do
too little than it is to do too much. It’s sad, and unfortunate, that the
administration appears to have lost sight of that truth.
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Slavery: The belief that people can be property
Corporatism: The belief that property can be people.