When Consumers Capitulate

PAUL KRUGMAN
NYT, October 31, 2008

The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.

To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.

Also, these numbers are from the third quarter — the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way.

So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time.

It’s true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent — sometimes it has even been negative — and consumer debt has risen to 98 percent of G.D.P., twice its level a quarter-century ago.

Some economists told us not to worry because Americans were offsetting their growing debt with the ever-rising values of their homes and stock portfolios. Somehow, though, we’re not hearing that argument much lately.

Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate. One is tempted to echo St. Augustine’s plea: “Grant me chastity and continence, but not yet.” For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap — a situation in which the Federal Reserve has lost its grip on the economy.

Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.

In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.

At this point, however, the instructor hastens to explain that virtue isn’t really vice: in practice, if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can’t offset the fall in consumer spending.

I’ll bet you can guess what’s coming next.

For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It’s true that Ben Bernanke hasn’t yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it’s hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.

The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response.

The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off.

No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.

Let’s hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let’s also hope that the lame-duck Bush administration doesn’t get in the way.

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COMMENTS BY NYT READERS
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.October 31, 2008 10:45 am
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As a pessimist, I thought I should mention two relevant issues.

First, the Federal government's finances are in bad shape and are already projected to get worse (in the short run) and vastly worse (in the longer run, as the Baby Boom retires). Foreigners are already showing that they are uncomfortable with their existing holdings fo US debt, and are already moving to eliminate the dollars as the international medium of exchange. In the past, it might have been reasonable to treat Federal spending as if could, for all intents and purposes, be turned up as far as required to restore aggregate demand. But now, that may no longer be a realistic assumption. It's not even a question of whether a large fiscal stimulus would be politically feasible, at this point it's edging into a question of whether its technically possible to borrow that much more money than we're already going to have to borrow under current policy.

In my opinion, this is yet another reason to despise the Bush administration. They were handed the opportunity to strengthen our fiscal position and they frittered it away. Now we have to deal with this from a standpoint of fiscal weakness instead of strength.

The second practical issue with non-rebate stimulus is the time lag and the constraints of our kan-ban economy. The cycle of legislation, issuance of regulations, request for proposal, bidding, acceptance of bids -- by itself, that would take about year if it were expedited, possibly more. So a year from now, we'd be just about ready to start spending the money. Then we would get to find out all the factors that would be in short supply if we decided to (e.g.) triple the pace of road and bridge reconstruction.

So, if the Feds can borrow the money, maybe there's still a role for whatever stimulus might act in the short run. Which means, I think, giving money away to somebody. If that's not rebate checks, then someone needs to suggest some better alternative that is equally short-acting.
— chogan, Virginia

Recommend Recommended by 0 Readers 102.October 31, 2008 10:45 am
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Mr. Krugman,

Subsequently unemployment will accelerate and further dampen consumer spending. Consumers have known about our failing economy prior to the third quarter, but the gov't plods along slow as ever. What we need is a full scale "Marshall" plan for the economy. Infrasturucture, alternative energies and other neglected areas need to get ramped up. Dawdling in a time of crisis will make the situation more dire. Assertiveness and tremendous leadership is required. What's next food lines and looking like Cuba ?
— RMD, Davidsonville, MD

Recommend Recommended by 0 Readers 103.All Editors' Selections » EDITORS' SELECTIONS (what's this?) October 31, 2008 10:45 am
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Time for a New New Deal.

Don't cut us a check. Send America to work. Now is the time to invest in infrastructure. Send America to school. Now is the time to invest in education.

If you are going to "spread the wealth around," don't cut people a check, spend the money on some sort of universal health care system. It doesn't have to be "like Canada's." In fact, the U.S. is so late to the party that we can learn from everybody else's mistakes. I like a system that provides people with a basic level of healthcare paid for with public funds, but allows people to use their own money to pay for better health care if they want to. The idea is that everybody gets a "Chevy," but you can pay more for a "Cadillac," if you want.

The biggest benefit for the country of universal health care is to free potential entrepeneurs from the burden of having to find health care for themselves and for their employees.

Modernizing our infrastructure, investing in education, and providing universal health care will provide the stimulus the economy needs while leaving us in better shape for the future. Tommorow's prosperity starts today.

— Jim, Columbia, SC

Recommend Recommended by 0 Readers 104.October 31, 2008 10:45 am
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The situation is not as bad as it looks, when one looks at the hard numbers. The USA has simply to augment the part of the State in the economy, to introduce more rationality in its economic activity. Last week, Mr. Greenspan discovered to his "shocked disbelief" that the financial markets are not self regulating. Well, neither is the economy. That's why we have governments: to direct the actors to do what we decide their parts will be. It's not to the actors to tell us. The State controls about 30% of GDP in the USA, but much more in all European States. It is 45% in France (and higher in Sweden). (The astute observer will notice that Japan, mired in waves of chronic recessions for 18 years, has a much smaller portion of its GDP from the State than the USA.)

The retrenchment of the US consumer, is just what the doctor should have ordered. The consumer was consumed by consumption ("consumption"used to be the old euphemism for tuberculosis). A lot of consumption was about buying lots of things made overseas, some of which (like cars) should rather be made at home: car making, plane making, or rocket making, or electronic chip making are strategic industries, they cannot go overseas too much without endangering the supremacy of the USA, and that later endangerment compromises world security (even leftist socialists with anti-American tendencies will recognize this, to their dismay). Ah, also: too much eating in restaurants is adverse to health: Americans have now an excellent occasion to learn to cook wholesome foods at home, as if they were fully grown up.

Most European countries run better economies, with the State spending more as a percentage of GDP. Some of the right wing will scream, because they made such good money in the old system. But they should address their whining to the old Roman republic, or even to the Athenian democracy, 25 centuries ago. Those first democracies invented massive public spending. And that reached new heights in the fascist Roman empire that followed. The Romans did not just build a giant infrastructure with public money (roads, ports, acquaducts, theaters, baths, public health spending, fortifications), but also invented food programs and wellfare. And nobody will accuse the Roman empire to have been too left wing. Public spending was extended to health in the European Middle Ages.

Clearly, the time for a new extension of the public economy has come. Just like financiers could not self regulate, the consumers could not self regulate. That's actually why consumers instituted government, 9,000 years ago, or so, in the first cities.

Half an hour after his inauguration, the next president should sign a decree instituting a tiny percentage tax on every single financial transaction (at the rate used in Europe, that would bring in at least 200 billion a year, more than is needed by Obama's health plan). And so on. Small (but expanding) taxes on energy will do wonders to introduce rationality in the US energy economy.

Funds could be directed to the green economy.
— Patrice Ayme, Hautes Alpes

Recommend Recommended by 0 Readers 105.October 31, 2008 10:45 am
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I suspect consumer spending is in for a long, long backward slide. It is not only the credit or income strapped consumer that is shutting down all but essential spending.

My spouse and I are among the fortunate - a secure retirement income and an adequate (albeit greatly reduced) savings and investment portfolio. But we are not spending on anything but essentials. In fact, we are trying to sell, giveaway or throwaway three storage bays of no longer used/needed items that represent a substantial portion of our contribution to consumer spending over the decades.

Judging from the number of new self-storage facilities near us that have sprung up in the past few years, one could speculate that the real message is that some consumers are tapped out on income and credit, but others, more fortunate, are also tapped out on needs and wants - are abandoning the materialism that has driven so much consumer spending in the past.

The only government programs, therefore, that will reverse the economy's slide are INVESTMENT programs like the "going to the moon" NASA program of the sixties - infrastructure renewal and energy independence cry out as candidates for such programs of national commitment.
— Downsizer, Reston, VA

Recommend Recommended by 0 Readers 106.October 31, 2008 10:45 am
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When I read about the administration bailing out the auto industry, and then as usual Bush meandering, changing the rules and considering a bail out of those who overextended themselves with credit card and mortgage debt, I wonder about the rest of us. This is everyone who has been responsible, lived within their means, paid their credit card bills and didn't grab a home equity loan. What about us? I don't take vacations or abuse the system. Is our reward supposed to be - nothing? This is not a good lesson, I say. The message is to lie, cheat and steal. It says that's it's OK to spend more than you have. I believe that people like us, who have been served our time with perfect behavior deserve a bonus too. Why doesn't Paulson reward the American people with $100 thousand dollars each? Do not bail out the auto manufacturers, and do not bail out those in default of payment. Just give everyone a tax free $100 thousand and say - live responsibly. And, as soon as Obama gets in, replace Paulson the plumber. He's flushing the 700 billion down the toilet. One more thing I'd lie to add, is that we need to get our eyes on the prize; jobs, infrastructure and investment in the US - not bail outs. Dear Mr. Obama, you have a wonderful opportunity here. Please don't mess it up.
— Brian Branigan, Catskill, NY

Recommend Recommended by 0 Readers 107.October 31, 2008 10:45 am
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Professor,

Agreed that "the stimulus should take the form of actual government spending". In particular, at least, it should include upgrading the infrastructure [bridges, roads] and spending to encourage energy independence. Agreed, encouraging more consumer debt at this point, is inappropriate and ineffective.

But how are we going to PAY for all of this? It could easily end up costing a trillion dollars of additional debt. I'd like to understand your thinking on the PAY for it side of the equation. It seems to me that there are four main ways to pay down this additional debt: 1) some return on investment in the bailouts; 2) Increased tax rates; 3) Increased economic activity resulting in increased tax revenue; 4) Inflation [a tax of a different sort]. But, I'm just an undergraduate level economics student from the '60's. What do you think? Politically the word "inflation" instills fear, and at my age, it isn't my favorite tax, but is it avoidable?

Thanks,

Peter Boswell


— Peter, Sarasota

Recommend Recommended by 0 Readers 108.October 31, 2008 10:45 am
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When all the "experts" tell the American consumer that the sky is falling and those consumers then stop going out to eat in order to strengthen their roof, we should not be surprised.

You all have been telling us for months how terrible the economy is and how lucky we are to have our jobs and how bad things are going to get. We have listened.

What makes me most skeptical of all this bad news is that, when I actually talk to people about how "they" are doing personally, their response is almost always that they are doing well. And when I ask my car dealer and my brother who is a loan officer if there is money available for a loan, they say "there is.:

I fear that, if Mr Obama is elected, the economy will magically and even before he has an opportunity to do a thing, get better.

Silly, you say? Well that is what an in the tank MSM will do for you.
— Ehillesum, Michigan

Recommend Recommended by 0 Readers 109.October 31, 2008 10:45 am
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Krugman's recommendation to apply Keynesian methods for stimulating the economy is well considered particularly in view of America´s often badly maintained, not to say, dilapidated infrastructures and the possibility to channel financial resources for such ends from unproductive,or counterproductive, foreign military engagements, thus eliminating or reducing needs for taxe-hikes or additional government borrowing.

Two more intriguing issues would be to (1) bring home to the Amercan people that it is not possible to live on tick forever, or put in a modern jagong that living on tick is not economically sustainable and (2) to device incentives for the restoration of the virtue of saving, resulting in a substantially increased national savings quote as a means to avoiding future financial and economic calamities.

-R.G.Lansler
— Rolf G. Lansler, Vaxjo, Sweden

Recommend Recommended by 0 Readers 110.October 31, 2008 10:45 am
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I wonder if we restructured our tax code temporarily to tax uninvested wealth reserves....

Everyone says infrastructure! infrastructure! here, but I don't think there's a one-off fixed. Let's say every state was the size of Georgia in terms of infrastructure requirements (most are significantly smaller; GA's the 9th most populous state): If we doubled the budgets of every state DOT, that would be $100 billion. The danger there, of course, being that if we overbuild our infrastructure, it becomes problematic to maintain and operate. Exactly the problem my state is experiencing, with over-built highway lanes. Quality over quantity, significant mass transit investment, to be sure, but that seems like a smaller issue than getting the $250+ billion credit fix through, anyway.

One needs to look little farther than the history of the Interstate Highway System to trace the downfall of inner-city urban neighborhoods, where urban connectivity was sold-off on the cheap to huge public works programs that subsidized commuting. I'm not saying that we don't need improvements to our system today, or even suggesting that the motives of most who want more infrastructure investment are a doubling repeat of the Interstate system. But history shadows the "throw money at it" model of infrastructure investment.
— Pierce, Atlanta

Recommend Recommended by 0 Readers 111.October 31, 2008 10:45 am
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I only hope that the fiscal stimulus chosen is not another war, as was done after 9/11. We're already doing that.

Come on, Paul, that's lame. As a mainstream economist I understand your role is to make recommendations within the context of the existing monetary system. Why not think outside the box, and redesign the monetary system to make it work properly. Have government issue notes without interest, nationalize the FED, spend directly on investment and social programs, stop financing the government by foreign borrowing, eliminate fractional reserve lending (which leads to these boom and bust cycles) etc.

Having a fractional reserve monetary system in which private institutions can issue credit at will (or not, at will) is what led us to where we are now. To fix the problem this must be addressed. And don't tell me why this change can't be done, tell me how it must be done to work.
— larry, hudson valley,ny

Recommend Recommended by 0 Readers 112.October 31, 2008 10:45 am
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The consumer needs to be refinanced. Supply side nonsense has run its course and we are all worse off for it. What we need is a demand driven economy. You get a demand driven economy from prosperous consumers.

Get money in the hands of the public and we will all prosper . Money does not trickle down, it flows up hill. By changing income tax schedules, restructuring the payroll tax, raising the minimum wage and making union membership easier, we can refinance the consumer and create a demand driven economy.

Since the consumer has no champions, it will probably take a few years of desperation before changes can be made. Supporters of the trickle down, voodoo economics are still in charge despite all the failures.
— c. perry, Florida

Recommend Recommended by 0 Readers 113.October 31, 2008 10:45 am
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What Mr. Krugman is suggesting is massive government spending; fat deficits and cheap money. Exactly the policy of the Bush Administration. Exactly the policy that brought us to this sorry state in the first place. Mr. Krugman is irresponsibly asking us to endorse a policy of pouring gasoline on a fire.
— FCL, Omaha, NE

Recommend Recommended by 0 Readers 114.October 31, 2008 10:45 am
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“The Paradox of Thrift!” -> paraphrased “Savings is bad for the economy???”

If we shouldn’t tighten our belts when the future of our income is bleak if not in total doubt, when should we tighten our belts? Certainly not when our future is bright!

Congratulations, Economics Nobel Laureate! Can we request you to help us (especially the free market freaks) with this conundrum?

— Anil Kumar, Alexandria, VA

Recommend Recommended by 0 Readers 115.October 31, 2008 10:45 am
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I don't have the brain power to fully envision how climate chaos will impact our near-term economic trajectory, but a year from now (or sooner) the business of getting on with rescuing our planet from the over-use of fossil fuels will be front and center to our politics and economics. Perhaps the mobilization required to meet the climate challenge will usher in a new economic order for the world. I don't see how we can continue to live as we did in the last century. The use of ever-growing consumerism as an economic foundation for capitalism cannot be sustained using a fossil-fuel driven infrastructure.
— Ed Cockrell, Chapel Hill, NC

Recommend Recommended by 0 Readers 116.October 31, 2008 10:45 am
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The government should quit dilly-dallying with Wall Street by trusting them to start spreading the bailout money and instead put the bucks where it will do the most good. That is, buy down every primary residence mortgage in America by 1/3. You will put money in the banks that hold the mortgages, put a floor to falling home prices and put some money in the consumers pocket. Call it the "Trickle Up" theory. Wall Street can no longer be trusted to police itself or America's financial system.
— Beyond Karma, Miami

Recommend Recommended by 0 Readers 117.October 31, 2008 10:45 am
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We need a massive public works program a la the WPA to rebuild our highways and bridges plus other projects such as alternative energy systems, high-speed Internet systems and high-speed rail lines to bring America up to speed with the other developed nations in these areas. Putting people to work as classroom aides to help our beleaguered education system and as health care aides to take care of our senior population wouldn't be a bad idea either.

To those who say we don't have the money to do it, I reply that the $10 BILLION A MONTH we are presently throwing away in Iraq would go a long way.

And in conclusion, I nominate Paul Krugman for treasury secretary in the coming Obama administration.
— HB, Bend, OR

Recommend Recommended by 0 Readers

76.October 31, 2008 10:10 am
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So our entire economic system rests on thwarting the virtues of the "consumer."

Great.
— Karen, Massachusetts

Recommend Recommended by 1 Reader 77.October 31, 2008 10:10 am
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My spending cuts have little to do with choice. My discretionary income has faded over the last number of years and completely disappeared in the last year. Even if I wanted to spend, I couldn't. Because of stagnating wages and increasing prices, every dollar that comes in, goes out to necessities. And I'm still luckier than most, because my debt is minimal and I'm still able to save. But any kind of emergency will end that. And my feeling is that all of this is only going to get worse and it's going to be a long time before it gets better.
— Blurkee, Wisconsin

Recommend Recommended by 0 Readers 78.October 31, 2008 10:10 am
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Paul: Could you please explain how the fiscal stimulus you propose would work differently from the Japanese failed one in the 90's? Thanks! Congras on the well deserved Nobel award.
— Pablo Alonso, Washington DC

Recommend Recommended by 0 Readers 79.October 31, 2008 10:10 am
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It could be that we've already bought everything we want.
— Rick Taft, Woodbury, MN

Recommend Recommended by 3 Readers 80.All Editors' Selections » EDITORS' SELECTIONS (what's this?) October 31, 2008 10:10 am
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Excellent article, as usual. If you are taking suggestions on where government can spend to stimulate the economy, then I would add scientific research to the list. Funding research at U.S. universities puts dollars in the hands of poorly paid graduate students (average stipend is $23,000/year), support staff, and local businesses. Most laboratory supplies are made in the U.S. Research funding quickly permeates the local economies and has the added benefit of leading to advances in knowledge, health care, and education.
— JFM, Syracuse, NY

Recommend Recommended by 15 Readers 81.October 31, 2008 10:10 am
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I wish someone would revisit the aftermath of 9/11 and recall the pronouncements by various pundits on how much that would change almost the air we breathe inside American culture. Remember how dearly the President, any President for that matter, wants us to experience "the moral equivalent of war" and even war itself. It is the desire for the Ghost of Calvinism past to resurrect the true grit of the American Spirit that was once alive in our great founding Fathers, but has since melted into the soft earth of tax and spend, socialistic complacency (and whatever insights DFW a la Infinite Jest could add to these insights) to bring us to the place we are now. An angry and vengeful God is shaking us over the open fire, Jonathan Edwards, intercede from where you are now, Heaven Please help us!

So, now Krugman is testing a similar theme, perhaps? Consumers repent for the the end of the Bargains is at hand? But we haven't even gotten past Thanksgiving yet, and the handwringing is beginning. In my opinion we should be assured that there are enough dissonant voices to any doom and gloom within our society to negate any trumpet blast of reformation. The US society of social spending and consumer debt is not going to change any more than 9/11 produced any remarkable transformation of US society. Individual instances sure. but Social trends away from where they were going , say last year? Not a chance, It will or would take repeated blows of this level to change the willfulness of our comfort seeking condition so that someone driving through anytown USA would notice any differences during the Christmas season of 2009 as a result of what is happening now.
— bahai&99, Japan

Recommend Recommended by 0 Readers 82.October 31, 2008 10:10 am
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Gloria - The markets have already priced in an overwhelming probability that Obama will win. The markets don't respond to events that everyone expected to occur.
— jkl, ny, ny

Recommend Recommended by 0 Readers 83.All Editors' Selections » EDITORS' SELECTIONS (what's this?) October 31, 2008 10:10 am
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Unfortunately there is no quick fix to these painful times. Yes, consumer spending creates jobs and stimulates the economy; however, too much of our GDP is based on consumer spending and past spending has been based on easy credit and people buying items they don't need with money they don't actually have, creating an artificial situation which could not be sustained. I fear that too much focus on increasing consumer spending at this juncture is am attempt to prop up an artificial economy. Would it not be better, as others have suggested, to focus on creating jobs that provide income and benefit the nation as a whole such as development of new energy sources and repairing infrastructure?
— mbb, nyc

Recommend Recommended by 12 Readers 84.October 31, 2008 10:10 am
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The plutes thought they had a grand strategy: maintain consumer spending by expanding easy credit in an economy that fails to reward all but the plutes. That strategy has now backfired. Now our economy can only be spared a very deep recession by getting cash, not credit, into the hands of consumers. Washington will do this, probably through a massive expansion of public works infrastructure programs, tax cuts and stimulus checks. The plutes can't long abide declining earnings and markets, and won't for long. So far, they've seemed willing to withdraw their wealth and hide it under the mattress while the middle class suffers the "adjustment", but their willingness to forego their return on capital won't last long. Welcome back, John Maynard Keynes.
— Bob, Valrico, FL

Recommend Recommended by 0 Readers 85.October 31, 2008 10:10 am
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While I agree with Brooks's column on nearly every point, I don't understand his dismissal of Obama's proposal to reward with tax credits U.S. companies that operate and hire domestically. At a time when unemployment is growing, and production declining, it seems like a reasonable measure.
— David Isenbergh, Washington, DC

Recommend Recommended by 1 Reader 86.October 31, 2008 10:10 am
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This is the moment to stop squandering our money and more importantly our environmental resources on unecessary consumer goods. Personal spending and governmental spending must both shift to those goods and services that will make us healthier, greener, and better educated. We've already seen where the gas guzzling SUVs we've been driving to the mall are really taking us. I am hopeful that a new Obama administration in Washington will lead the way with universal health care, infrastucture improvements including mass transport, improved public schools and support of green technologies. But it is also up to each of us as citizens to invest in a better future.
— Catherine, New York, NY

Recommend Recommended by 5 Readers 87.October 31, 2008 10:10 am
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Paul Krugman talks about reducing the interest rate from 1% to zero and it having minimal impact. I'm no economist, but it occurred to me that another way to stimulate consumer spending would be for the Fed to apply a ceiling cap to the interest rate charges that Credit Card companies apply. I'm sure a lot of people consider these charges, as I do, as little short of piracy.

Should you accidentally [or through financial constraints] miss a payment, a whopping 20-27% can be applied in some instances. Thereby further exacerbating the situation. How about applying a mandatory ceiling of inflation + 1% on the Credit Card companies?

That would surely ease the burden somewhat on consumers struggling with mountains of debt.

I'll now wait while the experts shoots my proposal down in flames. Don't be too cruel Mr Krugman.
— charlief, New York

Recommend Recommended by 2 Readers 88.October 31, 2008 10:10 am
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This so-called recession has been here or coming for several years. It must be understood by those who study economics that consumerism alone could not indefinitely sustain an economy. Where is our basic production? What do we actually truly produce other than Boeing's airplanes. Not ships, trains, tractors, plows, etc. I am not a trained economist (certainly not a Pulitzer Prize winner) but I cannot make myself believe that we can consume our way out of this. We need a Manhattan Project for energy creation, bridge and road repair and the reinstitution of good public transportation. That would put many to work and maybe some workers (oh, sorry, middle class) would begin to save a bit of money.
— edna moglewer, prescott, az

Recommend Recommended by 1 Reader 89.October 31, 2008 10:10 am
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The usa ought to look at the Australian banking system. No way do our banks give out loans to people that can't repay. The regulations were put in by the Howard government years ago. That's why we will not go into recession.
— Martyn, Australia

Recommend Recommended by 4 Readers 90.October 31, 2008 10:10 am
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Prof. Krugman:

Based on your exemplary and consistent body of work, which led to your being awarded the 2008 Nobel Memorial Prize in Economic Sciences I could not think of a better choice for U.S. Secretary of the Treasury under the new Obama Administation.

Good luck to you sir.


— Federico, NYC

Recommend Recommended by 5 Readers 91.October 31, 2008 10:10 am
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Not all government spending is equal. Pouring another trillion dollars on the war in Iraq will boost GDP as much as public investment into alternative energy infrastructure.

We need to make sure the Washington doeesn't get carried away with useless spending. The last thing we need is a bubble of government waste.
— Bill Mott, NY

Recommend Recommended by 3 Readers 92.October 31, 2008 10:30 am
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The Republicans (and some Democrats) were able to destroy this Country in only 8 years, loot the treasury in only 2 years and ruin this country's reputation in no time at all. Our educational system, for the majority of us, is a joke. Analytical thought is uncommon, and the reality is that this is a country that runs on credit and credit alone. We don't make anything that people want, except weapons and war, we have a "negative" savings rate and a large percentage of the population that thinks Sarah Palin is an excellent choice for Vice President.

Ever since the republicans, under Richard (I am not a crook) Nixon, decoupled the Dollar from the Gold Standard due to the increased runaway spending of the Vietnam War, we have been on a slippery slope towards economic ruin. The mad-dog , $10 Billion Dollars a month spending on the Iraq war is merely a repeat of the Vietnam War Economics. The crisis we are facing today is the result of a dollar that is not worth the paper it's printed on. The rest of the world is slowly coming to the same conclusion and if something isn't done post-haste, they will start dumping the toilet paper we call the U.S. Dollar and cutting their losses before we take them down with us. As to the $700 Billion Dollar bail-out, it's for the Chinese and other sovereign wealth funds that are demanding that their investments be made good or they will proceed to cash out while they can. Well I guess SOCIALISM is bad for the public but good for WALL STREET as it helps foreign banks recover their losses.

Good luck during the coming DEPRESSION, we are past the point of no return. There is nothing we can do to stop it.

— Vietnam Vet, Castro Valley, California

Recommend Recommended by 3 Readers 93.October 31, 2008 10:37 am
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When was the last time you and Brooks wrote the same column on the same day? An occasion worthy of note, I'd say.
— Johan Andersen, Gilford, NH

Recommend Recommended by 0 Readers 94.October 31, 2008 10:37 am
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Professor Krugman,

You say, "That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending"

So basically you're taking the view that running up the deficit is a good addition to the 700 billion we just gave to line the pockets of the crooks on Wall Street who have basically pocketed that money. Why not take that money back from them and fine and jail them and regulate them so this never happen again and slap on a one tenth of one percent transaction tax similar to our sales tax like we had under FDR and like Nader is proposing. And have the thieves pay for their own bailout. And LEAVE that money in the hands of the taxpayers so we can spend it in the marketplace. 700 billion is a pretty big stimulus package. What do you think?
— steve pesce, california

Recommend Recommended by 0 Readers 95.October 31, 2008 10:37 am
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Dave Brooks says today that what is needed is "A major infrastructure initiative [that] would create jobs for the less-educated workers who have been hit hardest by the transition to an information economy"

And Paul Krugman says today that "what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend."

Those two ideas sound very similar to me, kind of like a new deal for our economic crisis. Now where have we heard of that before??

— Randy, Alaska

Recommend Recommended by 0 Readers 96.October 31, 2008 10:45 am
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— LAS, Redmond, WA wrote:

There is one thing the government can do:

Drastically cut the interest rate on all student loans, no matter how old they are, and stop charging interest during the time when a student loan is on deferment. A person suffers a layoff and gets a deferment, and the interest on the student loan still accumulates, so whatever balance was paid off just returns and the loan is like revolving credit that is never paid off. Right now there is no way a person can refinance an old student loan at a lower interest rate. Student loan interest is eating people's salaries. Where is all of this interest money going? Currently, any actions taken on interest rates have no effect on student loans. Our society needs to stop gouging people just because they went to college or medical school.

===============================================

Amen to that - I will be paying for my undergrad and graduate nursing programs for the next 30 years - and they will top out at over $800 before I pay them off.

It would be a huge boon to a large segment of the population to have those rates reduced. I have no problem paying back my loans but when what I pay back ends up being double what I borrowed, I do have a problem with that (and my rate is pretty decent compared to others I know!).
— Amanda, Virginia

Recommend Recommended by 0 Readers 97.October 31, 2008 10:45 am
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You are so right. I saw this coming 4 months ago and adjusted my meager investment portfolio. I agree that it is time to invest in our crumbling infrastructure, invest in alternative energy al a Tom Friedman, and to provide universal health insurance.
— ErnieK, Ohio

Recommend Recommended by 0 Readers 98.October 31, 2008 10:45 am
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It's about time both government and consumers stop using credit and use the "Pay-As-You-Go" method.

We've seen our national debt soar from $4.5 to $11-trillion with nothing to show for it: not one new bridge, road, power plant, levee, or anything that would have put Americans to work, or improved our quality of life. All that money went out in tax cuts, credits and subsidies to the wealthiest, or businesses that were profitable, and not in need of assistance. Most of it went to Iraq, where greedy no-bid contractors have gouged and fleeced us without helping our soldiers, much less the war effort, and to those who have had no accountability.

Individuals have stopped saving, and borrowing to buy things as well. Some borrowing is needed: for a home, college, or to buy a business, but those are investments in one's future. Buying flat-screen TV's, designer clothes, or other trivial items is not needed, and has mired people in debt, so they'll be enslaved to the bankers the rest of their lives.

In both cases, government and people have been living beyond their means, and will need to spend less, more wisely, and evaluate purchases, give-aways, and determine actual need v. "wishing and wanting." Many people, and government, are paying so much in interest only (without reducing principle), it'll be decades, if ever, the debt will be reduced to manageable levels.

What happened on Wall St. was a typical example of greed, not saving/investing, lacking capital reserves, and ultimate implosion and melt-down of the system.

Any further stimulus package from the government should be to invest in our infrastructure, which would create jobs. Many are out of work, and can't spend on anything more than food or rent, so another $300 check won't be spend at an electronics store, but on bare-bones necessities, or to pay off a bill. Once the millions of laid-off workers start getting paychecks, they'll be better, and our country will improve. Start with investments in wind, solar, biofuels, natural gas, nuclear energy sources to wean us off oil, so we don't keep sending billions annually to other countries, and keep the money here, to repair and rebuild our electrical grid, up-date our internet, improve safety, and improve efficiency.
— Tina, California

Recommend Recommended by 0 Readers 99.October 31, 2008 10:45 am
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We should learn from history. In the 30's the most succesful projects were public works projects that employed people and resulted in assets to our country that still exist. Such as WPA projects that are still visible in many of our parks, as well as bridges and infrastructure. This is productive welfare that benefits all society,compared to the corporate welfare that never seems to trickle down to the people that consume and power the economy. We need change !
— tom, pittsburgh

Recommend Recommended by 0 Readers 100.October 31, 2008 10:45 am
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The market forces will bring the economy out of the doldrums, not Congressional policy. The only thing that a Democratic Congress will do is impede recovery.

President Clinton alluded to Democratic Congressional ineffectiveness on Good Morning America in September when he remarked that it was the Democrats in Congress who failed to support Fannie Mae and Freddie Mac reforms during his presidency.

Bernanke is easy to criticize , but his monetarist approach to adding liquidity to the market is a better measure than others unless one believes in contracting the money supply through Keynesian-style public works programs coupled with higher corporate and capital gains taxes that simply suck up investment dollars.


— Christopher Fee, Uniontown, PA

Recommend Recommended by 0 Readers

51.October 31, 2008 10:02 am
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Dear Nobel Laureate,

I really hope that government heads your warnings and starts spending on something productive, not 600 dollar checks for Walmart, aka China. Maybe our populace learns this time around that each of us is member of a larger community, that if you buy cheap at Walmart, aka China, your jobs would go where production is, China; that the only investment worthwhile is in education, infrastructure and equity, not vacations, fancy homes and accessories.

By the way you are such an optimist, I don't think anyone is accounting for the 15 million plus undocumented worker jobs we lost that were lubricating our economy with cash (no credit cards or checks), if you factor that in we are in a deep hole.
— Jose, Hoboken, NJ

Recommend Recommended by 1 Reader 52.October 31, 2008 10:02 am
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Comment #10 is exactly right. The disparity between the top earners and those at the bottom has contributed significantly to our current credit crisis. People buy on credit when their wages do not keep pace with the cost of living.

Sure, one can argue that those at the top work hard and deserve a bigger piece of the pie but when the compensation ratio is 400:1 it doesn't take an ethics scholar to see that this is unsustainable nor fair.
— Walter, Ames, IA

Recommend Recommended by 2 Readers 53.October 31, 2008 10:02 am
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"...in practice, if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment."

The Fed did start slashing rates over a year ago - target federal funds on 9/17/2007 was 5.25% - not exactly liquidity-trap level. The next day the drop in interest rates started and it continues now. At that time, inflation was a major concern, so many economists were opposed to cutting rates (they were kept high in Europe).

It's past time to face facts - monetary policy does not work the way Paul thinks it does.
— skeptonomist, Tennessee

Recommend Recommended by 0 Readers 54.October 31, 2008 10:02 am
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perhaps consumers will find a different kind of "cool" in their savings rates, or their in-home conservation projects, or community services. Where does it say that consumers must purchase stuff they don't need? If Madison ave. says home solar is cool, consumers will buy. That's a good thing.
— tuffy53, denver

Recommend Recommended by 1 Reader 55.October 31, 2008 10:02 am
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The credit card industry along with the home equity scam is what financed the last gasp of the seventeen year American consumer splurge. They started turning off the spigot second quarter. The public responded. Card rejected they had no other option.

The phrase overheard most frequently in our local Walmart? "No honey, put that back, mommy doesn't have the money."

The posters who point out that corporations preemptively laying off workers in anticipation of this downturn are magnifying the effect also make an excellent point. The stock market has regularly rewarded cost cutting (firing) and punished humanity (keeping a workforce in place). What to do to change this? Why is it that the bottom of the pyramid is the first to shrink? Because those at the top decide who is needed and the top of the pyramid is in contact with itself and its immediate clerical support staff.

Bridges and public transportation renewal will help the displaced construction industry, but that won't put the genie back in the bottle. The artificial inflation of the equity values of the nation's housing is now swinging in the opposite direction. Much of the new housing was poorly conceived - housing in the middle of deserts with no local water that is two hours of car commute from the local source of employment (it wasn't just Dubai) just doesn't make long term sense. But, housing in many inner city's where there are the supporting resources has been hit harder in many cases, often because housing bubbles are not driven by common sense (a golf course is not a necessity). The assertion of ecological thinking and rationality will be a bitterly contested battleground in the years to come ("Drill baby, Drill" and similarly idiotic mantras make this more than clear).
— jwp-nyc, New York City

Recommend Recommended by 1 Reader 56.October 31, 2008 10:02 am
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Is it just possible that our so-called leaders and the general population will eventually come to some sort of realization that our obscene military spending ($10 billion a month in Iraq and $4 billion a month in Afghanistan, as well as the billions it requires to maintain an empire of over 800 US military bases globally) cannot be sustained? As a start, why not cut half of the Pentagon's budget and use that money on job creation ("green-collar"), on rebuilding infrastructure, and programs of "social uplift" as Dr. King once said.
— Will Thomas, Auburn, NH

Recommend Recommended by 3 Readers 57.October 31, 2008 10:02 am
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On a recent episode of The McLaughlin Report, Pat Buchanan stated that the biggest mistake in the history of American economics was to create a credit system. To him, spending money we don't really have, which is not protected by any currency standard per se, and paying upwards of 25% interest on the balance created a debtor nation. Just like any other addiction, after a period of "putting off" the inevitable, we begin to dodge the inevitable. The balance soars, and we haven't paid the piper. Nor is consumer credit a system based on rational economics, as it stimulates abuse and creates a false sense of well-being, giving people a delusion that their income is actually much higher than it is. People get used to that idea very quickly and the credit card becomes the Golden Calf.

I remember back in the 60s I wanted to buy my mother a silk scarf for Christmas, and I went back to the store every week with $2 to pay on the "Lay-Away plan. I didn't get my purchase until the balance was paid in full. Somehow that principle has to be applied as the government revamps a decrepit, bleeding economy.
— Max, Centereach, NY

Recommend Recommended by 3 Readers 58.October 31, 2008 10:02 am
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"The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year."

Only in the last few weeks, and only for higher-risk loans. Until the Lehman Bros collapse, short-term rates had followed federal funds, as they usually do, to levels which were extremely low by historical standards.


— skeptonomist, Tennessee

Recommend Recommended by 0 Readers 59.October 31, 2008 10:02 am
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Your articles always help me understand what's happening. I hope Obama wants your advice after he's been elected and becomes our next President, whether or not you join in his administration. But if you're officially part of it, that would give me even more confidence that we'll get out of the current depression as quickly as is possible. At best, unfortunately, that won't be very fast. No one is advocating another WPA. And reforming education, starting with nursery schools, takes more than 20 years to have an effect on productivity. It would be helpful to your readers if you evaluated each of Obama's major economic stimulus programs in terms of the length of time it would take for them to have an effect on the current depression.
— BabsW, Massachusetts

Recommend Recommended by 1 Reader 60.October 31, 2008 10:02 am
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President Jimmy Carter asked American consumers to stop using credit cards in the 1979 credit crisis. The response, credit card outstandings continued to grow at an even faster pace.

This is very unusual behavior for US consumers.
— Scott Harrison, Austin, Texas

Recommend Recommended by 1 Reader 61.October 31, 2008 10:02 am
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Once again you are on the mark, Mr. Krugman. To thrive into the future, we must target those segments of the economy that form the infrastructure we depend upon for our survival. Roads, bridges and flood control are obvious examples of big "public works" infrastructure projects, but many of the systems that support our civilization are in need of repair and upgrades. Some have been in the news for years, such as primary and secondary schools, especially in our urban areas. Some are more recently in the news, such as our electric distribution system. There are aspects of our economy that can and will quickly produce wealth and jobs given incentives that provide confidence for investment and some R&D assistance. We don't need another invitation to shop for goods, transferring most of the benefit out of the country.

...and since you brought up "zero interest rates", what if we try what the Chinese did. They instituted a system that essentially produced NEGATIVE interest rates to promote business and job creation. While I would not agree with much of what the Chinese have done, manipulating their economy, they certainly provide an economic example of what it takes to go from moribund to dynamic.

We need to get out of the ditch, in repair, and back on the road with a new hand at the wheel. The current occupant has become much worse than a lame duck. The image I have is a flock of dead ducks, rotting and contaminating the whole pond.
— R Mayer, Cincinnati, OH

Recommend Recommended by 3 Readers 62.October 31, 2008 10:02 am
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So government spends more and puts people back to work. And does that mean that more will be saved or more will be spent. Saving it doesn't help a consumer-based economy and spending it won't help either because then there is nothing for the inevitable rainy day. Will inflating the currency help? Look at Germany in 1923 as an example and what followed. Frankly, I don't think anyone knows how the problems are going to be solved in the short or medium term. As for the long term, Augustine lived at the end of the Roman Empire and maybe we are living at the end of the American Empire.
— Stephen, Windsor, Ontario, Canada

Recommend Recommended by 1 Reader 63.October 31, 2008 10:02 am
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Of course we have capitulated, 4$ gas was just a month ago, food prices rising, health care cost out of control with insurance companies making excessive profits. $401k's in the toilet. I just hope the Obama get in and brings the troops home and uses that money to allow the States to award contracts to rebuild our infra structure, develop alternative energy, fuel efficient cars and trucks and build America wealth at home. Hopefully with the Obama tax cuts the middle class will be able to save for the future.
— ejm, Pensacola,fl.

Recommend Recommended by 0 Readers 64.October 31, 2008 10:02 am
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I doubt that the economy will rebound until consumers get their financial houses in order. It amazes me how so many people thought they could live on credit forever. The day has come to pay the piper. I don't feel any sympathy for people who went on spending sprees, wracked up credit while knowing they were buying what they could not afford. If they feel the pain, they might learn how to handle money.
— Debra Garson, NYS

Recommend Recommended by 3 Readers 65.October 31, 2008 10:02 am
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Luxuries exttras! I use my credit cards to buy food. No job, paying taxes on unemployment which I know I am happy to get. A small house that I am trying to keep. I guess I am the lucky one. I never thought I would retire anyway. My retirement plan is work, if only I could, and die. Save money--what's that?
— taigail, Pennsylvania

Recommend Recommended by 2 Readers 66.October 31, 2008 10:02 am
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As usual, a superb job of explaining the paradox of thrift, the relative impotence of monetary policy and the pressing need for fiscal policy (should we not all be Keynesians now?). The fiscal push should be for investments that will increase the efficiency and productive capacity of the country, as opposed to personal consumption of nonproductive items, else we will not be able to service the greater debt and eventually repay it.
— Peter Braun, M.D., Arlington, Mass.

Recommend Recommended by 1 Reader 67.October 31, 2008 10:02 am
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Not just any infrastructure, but energy efficiency improvements that will allow us to send less money overseas so that more remains here to be spent in our economy.
— Fred, Seattle

Recommend Recommended by 3 Readers 68.October 31, 2008 10:02 am
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This is the year there will be no Christmas. As a retailer, I'm already seeing it. Empty stores, people pinching pennies. The next big fall will be large box stores going under. They, too, were greedy with one built on every corner. How many do we need? And they all carry the same merchandise.
— Gary, Michigan

Recommend Recommended by 4 Readers 69.October 31, 2008 10:02 am
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As always the Professor is telling the truth as it is. The worrying thing is, that there is nothing you can do to stop it. At least not as long as you try to fix this old system. The solution lies in coming up with a different economic model, one that actually is just, provides for the general welfare and furthers the pursuit of happiness, in short on that actually implements the ideals of the American Revolution and finally delivers on those promises.

— Alexandra, Washington D.C.

Recommend Recommended by 1 Reader 70.October 31, 2008 10:03 am
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The optimum time for consumers to cut spending is the same as for planting a tree-- the best time was ten years ago, the second-best time is today. The reckoning will never be pleasant, but waiting won't make it easier. I've been joking that for Christmas this year, I'm giving two gifts--canned peaches and ammunition. It's barely a joke, but it's also barely not true.
— Adrian B., Madison, WI

Recommend Recommended by 0 Readers 71.October 31, 2008 10:03 am
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So let me get this straight: The economy needs someone to be spending to move the money around. But most consumers have stopped spending and taken to saving, which anyone with a modicum of personal-finance sense would tell you we need to do.

There is one segment of the population that doesn't need to really increase their savings: the rich. They've been "saving" by investing their money or loaning it out to the government. So how about us non-rich 95% start doing the saving, and the remaining 5% do the spending. Of course, they can't buy enough boats and Lexi (plural of Lexus?) to offset that TV that I'm not going to buy now, so let's help them out buy directing their money towards infrastructure. By that, I mean human (health, education), communications, energy (renewable, electric grid), civil (roads, bridges, rail network, water network), military (our men and women and materiel have taken a beating lately), and economic (paying down the debt). I'm sure we can re-establish some means by which the wealthy pay for these things. (Is it ironic that our biggest re-distribution of wealth happened during the Red-scare era of the 1950s?)

It's my turn to do the saving-part of the economy. Let the rich do the spending.
— GW, Indiana

Recommend Recommended by 1 Reader 72.October 31, 2008 10:10 am
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You're right and David Brooks is right and you are TOGETHER! Surely, someone in the Bush Administration will dane to read both your pieces in the despised "liberal press", today, and get new economic polices moving!
— Ellie Moller, RYDE, CA

Recommend Recommended by 1 Reader 73.October 31, 2008 10:10 am
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Dr. Krugman, you have always beem a Nobel Prize winner in my view but congratulations on the fact that the rest of the world noticed. And, as you offer, perhaps the most direct route out of this crisis is a works project (such as Senator Obama proposes and such as FDR imposed over the objections of those who took all the money) because, thanks to the Bush plan, we have a huge deficit with almost nothing to show for it - can we take on the quasi-economic notion of supply side policies, end the Iraq conflict (at least as Afghanistan looks now to be even trickier), and begin to use taxpayer dollars to help, well, taxpayers.
— alprufrock, Portland, Oregon

Recommend Recommended by 1 Reader 74.October 31, 2008 10:10 am
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Infrastructure: our children will thank us.

Healthcare: it's labor, thus jobs, intensive.

Green technology: let us take the lead in the

technologies of the future.
— epistemology, Media, PA

Recommend Recommended by 3 Readers 75.October 31, 2008 10:10 am
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Mr Krugman Why not spell out your suggestions for a stimulus package right now before the lame duck congress and administration return.Then we would have a baseline to work with. Previous actions by treasury and the fed, some of which you agreed with, have floundered because of continued greed by banks and without a sense of national unity or purpose. Lets see if this malaise can be changed.
— TEK, NY

Recommend Recommended by 1 Reader

26.October 31, 2008 9:49 am
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We need a stimulus package that doesn't involve a giveaway to consumers who will only save it.

But won't more spending just increase the deficit?

Here's my idea. Lets build the ultimate WPA project - a high speed rail line between NY and Chicago. A 700 mile trip at 200 mph (maybe 150 avg with stops), a business traveler could go from Union Station to Penn Station in 5 hours, faster than flying when overall trip length is considered. At $1 million per mile the money would flow for materials and labor, benefitting all segments of society.
— 10K walker, New York

Recommend Recommended by 5 Readers 27.October 31, 2008 9:49 am
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It is obvious that Americans can no longer rely on loans to make up for their meager incomes which have stagnated for decades. Instead, it would make quite a bit of sense to turn to their.... ACTUAL INCOMES, by demanding salaries that can be lived on. For 30 years, it has somehow been reprehensible for workers to demand what's rightfully theirs: a share in the incredibly rapidly climbing profits of their employers.

www.usparliament.blogspot.com
— Jacob Olsson, New York

Recommend Recommended by 10 Readers 28.October 31, 2008 9:49 am
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I suppose it would be political suicide to suggest that, instead of a "rebate" check, the government should give some extra money to those already on welfare or at poverty-level income.

They would certainly spend it. But they aren't "working class" and don't pay taxes, and therefore do not deserve any extra help.

That would be, oh no! even more socialism.
— maryann, Tacoma

Recommend Recommended by 5 Readers 29.October 31, 2008 9:50 am
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I wonder if the fact that the consumer has effectively already bailed (or started to) is actually a good thing rather than a bad one -- after all, such behavior, no matter what the path of the economy overall is over the longer term, will last a certain amount of time. With the downturn in consumer activity starting relatively earlier in the process, it would seem that by the time things begin to stabilize, the consumer would be ready to jump back in -- perhaps shortening the "bad times". Back in 1989, as the seeds of the last "normal" recession began (the events of 9/11 obviously had a profound effect on the most recent one, rendering it "not normal") I found myself running the old family business (a women's clothing shop in Brooklyn). After a rather promising Columbus day weekend (the beginning of the coat season -- the time of year that effectively determines how the year overall will look) all of a sudden things just died. It was palpable. You could almost smell it.
Maybe, just maybe, the early capitulation of the consumer (and I think we all have a pretty good idea of what the fourth quarter will look like) coming early will lead to a recession that will look more like a "V" than a "U". I'm hoping that as long as unemployment remains under say 7% or so, an appropriate new administration comes in and credit markets begin to stabilize, we'll be OK (of course, "OK" in this context would mean that things perk back up in late 2009 as opposed to 2011.
I guess we'll see -- at least with any luck at all.
— Artie Gold, Austin, TX

Recommend Recommended by 2 Readers 30.All Editors' Selections » EDITORS' SELECTIONS (what's this?) October 31, 2008 9:51 am
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I think you're confusing sobriety with an empty bottle, Paul. I'll go on another bender if you can spare a little change.
— K McNamara, Houston

Recommend Recommended by 7 Readers 31.October 31, 2008 9:51 am
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I don't know much about the economy. But I believe in supporting local farms and mom and pop stores. These hard working Americans are my neighbors and I hate seeing them getting swallowed up by corporate America. Sometimes I have to pay a little more, but mom and pop stores give the best service, sell quality products, and truly care about their costumers. I buy what I need and hope I'm making a difference. You can't build a house on a weak foundation.
— cluppins, nh

Recommend Recommended by 6 Readers 32.October 31, 2008 9:51 am
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What we need now is a fiscal stimulus like actual government spending. Exactly what John McCain thinks is a bad idea.

Yet another reason to vote for Barack Obama.
— mjb, Tucson

Recommend Recommended by 6 Readers 33.October 31, 2008 9:52 am
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For one, Mr Krugman, read up on your St.Augustine. He never prayed or pleaded anything like your quote. Two, why are you not worried about the burgeoning federal deficit? A fiscal stimulus sounds good, but the wells are dry. Nobody will be buying our federal debt anymore, after China and other emerging markets are caught in recession. Interest rates will rise, mortgage rates will rise, home values will fall further, and all the stimulus goes for naught
— klaus volpert, wayne, pa

Recommend Recommended by 0 Readers 34.October 31, 2008 9:57 am
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Problem - no jobs - no jobs, no paycheck - no paycheck, no money - no money, can't pay bills.

Solution - JOBS! If it takes another project like the WPA, then do it. Put the construction workers back to work building and repairing our infrastructure and working on alternative energy programs like solar and wind power. More engineers will be needed to plan these projects, more clerical workers for support.

Put the unemployed people from the auto industry to work finding a better battery for electric cars, better fuel efficient engines, better designs for alternative energy vehicles.

Use the medical grads and undergrads in areas such as the Native American reservations and community clinics. Use the newly graduated and soon to be graduated teachers in inner cities and also reservations. So many ways we can employ the unemployed and also help our own country at the same time.

More jobs means that grocery stores will not close, more restaurants will not close, more hospitals will not close, more rentals will not be vacant, more homes will be sold, more people could pay their mortgages, retail sales will go up. So many ancillary businesses will benefit.

If this be "socialism", then why not take the best ideas of socialism and make them work for our people?
— Utahreb, Fort Mohave, AZ

Recommend Recommended by 7 Readers 35.October 31, 2008 9:57 am
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It says something ominous about 'the economy' the second-largest item (after 'defense') in the federal budget is the amount of interest we paid last fiscal year on the public debt. As I understand it, interest is one of those expenses that absolutely cannot be (ahem) 'deferred' (politely, its 'Non-Discretionary').

— sandyg, austin,tx

Recommend Recommended by 1 Reader 36.October 31, 2008 9:57 am
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Actually, we are still spending the same amount of money; but all of it is spent for gas, groceries, utilities, ...

Non-essentials have gone by the wayside.
— jr, Ohio

Recommend Recommended by 5 Readers 37.October 31, 2008 9:57 am
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I think that #9 got it right, an increased money supply. Presumably, this will increase inflation rates which, I posit, is useful in this situation. The massive debt that we have accumulated needs to be reduced or eliminated in order to allow increased spending. There are two options to reduce debt. First, one could pay it back. In this case, that would imply either a radical cutback in US consumer spending or taking massive amounts of market share from producers in other countries. Second, inflation works wonders at reducing debt, since a 5% annual inflation rate reduces the value of debt by 5% per year. Inflation also reduces asset value, but since we are a debtor nation at this point, I think that increased inflation rates would be hugely beneficial in the long term (10-30 year window) for the US economy.
— Rob, Boulder

Recommend Recommended by 1 Reader 38.October 31, 2008 9:57 am
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Mr. Krugman's comments about the financial crisis have, from the beginning (particularly the one previous to this), been instructive lessons in the difference between intelligence and wisdom -- not to mention how private virtue can be a public vice. The almost gleeful way with which he has spelled out "doom" for all to read makes me almost understand why conservatives find liberals so distasteful. There is certainly no harm in providing good information about what is happening, but indulging in predictions (such predictions are something which any economists knows not to accept, particularly from other economists), as he has repeatedly done, and gloomy ones too, whose only possible result could be to heighten the irrational anxieties that are already gripping people, is irresponsible and stupid. Warren Buffett had the right idea: "it is time to invest". And if you're cash-strapped, well then, learn some lessons about savings and then maybe the next time this happens you'll have some cash ready and you can spend gobs of it intelligently, on under-valued equities -- and you won't have to read about how your private virtue is flushing the country down the toilet.

Mr Krugman's wisdom in short: You should be so scared you'll never want to spend again, but please don't save your money, even though saving money is a good thing. Let's start another bubble!!!
— Jon, China

Recommend Recommended by 0 Readers 39.October 31, 2008 9:57 am
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I believe your columns lately have been laced with excessive hyperbole and, at times, downright fear mongering. We must act now or we will all be penniless, homeless and hungry!!! Remember many qualified economists agree that the Great Depression was made worse by government action, not better

Similar to what GWB did back in 2001/2002 in the war on terror, you and others are pushing fear in an effort to obtain certain political goals. While I cannot be certain such goals are not worthy of consideration or action, I am sure that any agenda hastily pushed and passed based on fear is one that we will all regret in the years to come.
— Dave, NJ

Recommend Recommended by 1 Reader 40.October 31, 2008 9:57 am
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Throughout this recent fiscal crisis, much has been made in comparing this recession/downturn to prior recessions, particularly 1991, 1980, and even the Great Depression.

One very important difference between today and prior economic recessions is the Internet, with its vast resource of information and data (some valuable, some worthless) and the speed at which information is shared.

In the current environment, investors and consumers have access to immediate and widely broadcast information. And equally important is the lack of or “missing” information (lack of disclosure and transparency regarding mortgage backed securities, credit default swaps, how AIG has spent the bailout funds, etc.). These factors might impact the speed and degree at which consumers react to economic news and business cycles, from the start of the downturn, through the depth of the downturn, and the speed of recovery.

It would be very interesting study the impact of the Internet on the current crisis.


— M Bernier, Newburyport

Recommend Recommended by 0 Readers 41.October 31, 2008 9:57 am
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Yes. It's time for New Deal II. Though it will explode the budget deficit, it's time for major government investment in energy, health care, education, and infrastructure. For today at least, Paul Krugman and David Brooks are (sort of) on the same page. Let's revel in the harmony and put the spirit of bipartisanship to good use.
— Steve Blevins, Oklahoma City

Recommend Recommended by 5 Readers 42.October 31, 2008 9:57 am
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The government is printing money as fast as it can, but soon even it can not keep up with the bailout. And it too will need to be bailed out. Than we will call on GOD to bail us out. And what will GOD say, "This is a recorded message please leave you name and telephone number and I will get back to you as soon as I can".
— agittleman1, Arkansas

Recommend Recommended by 3 Readers 43.October 31, 2008 9:57 am
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Apparently companies slashing employees and keeping real wages down have forgotten that ultimately in order to be successful, people have to be able to afford their products. So, corporate America is also perpetuating the downward spiral.
— Mike, Mount Laurel, NJ

Recommend Recommended by 6 Readers 44.October 31, 2008 9:57 am
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So our economic well-being depends on ever-growing expenditures by consumers, using ever more of the finite resources of the planet (whether for any useful purpose seems irrelevant), and an ever-growing environmental footprint. There is something wrong with this picture! It makes one despair that so-called western civilization is capable of tackling the growing environmental pressures.

Jack
— Jack Johnson, Toronto, Canada

Recommend Recommended by 1 Reader 45.October 31, 2008 10:00 am
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tell me this, krugman. if the congress can afford to give wall street and the banks $700M, why cant it afford to give american citizens something other than the old $300 rebates?? wouldnt giving every american citizen, amn, woman and child, $100K help the economy even more. because that money would be put into circulation almost immediately. either as a spending spree or as a payment of some of the outstanding debt. also, some would probably invest it or, even better, hold onto it as savings (were already told that americans are the worst when it comes to saving for a rainy day).

why is it better to give the financial sector this huge bailout and not help the average joe (tinker, tailor, plumber or what-have-you) just a little? or a little more than what we usually get? sure, a lot of people would just waste it, but whos to say that the financial big dogs would use it any better?

you could put any stricture you want on the largesse: if 60-75% of the money doesnt go to pay down existing debt, then you cant declare bankruptcy for 10y. a lot of people would be helped, and a lot of money would exchange hands. and the point of an economy is the circulation of the currency, right? as for giving money to children (who, one would think, would have no debt), a generation of kids who would have a education fund ready made.

so the point of this comment is really, where is mine?? after all, it is my money, isnt it??
— milti, chicago

Recommend Recommended by 1 Reader 46.October 31, 2008 10:01 am
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For a President-Elect to propose policy before his inauguration may be virtually unheard of.

However, these are virtually unheard of times, and Barack Obama's win may prove large enough to give him the stature he'd need to offer policy to Congress in a matter of a couple of weeks after his victory.

Bush's stature is so low, his authority so utterly discredited, there would be little if anything he could do to undermine Obama ... at least not publicly.

Worth a try, for this special President-Elect?
— RWeber, Park Slope

Recommend Recommended by 1 Reader 47.October 31, 2008 10:01 am
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Mr. Krugman, why didn't you say:

Buy American!

To open so drastically and so fast the market from China & Co was the biggest mistake.

This is the main cause for the recession!
— janko1, Slovenia

Recommend Recommended by 2 Readers 48.October 31, 2008 10:02 am
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Paul, you are a Nobel prize winning economist.Surely if a working stiff like me can spot a neoliberal ploy at work in this current economic crisis. Talking about consumers seems almost a purposeful distration for the reality of the implementation of the neoliberal shock doctrine on America, in a late-term effort to massively redistribute wealth to the elitist plutocrats before they leave power. Yet you, dear sir, are tilting at windmills [though your quote from Augustine was very intesting]. Let's talk about the trillions of dollars that rich individuals and corporations have squirreled away in off-shore shelters. That is more the key to understanding - and solving - this crisis.
— Victor Edwards, Holland, Mich.

Recommend Recommended by 2 Readers 49.October 31, 2008 10:02 am
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Hooray! You're pinning our hopes on the Congressional Action Team! I feel better already. Given that consumer spending is the most significant leading economic indicator, this is the most depressing news I've heard in weeks. I doubt a good'ol temporary stimulus package-induced bump will do anything other than increase this year's hilariously large deficit. That is, of course, unless the GOP package, based on suspending capital gains taxes, gains traction. That's their answer to everything - "If only I didn't have to pay taxes on all those capital gains, I could invest in durable goods for my family." It's a moot point, since nobody will have any capital gains to tax this year anyway. Boehner's severe tunnel vision with respect to this issue is hysterical, but I digress.

The reality is that there is little the government can do to address a problem of this size and depth. We're going to have to ride it out until consumer spending thaws out, which, with any luck, will happen before xmas 2009. The best thing the new administration can do is set an example with a sober, consistent and calm temperament.
— Jaded, Brooklyn, NY

Recommend Recommended by 0 Readers 50.October 31, 2008 10:02 am
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so the fed is irrelevant;true but the key to the elite's control of americans remains the maintenance at all costs of consumer debt-credit.
only by renouncing debt at the personal level can the economy recover- pay cash for what can be afforded,or do without. yes there will be pain, but the credit vampires can be destroyed and people can take back control of their financial destinies; and proponents of the chicago school of economics should be dealt with by any means neccesary.
plus the usa should consider the repudiation of debt; imagine the panic in china.
— judah benjamin, portland,or.

Recommend Recommended by 0 Readers

1.October 31, 2008 7:19 am
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What kind of government fiscal spending? Fixing bridges and roads? Investing in our infrastructure?

I like it more than simply sending out checks - keep people working and they'll have that money to spend on necessities and we'll also get much needed work done.

And its time we stopped spending foolishly on designer clothes we didn't need (and couldn't afford), and on newer flashier cars each year and bigger unaffordable homes. I love nice clothes and cars and homes - but at some point you have to become aware how much of it is simply unnecessary and how much that kind of wasteful debt is harmful.
— Katy, NYC

Recommend Recommended by 69 Readers 2.October 31, 2008 7:19 am
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Yes! Thank you! Don't give me another credit voucher and tell me to go shopping.
I don't need anymore stuff. Build something -- a windmill, a bridge to somewhere -- I don't really care. Keep the gift certificate, make an investment and put people to work here in America.
— Bradley Towle, Tokyo, Japan

Recommend Recommended by 113 Readers 3.October 31, 2008 7:19 am
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There is one thing the government can do:

Drastically cut the interest rate on all student loans, no matter how old they are, and stop charging interest during the time when a student loan is on deferment. A person suffers a layoff and gets a deferment, and the interest on the student loan still accumulates, so whatever balance was paid off just returns and the loan is like revolving credit that is never paid off. Right now there is no way a person can refinance an old student loan at a lower interest rate. Student loan interest is eating people's salaries. Where is all of this interest money going? Currently, any actions taken on interest rates have no effect on student loans. Our society needs to stop gouging people just because they went to college or medical school.
— LAS, Redmond, WA

Recommend Recommended by 127 Readers 4.October 31, 2008 7:19 am
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I am willing to bet, and have been saying this for weeks, that a victory for Obama on November 4 will signal such a sea change in our economic confidence that the markets will respond in time to rescue a falling economy. It should take the form of calming fear itself just as the country experienced with the election of Franklin D. Roosevelt.
— Gloria Endres, Philadelphia

Recommend Recommended by 108 Readers 5.October 31, 2008 7:19 am
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I am aftraid that the consumer has finally seen the light and decided to opt out of the system. The economy is going downhill in a hurry and there are no brakes. I see a big crash ahead, and most likely a collapse will follow the crash. No matter what the government does now, short of funding a major war on the scale of WWII that bush has not yet managed to create, anything that is proposed/udertaken has the people not believing,trusting or wanting. They have been burned too often and they are wary of everyone and everything.

The worse is yet to come. A new WPA might staunch the bleeding, but there is not much help for a severed juglar.
— Clifford, WA

Recommend Recommended by 23 Readers 6.October 31, 2008 7:19 am
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I largely agree with this view. However, this spending comes on top of an existing debt and existing large deficits. We have to finance all this. This is a large amount of Treasuries that could flood the market. What if not enough buyers show up to an auction. This is hardly ever discussed. It is just assumed someone will buy all this debt. What if they won't? What if they can't?!?!?

Won't interest rates shoot through the roof?

Possibilities of US default are being whispered about in the far reaches of the ether, just like the possibility of financial crisis was two years ago.

By the way, congrats on the Nobel. Nicely done.
— Roy S, Salt Lake City, UT

Recommend Recommended by 16 Readers 7.October 31, 2008 7:19 am
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It's a great time to spend massively on infrastructure and clean energy, both items are in Obama's agenda. Deficits really don't matter in the short term as only government can pick up the slack in consumer spending.
— rpa, Seattle

Recommend Recommended by 59 Readers 8.October 31, 2008 7:19 am
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It may be painful, for all of us, for the consuming public to retrench, but it is very short-term thinking to believe such behavior is unfortunate. The materialism of our culture is out of control, and the corporate structure that has encouraged it is bankrupt, literally and morally. There is little to no authentic joy to be had at the mall. It is the essence of neurosis to repeat what hasn't worked, in the vain hope that next time it will, yet the ever-unrequited lure of stuff has brought us to the mall repeatedly. What a ridiculous basis for a world economy!

How much better will we be if we invest our resources in strengthening and beautifying ourselves, country and world included. No, it is not too bad that consumers are shying from purchases now. This system is bust, and we have to bust it. May as well happen sooner than later.
— Shelley, Santa Barbara

Recommend Recommended by 95 Readers 9.October 31, 2008 7:22 am
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Interest rates are not the only tool the Federal Reserve controls. Watch the action in the Open Market Committee to buy securities and increase the money supply.
— Barbara Reader, New York

Recommend Recommended by 6 Readers 10.October 31, 2008 7:22 am
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It's pretty simple. People are not payed a living wage in the US anymore. The spread between what folks get paid and what they need to live has been made up by credit over the past 20 years. The wealthiest simply pocketed the difference plus all the interest on those loans.

The answer is simple, pay better wages and people will spend more.
— Don, Madrid

Recommend Recommended by 125 Readers 11.October 31, 2008 7:22 am
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You are channeling Lord Keynes quite nicely, sir! Now if President Obama can channel FDR, we might, just might, stimulate a recovery based on adding value to the nation's infrastructure as well as its psyche.
— Ken Rabin, Warsaw

Recommend Recommended by 47 Readers 12.October 31, 2008 7:22 am
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Save baby save, worked for us after WWII, the Japanese and the Koreans later on, so hopefully after we have stooped our addiction to easy credit it will work again. A little hardship always builds character and makes for a better future! Just like there are no atheist in a foxhole so there are no (fewer) moral voters in an economic crisis!
— Sparti, Orlando, FL

Recommend Recommended by 10 Readers 13.October 31, 2008 7:22 am
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Isnt the real problem that there is nothing in the forseeable future that will provide an increase in disposable income to enable consumers to go out and buy again? Wages are stagnant and we are producing fewer and fewer goods here at home. Can government spending be big enough to restart our economy in a significant way? Im not sure there is a clear way out of this crisis.

Perhaps we need to create a new sector in the economy.

Is the Green Economy the solution? Just as the introduction of the digital age created new jobs and economic activity? Consumer spending based on credit rather than real income has been tapped out to the maximum.

Unless a new economic sector can be established, I see little hope to offset the loss of exported jobs and income.
— Frederick, Studio City

Recommend Recommended by 42 Readers 14.October 31, 2008 7:22 am
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I'll admit it. I've reduced my spending. No more dinners out, no more new furniture, no new clothes etc.

My company just finished laying off several hundred people, so my response is rational. Why did my company have to slash jobs at this time? They still made money in the 3rd quarter. Our companies have sacrificed us on the altar of efficiency and leverage. It is their actions that are magnifying this financial crisis too. Businesses that cannot weather a 2 quarter recession without laying people are not well run. When they lay people off because they are over-leveraged, they just make that 2 quarter recession even worse. If shareholders demand efficiency and short-term focus on financial results, this is what they get when consumers stay home for a month or two.
— Paul, Kalamazoo, MI

Recommend Recommended by 81 Readers 15.October 31, 2008 7:22 am
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Is it really the American consumer who has capitulated, or is it the long chain of lenders and savers who fed his habit? And perhaps instead of monetary policy, we now need a fiscal policy that will prey on the desperation of the America's working (and unemployed) poor: let government give supplementary income to those in the bottom quarter of the income distribution. They will, of necessity, spend all of it.
— Pandit, SF Bay Area

Recommend Recommended by 14 Readers 16.October 31, 2008 7:22 am
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Temporarily Eliminate Sales Taxes: Paul Krugman points out that “what the economy needs now is something to take the place of retrenching consumers” and says that this “should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend”. I suggest that we supplement actual government spending (infrastructure etc.) with temporary elimination of all sales taxes, with the federal government making up the loss to the budgets of individual states. This will give a direct incentive to consumers and will stimulate the economy.
— crt-nyc, New York, NY

Recommend Recommended by 10 Readers 17.October 31, 2008 7:22 am
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Invest in green technology and universal health care. Those two things would REALLY stimulate the economy by fostering innovation and freeing up many people to strike out on their own without fear of losing health care and with the knowledge that they could get going on a green job.

Universal health care would also have the side benefit of employing more people to supply the health care for the people that have been doing without for so many years and stopping about half the bankruptcies that are happening due to overwhelming medical bills, slowing down the foreclosure rates quite a bit.
— splashy, arkansas

Recommend Recommended by 117 Readers 18.October 31, 2008 7:22 am
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As usual, a very clear explanation and policy prescription from Krugman. But if we keep borrowing money to pay people in Pakistan and Afghanistan not to fight us, we will debase the dollar even more, and leave our kids with less to show for it.

If we're going to overpay Halliburton, we should make sure that what they build is going to our own infrastructure instead of Iraq's - and it's easier to keep an eye on them to make sure they follow the electrical codes, so that particular private vice becomes public virtue.
— Roger, Texas

Recommend Recommended by 43 Readers 19.October 31, 2008 7:22 am
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What will the impact on consumer confidence of lower gas and groceries that will be more pronounced in October?
— Luis Arenzana, Madrid, Spain

Recommend Recommended by 1 Reader 20.October 31, 2008 7:22 am
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Actually, I think the timing is particularly poor for yet another mundane but important reason:

People don't have the money to make this anything close to a successful Christmas season for retailers. The impact of this will be to drive some of them out of business and cause others to shrink--the effects of which will ripple through the economy. More people will be trapped in economic limbo or hell with very little opportunity to escape within a short period of time.

But my belief is that artificial stimulation and expansion of the world's economy through over-stimulation of American consumption was bound to produce a backlash or pendulum effect at some point. We've overspent to such an extent that the hangover and recovery periods are going to be extremely long--and extremely painful.
— MS, West Hollywood, CA

Recommend Recommended by 27 Readers 21.October 31, 2008 7:47 am
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Doesn't classical economics say that taxes and rates should be high and government spending low in 'good' times so that in 'bad' times taxes could be slashed and spending boosted to keep the economy going? Has this ever happened?
— JR Rudert, RI

Recommend Recommended by 17 Readers 22.October 31, 2008 7:47 am
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Unfortunately, this is so true. My husband, who always says that I can't go a week without buying something, hasn't said that in quite a while.
— jss, new york

Recommend Recommended by 14 Readers 23.October 31, 2008 7:47 am
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Infrastructure, infrastructure, infrastructure.
— Gerard Schaefer, Massachusetts

Recommend Recommended by 29 Readers 24.October 31, 2008 7:47 am
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As usual you are correct, the government is going to have to spend to take up the slack.

"That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend."

And that stimulus spending should be devoted to pulling this country from the old to a modern infrastructure of the 21st century; a wind powered electrical grid, modern seaports and a rail system equal or even better than the interstate road network.

Spend the money but have something of real value to show for it other than just red ink. Try to turn this sow's ear in to a silk purse and we can come out of this in better shape than before.
— tim, iowa city

Recommend Recommended by 50 Readers 25.October 31, 2008 9:47 am
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Having a long-overdue pay increase at work would greatly help too. Pay never seems to keep pace with the essentials, nevermind frivolities.
— Seymour Goode, MA

Recommend Recommended by 8 Readers

The fruit of hypocrisy

Dishonesty in the finance sector dragged us here, and Washington looks ill-equipped to guide us out

Joseph Stiglitz
The Guardian, September 16 2008

Houses of cards, chickens coming home to roost - pick your cliche. The new low in the financial crisis, which has prompted comparisons with the 1929 Wall Street crash, is the fruit of a pattern of dishonesty on the part of financial institutions, and incompetence on the part of policymakers.

We had become accustomed to the hypocrisy. The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures - yet when trouble strikes, all of a sudden they demand state intervention: they must be bailed out; they are too big, too important to be allowed to fail.

Eventually, however, we were always going to learn how big the safety net was. And a sign of the limits of the US Federal Reserve and treasury's willingness to rescue comes with the collapse of the investment bank Lehman Brothers, one of the most famous Wall Street names.

The big question always centres on systemic risk: to what extent does the collapse of an institution imperil the financial system as a whole? Wall Street has always been quick to overstate systemic risk - take, for example, the 1994 Mexican financial crisis - but loth to allow examination of their own dealings. Last week the US treasury secretary, Henry Paulson, judged there was sufficient systemic risk to warrant a government rescue of mortgage giants Fannie Mae and Freddie Mac; but there was not sufficient systemic risk seen in Lehman.

The present financial crisis springs from a catastrophic collapse in confidence. The banks were laying huge bets with each other over loans and assets. Complex transactions were designed to move risk and disguise the sliding value of assets. In this game there are winners and losers. And it's not a zero-sum game, it's a negative-sum game: as people wake up to the smoke and mirrors in the financial system, as people grow averse to risk, losses occur; the market as a whole plummets and everyone loses.

Financial markets hinge on trust, and that trust has eroded. Lehman's collapse marks at the very least a powerful symbol of a new low in confidence, and the reverberations will continue.

The crisis in trust extends beyond banks. In the global context, there is dwindling confidence in US policymakers. At July's G8 meeting in Hokkaido the US delivered assurances that things were turning around at last. The weeks since have done nothing but confirm any global mistrust of government experts.

How seriously, then, should we take comparisons with the crash of 1929? Most economists believe we have the monetary and fiscal instruments and understanding to avoid collapse on that scale. And yet the IMF and the US treasury, together with central banks and finance ministers from many other countries, are capable of supporting the sort of "rescue" policies that led Indonesia to economic disaster in 1998. Moreover, it is difficult to have faith in the policy wherewithal of a government that oversaw the utter mismanagement of the war in Iraq and the response to Hurricane Katrina. If any administration can turn this crisis into another depression, it is the Bush administration.

America's financial system failed in its two crucial responsibilities: managing risk and allocating capital. The industry as a whole has not been doing what it should be doing - for instance creating products that help Americans manage critical risks, such as staying in their homes when interest rates rise or house prices fall - and it must now face change in its regulatory structures. Regrettably, many of the worst elements of the US financial system - toxic mortgages and the practices that led to them - were exported to the rest of the world.

It was all done in the name of innovation, and any regulatory initiative was fought away with claims that it would suppress that innovation. They were innovating, all right, but not in ways that made the economy stronger. Some of America's best and brightest were devoting their talents to getting around standards and regulations designed to ensure the efficiency of the economy and the safety of the banking system. Unfortunately, they were far too successful, and we are all - homeowners, workers, investors, taxpayers - paying the price.

Joseph E Stiglitz is university professor at Columbia University and recipient of the 2001 Nobel prize in economics josephstiglitz.com

Growth and Welfare: Rising Income And Declining Satisfaction

Bharat Dogra
The Statesman, 31 october 08

In recent years whenever our ruling politicians have been told about increasing problems and discontent of the people, they have responded in various ways. They never forget to draw attention to the high rate of economic growth. “Look at the 9 per cent growth rate, things can’t be bad”. But what politicians forget is that there is an increasing disconnect between the growth rate and GNP figures on the one hand and the real well-being of people on the other. This leads to growing disenchantment with existing economic indicators like the GNP. So much so that the French government, responding to people’s changing perceptions, has now launched efforts to find other indicators which can be a better reflection of the real condition of the people.

Even the 23 high-income OECD countries, which are supposed to be the biggest achievers and beneficiaries of the existing path of development, are discontented.

The Human Development Report states: “Although per capita incomes in the OECD countries now average $20,000, surveys reveal growing insecurity and considerable dissatisfaction.” In Britain, a study by the New Economics Foundation which prepared an index of ‘Sustainable Economic Welfare’ revealed that during 1975-1990, the GNP rose by about 33 per cent but sustainable economic welfare fell by about 50 per cent.

Quality down

In a survey on the changes in the quality of life by the British Social Science Research Council covering a five-year period, the people who were interviewed almost unanimously said that their level of consumption had gone up yet the quality of life had gone down during the last five years. They feared that this trend of increased consumption and a decline in the quality of life would continue over the next five years.

Most countries have registered an increase in life expectancy in recent decades; but this has been accompanied generally by an increase in chronic health problems, physical as well as mental. The Director-General of WHO said recently, “Increased longevity without quality of life is an empty prize.” The state of the World Health Report 1997 (WHR) prepared by WHO went a step further when it added, “Longer life can be a penalty as well as a prize. A large part of the price to be paid is in the currency of chronic disease.”

In Britain, for instance, General Household Surveys after a 16-year gap revealed a 50 per cent increase in ‘long standing illness’ and a 75 per cent increase in acute illness during the preceding two weeks. Walter Yellowlees, a highly experienced doctor of this country said in a paper presented at the Royal College of General Practitioners : “I believe it is true to say that in those countries which have achieved unparalleled advance in technological skill in medicine and in what is called standard of living, we are witnessing the decay of man ~ the decay of his teeth, his arteries, his bowels and his joints on a colossal and unprecedented scale.”

Suicide rates are known to be quite high among some of the most economically prosperous countries, raising disturbing questions. In Australia (what appears to be a land of fun and fortune), suicide rates are reported to be among the highest in the world. As many as ten per cent of Australians commit some form of self-harm.

China is supposed to have the most impressive record of economic growth in recent years. However, a recent study by WHO, Harvard University and the World Bank noted that China also has one of the highest suicide rates in the world ~ about thrice the world average.

In India, the price rise is disconnecting the common people from the widely publicised data of high economic growth. The impact is worse than what is indicated by official statistics of inflation. In recent interviews with weaker section families, this writer found that people would time and again come back to talking of the impact of inflation regardless of what question was being asked.

However, even before the present phase of inflation, middle class families were also complaining of a sense of deception ~ of seeing their cash gains being lost in the middle of other, frequently bigger changes.

Many people complain bitterly about the steep hike in educational and medical expenses. With the increasing privatisation of education, people have more diverse options for their children’s education and careers, but for many of them this gain has come at too heavy a price. There is increasing economic tension as limited income gains are more than wiped out by sharply rising educational expenses from early school to the university level. At the same time, there has been a decline in the standard of government schools and closer career linkages with expensive educational institutions so that few options may be left for the people to opt out of the expensive system.

The lack of options is becoming even more difficult in the case of medical treatment. In most parts of the country, the standards of government hospitals and public health centres have been allowed to deteriorate. Simultaneously, there has been a proliferation of private hospitals and nursing homes, including several in the ‘five-star’ category. People are torn between the desire to avail the treatment here and the prohibitive expenses. A single serious illness or accident in a family can eat up all savings, perhaps also lead to indebtedness. Close family ties push people to seek better and convenient medical treatment at all costs, leaving behind a legacy of debt and economic stress even in the middle of rising cash earnings. Steeply escalating expenses of medicare and medicine cause tension and uncertainty among people regarding how to cope with a medical emergency.

Lopsided growth

Although India has been known for its closely-knit families, the trend towards a breakdown of ties has increased. This is partly because of the same factors that promise a rise in monetary gain. The disruption of family life leads to stress and depression, above all for children, and increasing economic problems as well.

Growing inequalities in the wake of fast but lopsided growth leads to social tension and a feeling of being left out among many people. In the middle of all the glitter and glamour of fast economic growth, many may feel squeezed out or alienated compared to those who can join in the celebrations. Thus in a situation of rising inequalities, in terms of relative gain and loss even many of those who have not lost in real terms may nevertheless feel like losers. Such feelings get aggravated in times of inflation when the majority suffer a huge pinch even as the party goes on uninterrupted for a select few.

There needs to be a wider and deeper realisation of these factors which matter a lot for the well-being of people beyond the statistics and rhetoric of growth and GNP. A better realisation of the real basis of people’s well-being will make it possible for economics and governance to become more involved in the true welfare of people.

The writer is a social activist