After the stimulus
For the coming year, and probably well beyond, the economy will be on life support — sustained by massive fiscal stimulus. (Either that, or we’ll be in a very deep slump.) But eventually the economy will have to come off life support. What will take the place of the stimulus?
I don’t really know the answer, but one thing that may be useful is to compare the sources of demand in 2007 with those over a longer period. Here’s a table showing C (consumer spending), N (nonresidential investment), R (residential investment), G (government purchases), and NX (net exports) as percentages of GDP in 2007 and on average over the period 1979-2007.
What stands out is the combination of high consumption and a large trade deficit. By 2007 residential investment had already fallen to normal levels, and nonresidential investment was also fairly normal.
Consumption probably isn’t going back to a 2007 share of GDP — savings are back. So what will fill the gap, once the stimulus is gone? Housing? Not for a long time. Business investment? Hard to see why. The natural thing would be to trade lower consumption for a smaller trade deficit.
But that’s going to be hard if the rest of the world is also in a slump, and in particular if emerging markets are facing currency crises.
What all this suggests — and it’s a very rough cut — is that our emergence from the era when massive fiscal stimulus is needed may hinge crucially on getting the world financial situation, not just our own, under control.
November 17, 2008, 4:38 pm
Krugman |
