My Economic Plan
The New York Times
October 4, 2002
By PAUL KRUGMAN
Although other news has been drowned out by the barking of the dogs of war,
something ominous is happening on the economic front. It's
not dramatic, but month by month the numbers keep coming in worse than expected
Let's put politics completely aside for once, and
review where we are and what should be done.
The key point is that this isn't your father's recession - it's your grandfather's
recession. That is, it isn't your standard postwar recession,
engineered by the Federal Reserve to fight inflation, and easily
reversed when the Fed loosens the reins. It's a classic overinvestment slump,
of a kind that was normal before World War II. And such slumps
have always been hard to fight simply by cutting interest rates.
Now there's no question that the Fed's rapid rate reductions last year helped avert
a much bigger slump. But a hard look at monetary policy
suggests that the Fed hasn't done enough - and possibly
can't do enough. Although the Fed funds rate, the usual measure of monetary
policy, is at its lowest level in generations, the real Fed funds rate - the interest
rate minus the inflation rate, which is what matters for
investment decisions - is actually about the same as it was at the
bottom of the last recession, in the early 1990's, because inflation is
considerably lower.
And the drop in the Fed funds rate engineered by Alan Greenspan & Company,
though faster than that in the last recession, has so far been
considerably smaller; last time it fell by 6.75 points, this time it fell by only 4.75.
Even if the Fed funds rate falls all the way to zero, that will
be a smaller interest rate reduction than the last time around.
If you think the excesses of the 1990's were larger than those of the 1980's,
that the economy needs more stimulus to pull itself out, then it seems likely
that the Fed hasn't done enough, and quite possible that even
going all the way to zero still won't be enough.
And this situation may last for a while. The overhang of excess
capacity, especially in telecommunications, will be worked off only slowly. It's
all too possible that we may be looking at a sluggish economy into 2004,
maybe beyond. The Fed should cut rates further - it may not be
enough, but it will help. What else should we do?
The answer is that we should have a sensible plan for fiscal stimulus - one
that encourages spending now, to bridge the gap until business
investment revives. Some of the elements of such a plan are obvious,
and were described by Jeff Madrick in yesterday's Times. First, extend
unemployment benefits, which are considerably less generous now than
in the last recession; this will do double duty, helping some of the
neediest while putting money into the hands of people who are likely
to spend it. Second, provide aid to the states, which are in increasingly
desperate fiscal straits. This will also do double duty, preventing harsh
cuts in public services, with medical care for the poor the most likely
target, at the same time that it boosts demand.
If these elements don't add up to a large enough sum - I agree with Mr. Madrick
that $100 billion over the next year is a good target - why
not have another rebate, this time going to everyone who pays payroll taxes?
And how will we pay for all of this? You know the answer to that:
Cancel tax cuts scheduled for the future. The economy needs stimulus now;
it doesn't need tax cuts for the very affluent five years from now.
This isn't rocket science. It's straightforward textbook economics, applied
to our actual situation. It's also, I'm well aware, politically out of the
question. But I think we're entitled to ask why.
o
In a column on Sept. 17, I wrote about evidence that Thomas White, the
secretary of the Army, was well aware that the Enron division of
which he was vice chairman before taking that position, Enron Energy
Services, was deliberately and improperly concealing large financial
losses. In that column I cited a February 2001 e-mail message that
I said was written by Mr. White. Since then Mr. White has said that he
does not recall writing such a message, and the authenticity of the
message has been questioned. As long as the authenticity of the message
remains in doubt, it should be considered unsubstantiated. I erred by citing it in my column.
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