Tags: Krugman | Obama | Fed | Avoid | Same | Mistakes | U.S.

Krugman Warns Obama, Fed to Avoid Same Mistakes U.S. Made in 1937

Monday, 04 Jan 2010 12:55 PM

The upcoming U.S. unemployment report may show the economy adding jobs for the first time in two years, writes Nobel Prize winning economist Paul Krugman.

But that’s not cause for optimism just yet.

In his column in The New York Times, Krugman reckons that the next GDP report is likely to show solid growth in late 2009.

“There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder,” writes Krugman.

“But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over.”

But what happened was that federal government spending was cut back.

Monetary policy was tightened — and the U.S. economy promptly plunged back into the depths, notes Krugman.

“As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump,” says Krugman, noting that in early 2002 initial reports showed the economy growing at a 5.8 percent annual rate.

“But the unemployment rate kept rising for another year,” he adds.

Krugman thinks now is the time for another round of federal spending, more stimulus to carry the economy through to good times.

Others seem to embrace this thinking as well.

The Wall Street Journal is reporting that stocks may struggle in 2010 unless a second stimulus is passed by the Congress. 

Meanwhile, Krugman also says it’s clear that China is pursuing a mercantilist policy by keeping its currency weak through a combination of capital controls and intervention — a policy that leads to trade surpluses and capital exports in a country that might well be a natural capital importer.

“We also know, or should know, that this amounts to a beggar-thy-neighbor policy — or, more accurately, a beggar-everyone but yourself policy — when the world’s major economies are in a liquidity trap,” Krugman writes in The Times.

Though the Chinese surplus was temporarily sidetracked by the global economic collapse, expert projections say it to be 0.9 percent of gross world product for 2010 to 2014.

“So we’re looking at a negative impact on gross world product of around 1.4 percent,” Krugman says.

“And if we think of the United States as bearing a proportionate share (using the rule of thumb that 1 point of GDP equals 1 million jobs, we’re looking at 1.4 million U.S. jobs lost due to Chinese mercantilism.”




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The upcoming U.S. unemployment report may show the economy adding jobs for the first time in two years, writes Nobel Prize winning economist Paul Krugman. But that s not cause for optimism just yet. In his column in The New York Times, Krugman reckons that the next GDP...
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