Paul Krugman: How Long Can This Go on?
Why I have shifted to thinking that in the long run the current downturn will turn out to have been a bigger deal than the Great Depression:
On The Political Economy Of Permanent Stagnation: We had what felt like an epic intellectual debate over austerity economics, which ended, insofar as such debates ever end, with a stunning victory for the anti-austerity side--and hardly anything changed in the real world. Meanwhile, the pain caucus has found a new target, inventing dubious reasons for monetary tightening. And mass unemployment goes on.
So how does this end? Here’s a depressing thought: maybe it doesn’t….
Many of us used to believe that sustained high unemployment would lead to substantial, perhaps accelerating deflation--and that this would push policymakers into doing something…. [But we] can probably have high unemployment and stable prices in Europe and America for a very long time--and all the wise heads will insist that it’s all structural, and nothing can be done until the public accepts drastic cuts in the safety net.
But won’t there be an ever-growing demand from the public for action?… U.S. political studies… [say] the level of unemployment matters hardly at all for elections; all that matters is the rate of change in the months leading up to the election…. [W]e could suffer endless, gratuitous suffering, yet the political and policy elite would feel no need to change its ways.
And Exhibit B:
The Farbissen Faction: I contemplated the increasingly loud campaign demanding that the Fed stop its bond purchases and indeed start raising interest rates… Martin Feldstein, the Bank for International Settlements, Raghuram Rajan, John Taylor, and more. I believe that this chorus has already had significant malign effects; it effectively bullied the Fed into talking about “tapering” despite a total absence of economic justification… has led to higher long-term interest rates.
The question is, what lies behind this campaign?… [A]s David Glasner says, the members of this group seem to believe, somehow, that the Fed is powerless to boost the real economy yet retains vast power over real interest rates… economic agents are selectively stupid… in different ways that just happen to justify tighter monetary policy in the face of mass unemployment…. Feldstein and others assuring us that higher interest rates won’t deter real investment because they’ll still be low; it’s news to me that demand curves turn vertical at low prices…. [Others] insist[ing] that low rates will induce financial investors to make irrational choices…. [But the] worst of both the dotcom and the housing bubble took place when rates were much higher than they are now.
The key observation here, I think, is that by and large the people now demanding higher interest rates have been against easy money all along — it’s just their alleged justifications that keep changing… an attitude looking for justifications, not an analysis.