Monday DeLong Smackdown: Dean Baker on the Inevitability of the Lesser Depression
Dean Baker: Krugman and DeLong on Avoiding Secular Stagnation: "Brad DeLong and Paul Krugman are having some back and forth on the problem of secular stagnation and what it would have taken to avoid a prolonged period of high unemployment.
I thought I would weigh in quickly since I have a better track record on this stuff than either of them.
The basic story going into the crash was that we had an economy that was being driven by the housing bubble... residential construction... $8 trillion of bubble generated housing equity.... Consumption also predictably plummeted. This is known as the housing wealth effect.... When the $8 trillion in bubble generated equity disappeared so did the consumption that it was driving. You can't borrow against equity that isn't there. This cost the economy between $400 billion and $600 billion (@ 3-4 percent of GDP) in annual consumption expenditures.... Some of this gap would be filled as excess inventory of housing gradually faded and the vacancy rates came back to more normal levels. We're getting there, but still have some way to go. Some would be filled by a drop in the trade deficit, which now sits at around 3 percent of GDP, compared to a level of almost 6 percent of GDP before the crisis. The government could fill the remaining gap with additional spending, but our cult of low-deficit politicians is insisting that they would rather keep people from getting jobs, so this ain't going to happen....
The other part of the demand story would be to make more progress on the trade deficit....
There are always things that can be done. The key point is to first understand where we are. And the most important take away is that millions are suffering now not because we are too poor, but we are too rich. We don't need all the workers we have. This provides enormous opportunities for making people's lives better, if we just had the political will.
