New York Times columnist and Nobel Prize winning economist Paul Krugman issued a warning about the economy on July 2, 2009. In a column entitled “That ‘30s Show” he cautioned that the world may be facing a replay of the Great Depression. And, already many commentators are calling the downturn “The Great Recession.”
“All of this is distressingly familiar to anyone who has studied economic policy in the 1930s,” Mr. Krugman wrote. “Once again a Democratic President has pushed through job creation policies that will mitigate the slump but aren’t aggressive enough to produce a full recovery.”
Two days later, U.S. Vice-President Joe Biden gave an interview to ABC News in which he said the Obama administration, “misread how bad the economy was.” He added that the White House didn’t anticipate how quickly the number of jobless would grow.
Unemployment Numbers Keep Rising
Paul Krugman points out that 6.5 million jobs have been lost in the U.S. since the recession began. He adds that this figure is a bit misleading. “Once you take into account the 100,000-plus new jobs that we need each month just to keep up with a growing population, we’re about 8.5 million jobs in the hole.”
Writing in The Globe and Mail (July 7, 2009) Barrie McKenna points out that, “The Obama administration predicted the stimulus plan would create 3.5 million jobs. And yet…across most of the U.S., unemployment continues to rise. The national rate, now at 9.5 per cent, is expected to hit double digits within a few months. Many economists say it could stay there for a while.”
Consumers who are still working are fearful about job loss, so they are hoarding cash and paying down their debts. “That’s a good thing,” writes McKenna, “but doesn’t help stores and other businesses generate jobs and economic activity.”
More Stimulus Spending Needed
To get out of this downward plunging spiral Paul Krugman says, “President Obama and his officials need to ramp up their efforts, starting with a plan to make the stimulus bigger.” Krugman is not alone.
The Wall Street Journal (July 6, 2009) reports that the Obama administration is considering a second stimulus package for some time in the fall but, “That timetable isn’t fast enough for some economists, who say quick action is necessary to avoid a protracted period of joblessness.”
The financial newspaper quotes Phillip Swagel, a professor at Georgetown University’s McDonough School of Business as saying, “A second stimulus should be the one they should have done the first time, something that is relatively fast and thoughtful.”
More Stimulus Will Cause Debt Explosion
In The Daily Telegraph (July 6, 2009), Banking Editor Philip Aldrick goes back to a paper written in 2003 by Thomas Laubach, then the U.S. Federal Reserve’s senior economist.
Mr. Laubach “calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the U.S. fiscal deficit and national debt, long-term interest rates will double from their current 3.5%.”
Tim Congdon is founder of Lombard Street Research, and he told Aldrick he is concerned about a “debt explosion…”
“Mr. Congdon said (Laubach’s) study illustrated the ‘horrifying’ consequences for leading western economies of bailing out their banks and attempting to stimulate markets by cutting taxes and boosting public spending.”
Those consequences would be rapidly rising interest rates.
“Should the cost of raising or refinancing public debt in the markets double, ‘the debt could just explode,’ (Congdon) said, adding that it would come to a head in ‘five to 10 years.’ ”
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