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Krugman: The Lame-Duck Economy
Paul Krugman, New York Times
… How much can go wrong in the two months before Mr. Obama takes the oath of office? The answer, unfortunately, is: a lot. Consider how much darker the economic picture has grown since the failure of Lehman Brothers, which took place just over two months ago. And the pace of deterioration seems to be accelerating.
Most obviously, we’re in the midst of the worst stock market crash since the Great Depression: the Standard & Poor’s 500-stock index has now fallen more than 50 percent from its peak. Other indicators are arguably even more disturbing: unemployment claims are surging, manufacturing production is plunging, interest rates on corporate bonds — which reflect investor fears of default — are soaring, which will almost surely lead to a sharp fall in business spending. The prospects for the economy look much grimmer now than they did as little as a week or two ago.
Yet economic policy, rather than responding to the threat, seems to have gone on vacation. In particular, panic has returned to the credit markets, yet no new rescue plan is in sight. On the contrary, Henry Paulson, the Treasury secretary, has announced that he won’t even go back to Congress for the second half of the $700 billion already approved for financial bailouts. And financial aid for the beleaguered auto industry is being stalled by a political standoff.
How much should we worry about what looks like two months of policy drift? At minimum, the next two months will inflict serious pain on hundreds of thousands of Americans, who will lose their jobs, their homes, or both. What’s really troubling, however, is the possibility that some of the damage being done right now will be irreversible. I’m concerned, in particular, about the two D’s: deflation and Detroit.
(21 November 2008)
US economy: Three steps to havoc
Larry Elliott, Guardian
Not since Roosevelt in 1933 has an incoming US president had a tougher economic challenge to face than Barack Obama.
He is still piecing together his Treasury team but he doesn’t need a pointy-headed academic to tell him the economy has hit the wall. The housing market is still crashing, unemployment is rising sharply, Wall Street is traumatised and it appears the life expectancy of another big bank, Citigroup, can be measured in days rather than weeks.
This is a crisis long in the making. And three big structural changes help explain the mess the US now finds itself in.
The first is that a profound shift in the balance of power between labour and capital over the past three decades has resulted in nugatory increases in real earnings for most people but massive rewards for those at the top.
The second is that the US is living beyond its means at every level. In recent years, it has spent $106 (£71) for every $100 it has earned.
The third is that Wall Street has grown in size and importance as more of America’s manufacturing capacity has been exported overseas.
America, as the world’s can-do society, found a way of making this work for a time. More women worked, which disguised the fact that male incomes were under pressure. Couples worked longer to maintain their spending. When both those avenues were exhausted, they took on more debt.
(21 November 2008)
Why cheap gas can’t save the economy
Paul R. La Monica, CNNMoney
Gas prices below $2 are a relief to many consumers. But there are too many other problems in the economy for it to have a major positive impact.
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… There is, however, one bit of good economic news: The average price of gasoline is now less than $2 a gallon for the first time since March 2005, down 52% from the peak of $4.11 in July.
That – in theory – means more money for people to spend and get the economy going. Mark Zandi, chief economist for Moody’s Economy.com, says that if gas prices stay around $2 a gallon throughout 2009, that would save consumers about $100 billion compared to this year.
But don’t get too excited: There may be less pain at the pump – but there’s pain just about everywhere else.
“Every penny helps and the savings are significant,” said Zandi. “But the negatives so far outweigh the positives that the economy will have a tough time in 2009,” Zandi said.
(21 November 2008)
