Paul Krugman, our recent Nobel Laureate, has taken to the media to predict a high likelihood of a coming economic contraction. The question is, what is going on here? I say that because I have followed Krugman closely for some time. He was upset that a larger stimulus package was not passed originally, that it would be difficult to pass another such package later because of deficit fears and that, in his view, the economy has not been recovering quickly enough. As the same time, however, all along he has been telling us that the recovery would be slow in coming and definitely not V shaped. So again the question is, what is going on in Krugman’s mind.
A partial answer here is that Krugman is acting politically to do what he can and use what influence he has to get a second stimulus package passed, even though the resources appropriated for the first stimulus package are by no means all used up in tax breaks and infrastructure repair. He definitely wants a second package passed. I have known that for some time. The question now is what is prompting him to go public with his newer prediction of dire consequences at this time. Krugman usual predictive capabilities are not terrible, but they are not on par with his general skills as an economist.
Krugman appeared on ABC’s This Week with Nobel Laureate Joseph Stiglitz, who has also been calling for a second stimulus package and who took the original initiative for both to go public now. Both seem to agree that there is a substantial chance, although less than fifty-fifty, that GDP growth will be negative for at least half of 2010. This is not too far out of line with the third quarter GDP growth figures which came in, first at 3.5%, then revised to 2.8% and finally stabilized at 2.2%, and this after many concluded that real growth on the original 3.5% figure, after backing out government stimuli effects, came to only 0.5%. Both economists have long recognized that unemployment into 2010 was going to remain high. But why the new hue and cry now?
Part of the answer is both economists do not like the projections for GDP grow for 2010, before their recent revisions. They did not seem aware of the recent revisions. As Bloomberg has explained them –the economy is poised for a “surge” as Dean Maki, the most-accurate forecaster in the Bloomberg survey, sees it, with growth in the area of 3.5% for the year. The two economists do not consider even that a real surge, especially when recovering from a deep recession, implying that, although he has denied it, we should have more of a V shaped recovery than both have foreseen in the past. It is the last half of 2010 that bothers both economists. They don’t see where the source of recovery or engine of growth is going to come from, especially when the effects of the first stimulus package totally wears off. It is noteworthy here that we have two arch Keynesians recognizing that the stimulus efforts of government by means of deficit spending are transient and do wear off, giving us only transitory boosts in GDP.
However, if that is the case, what is the point of a new stimulus package? To gloss over weaker figures for a while and make us look better off than we are for a bit? To hide less favorable GDP growth for political purposes? What? As current growth figures show, the so-called multiplier effect has certainly been less than dazzling.
The consensus economic forecast for the U.S. for 2010 is fortunately rising -- from 2.0% to 3.2% or better, after a -2.5% for 2009 and a 2.0% gain for 2008. Goldman Sachs is now predicting 4.4% for 2010. These numbers are more encouraging than projections of just a few months ago. Projections by others are still being raised. Also, no one is now forecasting a real dip in the second half of 2010. The question remains, however, will any additional stimulus package be worthwhile? I suspect not, on balance, for the reasons I have indicated and these new figures.
Disclosure: none relevant
