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A Stimulus Plan in Case We Ever Get Really Desperate and Insane

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"A Stimulus Plan in Case We Ever Get Really Desperate and Insane"

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In yesterday’s column, Paul Krugman wrote about how major recessions can come to a “natural” end if you wait long enough:

Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.

Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.

The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.

The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873. That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later.

The thing is, that this points the way toward one possible path toward recovery. Consider the European version of World War II ending the Depression. On that side of the Atlantic, it wasn’t so much that wartime spending drove fiscal expansion. Instead, what happened was that a gigantic war destroyed an enormous amount of useful stuff. The survivors were then, with some assists from the Marshall Plan and enlightened US trade and monetary policies, able to all get jobs rebuilding the continent. Given the right conditions, in other words, you can make the broken windows fallacy work—given enough idle resources, smashing windows will cause those resources to un-idle and possibly get you back on a growth track.

In theory, then, you could try to aim for recovery by breaking windows. And you could strategically target the window-breaking so as to not be so disastrous for anyone. Hire unemployed people to destroy every yacht in America. Go to rich neighborhoods and slash people’s tires and smash up their fine china. Burn down a few of the McMansions. Of course to really make this kind of stimulus of mass destruction work, you’d still need global coordination.

Less insanely, though, instead of hoping for recovery to be led by increased consumer spending we could invest more in public goods.

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