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Krugman: Stay the Course on Economic Boosts

By Matthew Yglesias on June 15, 2009 at 12:14 pm

"Krugman: Stay the Course on Economic Boosts"

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Paul Krugman has an op-ed on the need to stay the course on fiscal and monetary measures designed to boost economic growth. And he’s right. Whatever you make of the “green shoots” talk, it’s crucial to understand that that’s all speculative talk about the trends turning in the right direction. Signs of future positive trends are good—certainly better than signs of future bad trends—but they’re not the same thing as actual growth. Goldman Sachs’ basic model continues to think that an interest rate of negative eight percent would be appropriate, given macroeconomic conditions, were such a thing possible. Of course the Fed can’t set a negative nominal rate. So instead you get unconventional measures, which is what’s been going on. And we shouldn’t be even thinking about giving those measures up until we see some actual growth, rather than possible signs of future growth.

Recall that even when growth does return, there should still be a substantial “overhang” of excess labor capacity (and other things) driven by the sheer duration of the recession. Under the circumstances, the threat of inflation should stay at bay for quite a while now.

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