Krugman’s Case for Pessimism

Reading Paul Krugman’s pushback against recent optimism about the economic situation it occurs to me that the whole debate over “green shoots” or “glimmers of hope” is a little bit mis-framed.

I think what everyone agrees on is that the situation is out of free fall mode and that’s good. This is basically what the green shoots amount to. But the metaphor of a green shoot implies not just something that’s good, but something that’s promising. And this really just gets us back to a different set of metaphors. Namely about the prospects of a “V”-shaped recession in which you bounce sharply back up, or else a “U”-shaped recession in which recovery is slugging (the 2001 and 1991–2 recession were like this, or else worst of all, an “L-shaped” recession like Japan in the 1990s where things stop getting worse but don’t really get better.

Insofar as by “glimmers of hope” we mean an apparent end to the rapid-collapse phase of the business cycle, then detecting those glimmers just doesn’t tell us anything at all about whether we’re going to “L”-out or whether we’re going to loop back up.

For my part, the glimmers seem real enough. But I still worry about the L. And that’s because I think you get a different set of policy problems when you start talking not about how to avoid collapse but how to bring back growth. A strong and sustainable recovery means we would need to get to a point where global demand is at a high level but isn’t depend on debt-financed consumer demand in the United States. Not that Americans are going to stop consuming. But merely that since the United States is such a big and rich country, what constitutes a relatively modest level of prudent re-balancing on the part of an individual household can have a dramatic systemic effect. We need to a more sustainable set of international flows of money, and I’m not sure we have a real idea of how to get there. At the moment, there’s the idea that US public sector debt can serve as a kind of transitional source of demand as the US consumer cuts back. But how does that next transition get made?