December 01, 2014
Robert Samuelson apparently didn’t know that all sorts of good Keynesian types, starting with Paul Krugman, predicted that the recovery would be weak due to inadequate stimulus. (Here, here, and here are a few of my own contributions along these lines.)
The basic story is pretty damn simple. When the housing bubble collapsed we lost well over $1 trillion in annual demand. Housing construction fell from a record share of GDP to near record lows, as the boom had led to enormous overbuiilding. In addition, consumption fell as the $8 trillion in ephemeral housing equity created by the bubble disappeared. When this massive amount of housing wealth vanished so did the consumption that it supported.
As all good Keynesians tried to explain, there is no easy way to replace this loss of demand in the private sector, hence the need for government stimulus. And, we said at the time, we needed a larger and longer one than the stimulus package approved by Congress.
Apparently Samuelson is unaware of this history. He pushes his idea of leaving everything to the free market telling readers, harkening back to the recovery to the downturn following World War I:
“The recent financial crisis and the (unpredicted) weak recovery have exposed economists’ fragile grasp of reality. There has been a massive destruction of intellectual capital: Old ideas of how the economy functions and can be improved have been found wanting. Since the Great Depression, governments are expected to react to economic slumps with countercyclical policies that reverse the downturn and relieve personal suffering. These understandable impulses may compromise the economy’s recuperative rhythms. That’s a troubling possibility that echoes from the 1920s.”
It’s truly amazing to find something like this comment in a major newspaper.
Note: Typo corrected and link added.
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