Paul Krugman writes today in his column about the “new normal.” He cites Larry Summers who stated that “We have an economy whose normal condition is one of inadequate demand - of at least mild depression - and which only gets anywhere close to full employment when it is being buoyed by bubbles.” Krugman adds that even the sharp rise in household debt in 1985-2007 was unable to crack this “normal state of mild depression.” He continues that, “if our economy has a persistent tendency toward depression, we’re going to be living under the looking glass rules of depression economics,” which means savings, a virtue, is a vice, since we need to persuade people to spend more.
I have been writing about the “New Normal” for some time now. It means an economy with a higher level of unemployment, currently 7.4%, far above the 5% previously considered to be “full employment,” a growth rate well below the historic average of 3% and less opportunity, especially for newcomers to the work force. The phrase was coined by President Obama who warned against it. But now Krugman is on board.
We see this sad turn of events throughout the economy. No where is there any optimism or conviction that things will be better in the future. We have come to accept glum prospects as a fact of life.
And this sad turn of events has come in spite of the Feds under President Obama using every tool in their box to revitalize the economy. The old remedies have not worked. Proof is that the Europeans using the opposite approach, cutting spending, have come to the same continuing “mild” depression. The outcome has been that no matter what the government does, spend more or cut expenses, it is unable to stimulate a strong recovery.
My personal formula lies in two very unpopular ideas. First, we need to allow unfettered development of our oil and gas resources via ”fracking.” Second, we need to suspend taxes on capital gains. These two stimuli could generate substantial recovery movement. I know the outcry against these two actions but the “traditional” remedies have not worked. We need these new ideas.