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Krugman Goes 'Splat': On Endless Growth and Permanent Depression

I was fairly amazed to read Paul Krugman's latest op-ed in the New York Times, titled "A Permanent Slump?" He seemed to be coming remarkably close to saying what several of us have been trumpeting for the past few years--that world economic growth is ending and we'd better retool accordingly. "What if the world we've been living in for the past five years is the new normal?," he writes.

I was fairly amazed to read Paul Krugman's latest op-ed in the New York Times, titled "A Permanent Slump?" He seemed to be coming remarkably close to saying what several of us have been trumpeting for the past few years--that world economic growth is ending and we'd better retool accordingly. "What if the world we've been living in for the past five years is the new normal?," he writes. "What if depression-like conditions are on track to persist, not for another year or two, but for decades?"

Wow. That's a gutsy statement, given that it's coming from one of the high priests of the Religion of No Limits (otherwise known as economics).
What's even more remarkable is that Krugman's sudden insight was evidently triggered by comments from Larry Summers (who was almost nominated to be the next Fed Chairman), in a speech at a recent IMF conference.
Evidently, Respectable People are starting to discuss The End of Growth. Wow.
But read further. Why does Krugman think the economy has slowed? Because population growth (especially in the US and other industrialized nations) has tapered off. "A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off." True. So I guess the solution is to aim for an infinitely large human population so that we will never have to worry about slower economic growth. Hmm. Might be some problems with that.
"Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away." Okay, this could be another contributing factor for the US. But . . . is that it?
These are the only reasons Krugman lists. He seems blithely ignorant of the logical truism that economies simply cannot grow forever on a finite planet. Further, he shows no awareness of the role of high oil prices in choking off economic expansion in the older industrial nations.
Krugman does discuss problematic high levels of household debt in the US. The ratio of household debt to income "was roughly stable from 1960 to 1985, but rose rapidly and inexorably from 1985 to 2007, when crisis struck. Yet even with households going ever deeper into debt, the economy's performance over the period as a whole was mediocre at best, and demand showed no sign of running ahead of supply."
So household debt rose in order to maintain growing levels of consumption, but even so actual GDP growth became more anemic with every passing decade, right up until the bursting of the housing bubble. All true. Krugman doesn't take the next crucial step of introducing his readers to evidence that household debt has reached its natural limits (on the whole, people can't afford to make larger payments and the banks don't want to lend them more money).
Krugman (and Summers) appear, then, to have some dawning awareness of our actual economic predicament. Wonderful! So what does the Times's favorite economist suggest we should do?
It's here that Krugman goes splat, right on his face.
"If our economy has a persistent tendency toward depression," he opines, "we're going to be living under the looking-glass rules of depression economics--in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off--for a long time." In other words we should all stop saving and the government should keep up its deficit spending.
Krugman appears uncomfortable about having to offer what some people would consider to be counterintuitive economic advice. "Economics is supposed to be about making hard choices (at other people's expense, naturally). It's not supposed to be about persuading people to spend more."
Let me get this straight. One of the key solutions to our ongoing economic crisis must be to get people to spend more, presumably to buy more stuff, even if they don't need it and can't afford it. By implication, I suppose we should also try to persuade people to have more children (shouldn't we at least try to get our population growing again?).
Well, Krugman's right that all of this truly is vice rather than virtue. Will it actually help? Not if we are facing debt, resource, and environmental sink limits (as I argue in my book The End of Growth). If we are, then it's better to think of the industrial economy of the 20th century as an aberration, not a mean or norm. The world is entering an entirely different economic regime, one of persistent overall contraction--which will continue (with periodic relative ups and downs) until consumption is occurring within the bounds of Earth's long-term resource budget. Adaptation is the name of the game. We should be stabilizing population, reducing consumption, re-localizing and decentralizing economies, downsizing our financial system, and using the powers of government to minimize human and ecological casualties during the transition. Deficit spending may indeed have a good use in this context, but only if it is geared toward funding basic economic restructuring--such as building public transportation, local food systems, and renewable energy capacity. On a personal level, we should share more while also becoming more self-reliant--two ways of reducing our dependence upon markets to fulfill our needs.
That's a very different diagnosis, and prescription, from Krugman's.
Here's my conclusion from reading "A Permanent Slump?": Paul Krugman is just beginning to come to terms with the reality that the US economy is not reacting to Keynesian stimulus the way it's supposed to (the way slumping economies in the early industrial period did). Yet he remains trapped in the conventional assumption that growth will eventually resume--because, after all, growth is the normal condition of a healthy economy. And given the fact that we've built our current economy upon the expectation of ever-rising consumption and ever-growing population, a return to economic health demands that we consume (and reproduce) more!
His essay suggests that Krugman does not understand resource limits. He does not understand population limits. He does not understand why our economy is not growing, and he doesn't know what we should do to adapt to converging limits.
Perhaps in another few years mainstream economists will make a bit more genuine progress in understanding our predicament. I'm not holding my breath. Meanwhile, it's apparently up to us "consumers" to pursue virtue rather than vice, prudence rather than folly.
© 2023 Post Carbon Institute
imf

I was fairly amazed to read Paul Krugman's latest op-ed in the New York Times, titled "A Permanent Slump?" He seemed to be coming remarkably close to saying what several of us have been trumpeting for the past few years--that world economic growth is ending and we'd better retool accordingly. "What if the world we've been living in for the past five years is the new normal?," he writes. "What if depression-like conditions are on track to persist, not for another year or two, but for decades?"

Wow. That's a gutsy statement, given that it's coming from one of the high priests of the Religion of No Limits (otherwise known as economics).
What's even more remarkable is that Krugman's sudden insight was evidently triggered by comments from Larry Summers (who was almost nominated to be the next Fed Chairman), in a speech at a recent IMF conference.
Evidently, Respectable People are starting to discuss The End of Growth. Wow.
But read further. Why does Krugman think the economy has slowed? Because population growth (especially in the US and other industrialized nations) has tapered off. "A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off." True. So I guess the solution is to aim for an infinitely large human population so that we will never have to worry about slower economic growth. Hmm. Might be some problems with that.
"Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away." Okay, this could be another contributing factor for the US. But . . . is that it?
These are the only reasons Krugman lists. He seems blithely ignorant of the logical truism that economies simply cannot grow forever on a finite planet. Further, he shows no awareness of the role of high oil prices in choking off economic expansion in the older industrial nations.
Krugman does discuss problematic high levels of household debt in the US. The ratio of household debt to income "was roughly stable from 1960 to 1985, but rose rapidly and inexorably from 1985 to 2007, when crisis struck. Yet even with households going ever deeper into debt, the economy's performance over the period as a whole was mediocre at best, and demand showed no sign of running ahead of supply."
So household debt rose in order to maintain growing levels of consumption, but even so actual GDP growth became more anemic with every passing decade, right up until the bursting of the housing bubble. All true. Krugman doesn't take the next crucial step of introducing his readers to evidence that household debt has reached its natural limits (on the whole, people can't afford to make larger payments and the banks don't want to lend them more money).
Krugman (and Summers) appear, then, to have some dawning awareness of our actual economic predicament. Wonderful! So what does the Times's favorite economist suggest we should do?
It's here that Krugman goes splat, right on his face.
"If our economy has a persistent tendency toward depression," he opines, "we're going to be living under the looking-glass rules of depression economics--in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off--for a long time." In other words we should all stop saving and the government should keep up its deficit spending.
Krugman appears uncomfortable about having to offer what some people would consider to be counterintuitive economic advice. "Economics is supposed to be about making hard choices (at other people's expense, naturally). It's not supposed to be about persuading people to spend more."
Let me get this straight. One of the key solutions to our ongoing economic crisis must be to get people to spend more, presumably to buy more stuff, even if they don't need it and can't afford it. By implication, I suppose we should also try to persuade people to have more children (shouldn't we at least try to get our population growing again?).
Well, Krugman's right that all of this truly is vice rather than virtue. Will it actually help? Not if we are facing debt, resource, and environmental sink limits (as I argue in my book The End of Growth). If we are, then it's better to think of the industrial economy of the 20th century as an aberration, not a mean or norm. The world is entering an entirely different economic regime, one of persistent overall contraction--which will continue (with periodic relative ups and downs) until consumption is occurring within the bounds of Earth's long-term resource budget. Adaptation is the name of the game. We should be stabilizing population, reducing consumption, re-localizing and decentralizing economies, downsizing our financial system, and using the powers of government to minimize human and ecological casualties during the transition. Deficit spending may indeed have a good use in this context, but only if it is geared toward funding basic economic restructuring--such as building public transportation, local food systems, and renewable energy capacity. On a personal level, we should share more while also becoming more self-reliant--two ways of reducing our dependence upon markets to fulfill our needs.
That's a very different diagnosis, and prescription, from Krugman's.
Here's my conclusion from reading "A Permanent Slump?": Paul Krugman is just beginning to come to terms with the reality that the US economy is not reacting to Keynesian stimulus the way it's supposed to (the way slumping economies in the early industrial period did). Yet he remains trapped in the conventional assumption that growth will eventually resume--because, after all, growth is the normal condition of a healthy economy. And given the fact that we've built our current economy upon the expectation of ever-rising consumption and ever-growing population, a return to economic health demands that we consume (and reproduce) more!
His essay suggests that Krugman does not understand resource limits. He does not understand population limits. He does not understand why our economy is not growing, and he doesn't know what we should do to adapt to converging limits.
Perhaps in another few years mainstream economists will make a bit more genuine progress in understanding our predicament. I'm not holding my breath. Meanwhile, it's apparently up to us "consumers" to pursue virtue rather than vice, prudence rather than folly.

I was fairly amazed to read Paul Krugman's latest op-ed in the New York Times, titled "A Permanent Slump?" He seemed to be coming remarkably close to saying what several of us have been trumpeting for the past few years--that world economic growth is ending and we'd better retool accordingly. "What if the world we've been living in for the past five years is the new normal?," he writes. "What if depression-like conditions are on track to persist, not for another year or two, but for decades?"

Wow. That's a gutsy statement, given that it's coming from one of the high priests of the Religion of No Limits (otherwise known as economics).
What's even more remarkable is that Krugman's sudden insight was evidently triggered by comments from Larry Summers (who was almost nominated to be the next Fed Chairman), in a speech at a recent IMF conference.
Evidently, Respectable People are starting to discuss The End of Growth. Wow.
But read further. Why does Krugman think the economy has slowed? Because population growth (especially in the US and other industrialized nations) has tapered off. "A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off." True. So I guess the solution is to aim for an infinitely large human population so that we will never have to worry about slower economic growth. Hmm. Might be some problems with that.
"Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away." Okay, this could be another contributing factor for the US. But . . . is that it?
These are the only reasons Krugman lists. He seems blithely ignorant of the logical truism that economies simply cannot grow forever on a finite planet. Further, he shows no awareness of the role of high oil prices in choking off economic expansion in the older industrial nations.
Krugman does discuss problematic high levels of household debt in the US. The ratio of household debt to income "was roughly stable from 1960 to 1985, but rose rapidly and inexorably from 1985 to 2007, when crisis struck. Yet even with households going ever deeper into debt, the economy's performance over the period as a whole was mediocre at best, and demand showed no sign of running ahead of supply."
So household debt rose in order to maintain growing levels of consumption, but even so actual GDP growth became more anemic with every passing decade, right up until the bursting of the housing bubble. All true. Krugman doesn't take the next crucial step of introducing his readers to evidence that household debt has reached its natural limits (on the whole, people can't afford to make larger payments and the banks don't want to lend them more money).
Krugman (and Summers) appear, then, to have some dawning awareness of our actual economic predicament. Wonderful! So what does the Times's favorite economist suggest we should do?
It's here that Krugman goes splat, right on his face.
"If our economy has a persistent tendency toward depression," he opines, "we're going to be living under the looking-glass rules of depression economics--in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off--for a long time." In other words we should all stop saving and the government should keep up its deficit spending.
Krugman appears uncomfortable about having to offer what some people would consider to be counterintuitive economic advice. "Economics is supposed to be about making hard choices (at other people's expense, naturally). It's not supposed to be about persuading people to spend more."
Let me get this straight. One of the key solutions to our ongoing economic crisis must be to get people to spend more, presumably to buy more stuff, even if they don't need it and can't afford it. By implication, I suppose we should also try to persuade people to have more children (shouldn't we at least try to get our population growing again?).
Well, Krugman's right that all of this truly is vice rather than virtue. Will it actually help? Not if we are facing debt, resource, and environmental sink limits (as I argue in my book The End of Growth). If we are, then it's better to think of the industrial economy of the 20th century as an aberration, not a mean or norm. The world is entering an entirely different economic regime, one of persistent overall contraction--which will continue (with periodic relative ups and downs) until consumption is occurring within the bounds of Earth's long-term resource budget. Adaptation is the name of the game. We should be stabilizing population, reducing consumption, re-localizing and decentralizing economies, downsizing our financial system, and using the powers of government to minimize human and ecological casualties during the transition. Deficit spending may indeed have a good use in this context, but only if it is geared toward funding basic economic restructuring--such as building public transportation, local food systems, and renewable energy capacity. On a personal level, we should share more while also becoming more self-reliant--two ways of reducing our dependence upon markets to fulfill our needs.
That's a very different diagnosis, and prescription, from Krugman's.
Here's my conclusion from reading "A Permanent Slump?": Paul Krugman is just beginning to come to terms with the reality that the US economy is not reacting to Keynesian stimulus the way it's supposed to (the way slumping economies in the early industrial period did). Yet he remains trapped in the conventional assumption that growth will eventually resume--because, after all, growth is the normal condition of a healthy economy. And given the fact that we've built our current economy upon the expectation of ever-rising consumption and ever-growing population, a return to economic health demands that we consume (and reproduce) more!
His essay suggests that Krugman does not understand resource limits. He does not understand population limits. He does not understand why our economy is not growing, and he doesn't know what we should do to adapt to converging limits.
Perhaps in another few years mainstream economists will make a bit more genuine progress in understanding our predicament. I'm not holding my breath. Meanwhile, it's apparently up to us "consumers" to pursue virtue rather than vice, prudence rather than folly.
imf