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The Little Engine That Could

Could Paul Krugman possibly be wrong?  Could the US economy be actually recovering even though the Obama administration hasn’t taken Professor Krugman’s advice?

That is the heretical possibility suggested by the encouraging jobs news this morning; 243,000 new jobs and a further fall in the unemployment rate.

Other heretical thoughts: just possibly, the US economic model still works. In every recession there is talk of the failure of the “Anglo-Saxon” model and “cowboy capitalism.” In every serious recession, the world’s chattering classes amuse themselves by talking about the “challenge of state capitalism.”

Just possibly, recessions don’t last forever any more than booms do.

Many obstacles remain and the recovery is still vulnerable.  The world situation is grim.  There are long term problems and shifts still to be made.  But the US economy wants to grow again; that is this morning’s good news.

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  • Anthony

    U.S. must still improve match between potential jobs and worker skills WRM and many obstacles remain as recovery struggles; yet, measured optimism is a good thing….

  • WigWag

    Professor Mead’s take on this is just ridiculous. Krugman was the biggest advocate for counter-cyclical stimulation of the economy; his complaint was that Obama’s stimulus program wasn’t big enough. What the improving employment picture proves is that Keynes has been proven right again and Obama and his economic advisers like Larry Summers were right to massively stimulate the economy. The result of Obama’s program is a growing economy with little to no inflation. The people who were proven wrong were Professor Mead, his hero, Prime Minister Cameron, the entire Republican Party and the European advocates of austerity. In nations that thought the way to escape the economic slump was to cut spending, things are as bleak as ever. The Tea Party and the members of Professor Mead’s fan club who were sure that Obama’s approach would prove counterproductive have also been exposed for what they are; economic illiterates.

    Of course Prime Minister Cameron isn’t the only hero of Professor Mead who looks like an idiot for advocating austerity; the Professor also genuflects before the wisdom of all of those preternaturally wise average Americans who reject counterintuitive thinking like deficit spending to ameliorate economic downturns. Score one for counterintuitive thinking.

    If Professor Mead wants an assessment of who got it wrong instead of looking at Paul Krugman, he should look in the mirror.

  • Cromwell

    Hate to rain on the parade BUT:
    *113k of the jobs were low-wage/unskilled
    *The household survey showed 1.2 million (yes that’s 1.2 MILLION) left the labor force between Dec. and January. there’s your lower UNR.
    *Yes, the Anglo-Saxon model works, but that’s not what we got here.

  • Tacitus

    I read your blog daily (as well as Krugman’s) and I’ve profited mightily from your insights on many occasions, but your take on this is way off base. Krugman has consistently argued against austerity and in favor of counter-cyclical stimulus. His chief criticism of the Obama administration has been that the stimulus was perhaps a bit too small given the size of the recession. A larger stimulus, in his estimation, would have sped up the recovery.

    In any event, the austerity policies pursued in the UK have produced a weaker economy, while here in the States our stimulus has been followed by an increasingly stronger recovery.

    These facts have proven two assumptions to be incorrect: that America is in decline and that expansionary austerity works.

  • Hoyticus

    The style of Capitalism we currently embrace is very different than what made the US rich and powerful. We still underinvest in people, infrastructure, and R&D. Also not every job is worth working…I’d rather do physical labor than a McJob.

  • George

    Yea, maybe we are on our way up, but the numbers are not showing that. Small business employment was flat, 1.2 million people dropped out of the labor force, and labor participation rate is at a 30 year low. The 200+ figure is adjusted based on birth/death stats and nobody believes those have been accurate for quite a while. Looking at other areas – the Baltic dry index has absolutely collapsed to a number that has never been recorded and gas is over $4 a gallon where I live.

    I don’t believe Krugman is correct, but I also don’t think its correct to say that there is anything glowing about today’s report – exactly the opposite, things are so out of whack that it is unreal and one has to really wonder what to believe about our economic system that seems about to implode. This is not an anglo-saxon recovery nor is it an anglo-saxon collapse coming up. This is a capitalistic system that, for whatever reason, has gotten completely out of whack and is going to self-correct big time.

  • Mrs. Davis

    Cromwell stole my thunder. Especially about the Anglo Saxon model.

    This would have been a somewhat shorter but deeper event had economic forces been allowed to work instead of being resisted by government. We would have suffered more acute pain, but for a shorter duration and at lower long term cost.

    And the housing market is far from fixed. Note that we are only about half way through the foreclosure cycle. No significant structural changes have been made to the financial regulatory environment to prevent a recurrence. MERS is still in business and no alternative to MBS has been set up.

    There are many other structural challenges the economy faces that are a result of the breakdown of the blue model and the retirement of the boomers. It will take some time for these to work through the system.

    The monetary problem the economy faced was not inflation, but deflation. That was avoided, but at the cost of putting in place all the pieces for inflation several years down the road. To resist them will require a will and discipline that has yet to be displayed.

    Happy days are not yet here.

  • George

    Another piece of data to review is the Household Data Survey’s breakdown between Full Time and Part Time Workers. January part-timers increased by the 3rd highest ever – 699K. Only 80k full time jobs actually were added. So only 10% of the headline number were actually full time jobs. Any bright spot is good at this point, so I will take it – this may be a signal that employers are carefully testing the waters. But I would be careful about trumpeting this very much.

  • SteveMG

    The Paul Krugman that I’ve read and listened to over the past three years is far different than the one the posters who defend him above appear to know.

    Krugman has repeatedly complained that the stimulus three years ago was far too small and that the only way we would recover from the downturn would be to enact World War II levels of government spending. That’s trillions of dollars of spending. Over several years.

    Moreover, he’s argued that the austerity measures the Republicans have put into place would be disastrous for whatever chances of recovery we would have.

    If our economy is indeed recovering and we should all hope so – it has come despite all of Krugman’s suggestions and advice.

    Shorter me: Krugman was wrong again.

  • Mark in Texas

    I think that the important numbers are 3 million fewer people working than a year ago and 16 million fewer working than when Obama took office.

  • Gary Elam

    Before championing a Keynesean success here (would it be the first ever?), please reflect on the participation rate – and the Adminsitration’s capacity to game it.

    The particiaption rate is the number of unemployed folks who are “actively” looking for work, divided by the total of all who COULD work. The numerator i.e., those actively searching) is also the denominator in the fraction that results in the published unemployment rate.

    The participation rate was as high as 66.8% in 2002. The average since 1980 has been 65.8%, which is where it was in December 2008. It sets now at 63.7%.

    Zerohedge descibes the interplay better than I ever could:

    “One does not need to be a rocket scientist to grasp the fudging the BLS has been doing every month for years now in order to bring the unemployment rate lower: the BLS constantly lowers the labor force participation rate as more and more people ‘drop out’ of the labor force for one reason or another.”

    There are lies, damned lies, and statistics:

    “Extending this lunacy, America will officially have NO UNEMPLOYED, when the Labor Force Participation rate hits 58.5%, which should be just before the presidential election.”

  • Jeff77450

    As a number of people have pointed out the new unemployment-rate *looks* good — until you look beneath the surface and actually parse the numbers.

    That valid issue aside, I’m continuously amazed & amused that presidents get both the praise & the blame for things that just happened to happen on their watch and that they had little or nothing to do with. All economist know: boom–which we *aren’t* experiencing–inevitably follows bust which follows boom which follows bust…..

  • justaguy

    I predict that by November and elections the UNR will be below 6% and we will have consistent reports of over 300k jobs added. Of course the robotocrats will have dropped 10 million more people out of the labor force and the statistical factors used for job gain will multiply each job actually gained 3X.

    Everyone will believe the mainstream media about how woderful the Obama recovery is doing, not how they they and their neighbors are unemployed, have cut hours at work, or are worried about being laid off.

  • Andrew Allison

    What Prof. Krugman and the anti-austerity mob cannot seem to grasp is that a person or a country cannot spend their way out of debt. The can may be, and is being, kicked down the road, but the “road” is a cul de sac.

  • Some Sock Puppet

    Yeah, it sure feels like a recovery here.

    Insanity. Stop the world, I want to get off.

  • a nissen

    Didn’t notice this until now because more and more often I am forced to go off searching for reality checks on the media and at least a balance to WRMs’ sudden turn to whitewash.

    This close sounds as counterproductive as the fashionable know-it-all language that produced 1960s architecture: “But the US economy wants to grow again; that is this morning’s good news.”

  • Jim.

    Krugman my be a huckster, but he is also a good strategist… his “stimulus isn’t big enough” line set him up for a defensible position whether the economy improved, went downhill, or stayed in limbo.

    That said, anyone who believes we haven’t had inflation hasn’t done any grocery shopping in the last ten years.

    Krugman is a hack. The only clear effect of stimulus has been to saddle us with debts that only countries that have recently crushed their main rivals and enjoy absolute superiority in internatonal trade have ever outgrown.

    China could outgrow a debt like ours. It’s not clear that we can.

  • Toni

    SteveMG says, “Krugman has repeatedly complained that the stimulus three years ago was far too small and that the only way we would recover from the downturn would be to enact World War II levels of government spending.”

    No. FDR *at last* turned the private sector loose to do what it does best, innovate to meet current needs, and gave it the funds the US needed to go to war against a monster.

    Seven decades later, businesses have to deal with seven decades’ worth of encrusted regulation, at a time when they don’t know whether and how much of ObamaCare will last, whether and how much their taxes will rise or fall, etc.

    Plus, Krugman-level spending under Obama would come with the same restrictions, payoffs to unions, and other fiddling that made Obama’s stimulus so spectacularly unsuccessful. Remember, it was supposed to fund “shovel-ready” projects that turned out not to exist. Then Obama promoted the “Summer of Recovery” in, I think, 2010. All the while adding further crusts of regulation in the form of ObamaCare, Dodd-Frank, an ambitious EPA, etc.

    Why should anyone think the Obama Administration has any clue what the economy really needs? I shudder to think what it would do with WWII-level funds. The US would only go bankrupt faster than we already are.

  • Toni

    This reminds me of Times stories along the lines of “Crime Rate Falls Despite High Incarceration Rates.” Reality is never allowed to interfere with ideology.

  • Eurydice

    What’s more likely is that we’re seeing what Americans are managing to do despite the “best” efforts of our politicians and experts.

  • Toni

    Tacitus, please see above my expansion on SteveMG’s post. It explains why Krugman’s stimulus recommendation would have at best not worked and at worst proved disastrous.

    You say, “In any event, the austerity policies pursued in the UK have produced a weaker economy, while here in the States our stimulus has been followed by an increasingly stronger recovery.”

    Wrong. U.S. GDP growth last year was 1.7%, DOWN from 3% in 2010. Moreover, it’s expected to slow from its Oct.-Dec. rate in coming months.


    “But even with the acceleration, growth remained stubbornly below the 3% pace that many economists say is needed to quickly bring down the unemployment rate. The report also showed that most of the growth was thanks to a surge in inventory replenishing by businesses—a trend not likely to last. Final sales—a measure of products sold to end users, rather than to wholesalers or suppliers—advanced only slightly.

    “Neither development is a good signal for the pace of the recovery, some economists said. William C. Dudley, president of the Federal Reserve Bank of New York, echoed that concern in a speech Friday.

    U.S. stocks fell on the downbeat report. The Dow Jones Industrial Average was down 74.17 points, or 0.6%, closing at 12660.46.

    Many economists expect growth to slow early this year, and Friday’s report did little to dispel that notion. Consumers boosted their spending at the end of 2011 in part by drawing down savings, another trend unlikely to last over the long haul. Much of the boost in consumer spending was powered by auto purchases. Many analysts attributed that to pent-up demand after supplies were disrupted following last year’s Japanese earthquake, leaving dealers with skimpy inventories for much of the year.

  • Toni

    a nissen: The economy never stops wanting to grow. Government’s response can range along a spectrum from getting in the way (prime example: FDR) to getting out of the way (prime example: Reagan).

    Obama’s response has been closer to the FDR end. Many would say much closer, including me. Megaspending + megalegislation (ObamaCare, Dodd-Frank) + megaregulation (EPA, NLRB) = an economic engine trying to pull way too much unnecessary baggage.

  • Kebert Xela

    Recessions may not last forever but over-per capita growth is quite rare, contra Romney and Obama.

  • a nissen

    Toni, economies don’t “want” any more than buildings “want.” Humans who resort to such language have been convinced by fashion or low self-esteem to think they need an appeal to authority in order to convince others.

    When WRM has time to thinks before he writes, he is fully aware that his own authority works and accompanied by factual evidence, even better. No time to gather the facts, so be it—appeals to authority always weakens the case!

    Rhetoric not politics.

  • Toni

    a nissen: Let’s put it this way. Americans and businesses run by Americans never stop seeking prosperity. Government can get in the way or out of the way. The Obama Administration and the 111th Congress are in the former category.

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