BY PAUL KRUGMAN
The New York Times/Truthout
Posted by Bulatlat
Vol. VIII, No.2. February 10-16,2008
The economic news has been fairly dire this week. The credit crunch is getting worse, and a widely watched indicator of trends in the service sector – which is most of the economy – has fallen off a cliff. It’s still not a certainty that we’re headed into recession, but the odds are growing greater.
And if past experience is any guide, the troubles will persist for a long time – say, into the middle of 2010.
The problems now facing the U.S. economy look a lot like the problems that caused the last two recessions – but this time in combination.
On one side, the bursting of the housing bubble is playing the role that the bursting of the dot-com bubble played in 2001. On the other, the subprime crisis is creating a credit crunch reminiscent of the crunch after the savings-and-loan crisis of the late 1980s, which led to recession in 1990.
Now, you may have heard that those recessions were short. And it’s true that the last two recessions both officially ended after only eight months.
But the official end dates for those recessions are deeply misleading, at least as far as most peoples’ experience is concerned. There’s a reason that the Bush administration, in its (increasingly strained) efforts to tout economic performance on its watch, always talks about jobs added since August 2003. It was only then – two and a half years after the recession began – that the U.S. economy began to experience anything that felt like a recovery.
And the same thing happened a decade earlier: the recession that began in 1990 officially ended in March 1991, but the jobless recovery that followed kept Americans feeling miserable about the economy right up through the 1992 election.
Since the current problems of the U.S. economy look like a combination of 1990 and 2001, the shape of this episode of economic distress will probably be similar to that of the earlier episodes: even if the official recession is short, the bad times will linger well into the next administration.
How severe will the distress be? The double-bubble nature of the underlying problem – a housing bubble and a credit bubble combined – suggests that it may well be worse than either 1990 or 2001.
And some highly respected economists are issuing dire warnings. There has been a lot of buzz about a new paper by Carmen Reinhart and Kenneth Rogoff that compares the United States in recent years to other advanced countries that have experienced financial crises. They find that the U.S. profile resembles that of the “big five crises,” a list that includes, for example, Sweden’s 1991 crisis, which caused the unemployment rate to soar from 2 percent to 9 percent over a two-year period.
Maybe we’ll be lucky, and that won’t happen. But what can be done to limit the damage?
Since September, the Federal Reserve has slashed its target interest rate five times, and everyone expects it to cut further. But interest rates were cut dramatically during the last two slumps, too – yet the slumps went on for years anyway.