Comment not accepted on Krugman blog

Here is a comment I posted in response to this post on Paul Krugman's blog that apparently didn't make it past the moderator:


I think its fascinating that so far nobody has really made any predictions for how it will end. So, I will give it a go.

To me the key word for understanding where we are headed is “unsustainable.” I think everyone agrees that the levels of borrowing and spending in the US (both public and private) during the past few years were unsustainable. One way or another the US is going to eventually end up back at sustainable levels of borrowing and spending, and that sustainable level is going to necessarily mean a lower GDP per capita than we had in 2007. Once the economy falls back to a sustainable level of GDP it will start to grow again slowly. So that is my prediction: the economy is never going to “recover” to where it was before, because where it was before was unsustainable.

What is a sustainable level of GDP? I have no idea beyond that its going to be lower than the peak of the bubble.

I see a couple paths back to a sustainable level of consumption:
1. Do it the old-fashioned way and let the contraction run for a few years until consumption bottoms out on its own and all the excess durable goods are used up.

2. Use hyperinflation to wipe out all debts and all financial assets, effectively rebooting the whole economy. Even with hyperinflation we would still have a huge surplus of durable goods (ever noticed how many storage units there are out there?) that we would have to work through, but at least people wouldn’t be investing massive amounts of energy into maintaining an increasingly tangled web of wacky financial arrangements.

3. Have another World War II to blow up all the excess durable goods.

4. Lift all immigration restrictions for people with a positive net worth and a college degree and let all the new immigrants soak up the excess durable goods and boost consumption spending (nothing would stimulate like 10-20 million people with money in the bank setting up house in a new country.) We could kill two birds with one stone by lifting all immigration restrictions for nations facing civil unrest or ethnic conflicts and providing them a subsidy to relocate to the US. That way all the people in Somalia, Gaza, the West Bank, Iraq, Afganistan, the Sudan, etc. who just want to live a peaceful life have a chance to leave conflict behind. When the warring factions see everyone leaving they will realize that if they keep fighting they will soon have nothing left to fight over.

5. Use export sales to replace lower levels of domestic consumption (not looking likely as noted by Prof. Krugman).

I am no expert in economic history, but I cannot think of a single major recession or depression whose recovery didn’t involve one or more of these. So my prediction is that it will end with some combo of the above, just like every other major recession has.

The one thing I am pretty sure of is that bailouts and stimulus packages are not going to magically make unsustainable sustainable.

1 comment:

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