In his column this morning Paul Krugman bids a not-so-fond farewell to the first decade of the 21st century with a tirade on the economic stagnation of the decade:
But from an economic point of view, I’d suggest that we call the decade past the Big Zero. It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true.
On net the decade saw zero job creation, zero gains for families, zero gains for homeowners, zero gains for stocks. See also this fine post by economist James Hamilton [ed. link corrected].
I could respond by wondering how things might look if you measured from trough to trough or from peak to peak rather than when measuring from peak to trough or note that the period 1966 to 1983 saw similar economic doldrums. I’ll leave that, as my mathematics textbooks used to say, to the interested student.
Alternatively, I’ll look forward and wonder what Dr. Krugman would prescribe? I can say flatly it isn’t central planning. If it were, the Soviet Union would be the world’s economic powerhouse. That’s only true in the pages of the New York Times of the 1930’s and 1940’s.
I can also suggest more tentatively that it isn’t industrial policy. Japan was the shining light for industrial policy and its approach was successfully imitated by South Korea and Taiwan. While it may be a good tool for bootstrapping an economy from ruins, it doesn’t appear to be nearly as well suited for promoting growth in a developed economy, as Japan’s economic stagnation in recent decades indicates.
Government subsidies to business? Deadweight loss guarantees that picking winners and losers will result in sub-optimal performance.
I can you my answer: economic growth is produced by sustained domestic business capital investment. For that you need a solid banking system, a stable regulatory environment, and some incentives for investing domestically rather than internationally whether those be more favorable tax environments, regulatory environments, or what have you. Sustained domestic business capital investment is what we’ve been missing for the last decade and the emphasis on consumer spending rather than business spending is the reason that I believe the Bush tax cuts, were ill-considered.
I would, however, be interested in what failed policy Dr. Krugman advocates.