Bidding Farewell to the First Decade of the Century

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.

4 comments… add one

  • Drew

    “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.”

    Well, that’s exactly correct. Neither the stock market nor the economy have a pocket calendar. They respond to events and policies. Anyone who thought PE multiples over 30 were sustainable in the late 90’s needs their head examined. And attributing net zero growth in employment to a decade, given the dive the past, 15 months is just wrongheaded. But Krugman is who he is.

    I went to the BEA tables to quickly look at investment. Making the same adjustment for cycles rather than calendar dates, and observing the huge lump growth in computers and software in the late nineties paints a picture of steady growth in investment in the long term. They have a feature where you can ask for a graph of yr on yr pct growth, and you can’t distingush the 00’s from the 50’s, 60, 70’s ect.

    (PS – I used total non-residential expenditures. Let the slicing and dicing of data begin.)

  • Drew

    Commentors –

    The Hamilton link takes you to one of Menzie Chinn’s posts. I think Dave is referencing “Lost Decade for Stocks.”

  • steve

    Drew-When I look at the normalized net domestic investment curve, it looks as though it took quite a dip around 2000 and does not make as strong a return to trend as in the past. Is that the data you were referencing?

    As to the larger issue, I think we should do away with corporate income taxes as a first step. It is not that big a contributor to revenue and is a major cause of corruption and rent seeking. I also believe, without as much data as I would like to have I admit, that we need to do things like health care reform to provide the necessary safety nets that will let people take entrepreneurial risks. This also acknowledges that a lot of people are out of work more often and for longer periods than in the past, if you remember the data from Douthat and Salaam’s book.

    Steve

  • Drew-When I look at the normalized net domestic investment curve, it looks as though it took quite a dip around 2000 and does not make as strong a return to trend as in the past. Is that the data you were referencing?

    That’s the way I read the data, too, Steve, and that’s what I was referring to. In the early part of this decade there was not much in the way of a decline in consumer spending but there was in business spending. Policy was not well-matched to the facts on the ground.

    There’s a more complex and difficult to prove argument that businesses haven’t been investing in the stuff that we make here and that the businesses that have been investing are ones that don’t provide as much bang for the buck as the ones that aren’t. But that’s a lot harder to prove from the available data than my simple assertion that we need to invest more.

    And the basic question I raised in my post remains unaddressed: what should we be doing? I don’t think more bailouts, stimulus packages, industrial policy, or subsidies is the way to go.

Leave a Comment