The Way Out of the Slump

[Kurt_and_Hunter]

The Way Out of the Slump
October 14, 2010
Paul Krugman and Robin Wells

. . .

So what would we recommend doing? Practically everything that might stimulate the economy. If more spending on infrastructure is politically impossible, at least make the case for it and pound its opponents for their obstructionism. (It’s worth noting that President Obama’s recent proposal for a national infrastructure bank is very similar to a proposal that has been endorsed by none other than the bitterly anti-Obama Chamber of Commerce.) Targeted, temporary tax cuts—like the temporary incentives for business investment also recently proposed by the Obama administration—aren’t our preferred policy, but they would be better than nothing. And monetary expansion should be pursued through every route possible—yes, it’s uncertain how effective any given measure would be, but that’s no reason not to try.

We should also consider policies that enable borrowers to reduce the burden of their debt, such as allowing mortgages to be covered by personal bankruptcy procedures or, as Bill Gross of the bond fund Pimco has proposed, allowing Fannie Mae and Freddie Mac to engage in mortgage refinancing. (Although Obama’s program for modifying mortgage obligations was a step in that direction, it has largely failed as a result of overly complex rules and stonewalling by lenders—a result of its cautious construction. Indeed, it has made many borrowers worse off.)

One more thing: just as global imbalances—the savings glut created by surpluses in China and other countries—played an important part in creating the great real estate bubble, they have an important role in blocking recovery now that the bubble has burst. Koo is right in saying that the essential problem of the world economy right now is an excess of saving, with not enough borrowers; countries that continue running large trade surpluses in this environment—like China and Germany—are propping up their own economies at the rest of the world’s expense.

What this means, first of all, is that the United States should be taking a much tougher line with China than it has so far: China’s deliberately undervalued currency is, purely and simply, a destructive policy from a global point of view. It also means that the rest of Europe needs to start holding Germany to account: the Germans may regard themselves as models, but their surpluses after 2000, by flooding the rest of Europe with cheap money, played a large part in creating the real estate bubble in Europe’s peripheral economies. And Germany’s continuing reliance on export-led growth is in effect a beggar-thy-neighbor strategy of growing at its neighbors’ expense.

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http://www.nybooks.com/articles/archives/2010/oct/14/way-out-slump/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+nybooks+%28The+New+York+Review+of+Books%29

[exboyfil]

1. How the heck can Germany which uses the

Euro begger their neighbor with exports. Do their industries have a lot of subsidies? What other mechanisms are there?