Two wars are not enough.
America's economic outlook is so grim, and political solutions are so utterly absent, that only another large-scale war might be enough to lift the nation out of chronic high unemployment and slow growth, two prominent economists, a conservative and a liberal, said today.
Nobelist Paul Krugman, a New York Times columnist, and Harvard's Martin Feldstein, the former chairman of President Reagan's Council of Economic Advisers, achieved an unnerving degree of consensus about the future during an economic forum in Washington. Their views were shared by a third economist, Jan Hatzius of Goldman Sachs, who said the only economic scenarios he could visualize were either "pretty bad" or "very bad."
As far as returning to full employment, Krugman said his estimate is "basically never. There is nothing visible on the horizon that will make that happen." Krugman said the United States is caught in a post-recession trough so bleak that "we're going to look at Japan's 'lost decade' as a success story" by comparison.
Krugman and Feldstein, though often on opposite sides of the political fence on fiscal and tax policy, both appeared to share the view that political paralysis in Washington has rendered the necessary fiscal and monetary stimulus out of the question. Only a high-impact "exogenous" shock like a major war -- something similar to what Krugman called the "coordinated fiscal expansion known as World War II" -- would be enough to break the cycle. "I don't think we're about to launch a war against anybody," Feldstein said with tongue-in-cheek regret at the left-leaning forum, "America's Fiscal Choices," sponsored by four think tanks. "But Paul is right. That was the fiscal move that got us out" of the last downturn comparable to this one, the Great Depression.
Both reiterated their previously argued views that the Obama administration's stimulus was far too small to fill the output gap. Feldstein expressed a cautious optimism that if government did nothing, then a dramatic dollar depreciation around the world -- driven, ironically, by a lack of faith in Washington -- might boost exports and the economy. But Krugman and Hatzius appeared to disagree. "A loss of confidence in the dollar would coincide with instability in other markets," Hatzius said, and that would wipe out whatever economic benefits depreciation might supply. Hatzius said the most likely of his scenarios -- the "pretty bad" one -- called for unemployment to climb again to somewhere over 10 percent on growth of 1 percent to 2 percent through the early months of 2011, and no return to full employment before 2014. But he gave a 25 percent to 30 percent chance that his "very bad" alternative could develop: a double-dip recession over the next six to nine months.
Krugman added a third "catastrophic" alternative involving "a 50 percent probability of a government shutdown in the next two years," especially with the upcoming midterm elections expected to empower an even more right-leaning Republican Party.
The discussion -- put on by Demos, the Century Foundation, the Economic Policy Institute, and the Center for Budget and Policy Priorities -- was entitled "Budget Policy, Short-Term Recovery and Long-Term Growth." The participants were so caught up in the pessimism of the moment that they never got to questions about budget policy or long-term growth.