If you look at a chart of industrial production through the early 1930s, you see that at several times during the long road to the bottom of the Depression production leveled off or picked up, seeming to point to recovery. Now, it’s possible that those upward ticks would actually have led to recovery, had the world’s governments not been shooting themselves in the foot repeatedly — tightening monetary policy, balancing budgets, letting the financial system collapse, and erecting massive tarriff barriers.
Still, I think Paul Krugman has a point in saying that recent, positive signs in the economy shouldn’t lead to a reduction in vigilance. Pulling back on fiscal or monetary stimulus at this point, or on aid to the financial system, would kill a nascent recovery dead. Policymakers will need to see this thing through.
But Krugman goes beyond that point, writing:
So far, thereâ€™s nothing pointing to a fundamental turnaround this year, or next, or for that matter as far as the eye can see.
Whoa! There is nothing pointing to a recovery at any time in the future? As I said, the world spent four years doing everything wrong, and yet the Depression finally came to an end. Even if we’re not taking all the steps Krugman would have us take, we are at least avoiding the big errors that doomed the economy before. Krugman is basically saying that this downturn will last as long as the Depression or longer, despite the drastically different — and economically orthodox — policy path taken by the world’s large economies. This seems crazy to me.
I don’t know if we’ll see a bottom and recovery in 2009, though I think it likely that output will be growing again by the fourth quarter. But I have to say, the burden of proof is on Krugman to explain why the much, much better policy response to this crisis, relative to the Depression, will nonetheless leave us with a downturn as long, and possibly as deep.