Krugman's reason for optimism in 2014"There’s an alarming amount...

Krugman's reason for optimism in 2014


"There’s an alarming amount of optimism out there about US economic prospects for 2014. Let me make the situation even more alarming by saying that I basically share that optimism.

Why? Basically because of the Three Stooges effect: if you’ve been banging your head against a wall for no good reason, you’ll feel a lot better when you stop.

One way to look at the US economy in 2013 is that it was, in effect, trying to begin a strong recovery, but was held back by terrible federal fiscal policy. Housing was making a comeback, state and local austerity was, if not going into reverse, at least not getting more intense, household spending was starting to revive as debt levels came down. But the feds were raising the payroll tax, slashing spending via the sequester, and more.

Incidentally, these other factors are why I don’t take seriously the claims of market monetarists that the failure of growth to collapse in 2013 somehow showed that fiscal policy doesn’t matter. US austerity, although a really bad thing, wasn’t nearly as intense as what happened in southern Europe; it was small enough that it could be, and I’d argue was, more or less offset by other stuff over the course of a single year.

The point, in any case, is that the head-banging is about to stop — not in the sense that we’ll reverse our move in the wrong direction, but that we won’t keep on moving in that direction. Here’s Goldman Sachs’s estimate of “fiscal drag” from federal policies (no link):

Goldman Sachs

What a drag! But it’s coming to an end. Meanwhile, housing is still moving forward, and other stuff is relatively favorable.

None of this vindicates the multiple years of sluggish recovery that should have been vigorous. And let’s be clear: this kind of forecast is much less secure than, say, my predictions that inflation and interest would stay low in a liquidity trap, which were grounded in model fundamentals.

Still, the new year starts with some good omens. Oh, and politics: between the non-disaster of Obamacare (which is producing epic levels of denial) and the prospect of a decent rate of economic growth, the midterm elections may not go the way many on the right currently expect."


At least here there is some logical explanation (Three Stooges effect) and data to support the author's views.