Krugman, Colebatch, and the big picture

Paul Krugman has an interesting column in which he seems somewhat persuaded by an argument that the world may have moved to a sort of permanent economic slump:

Again, the evidence suggests that we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing. 

Why might this be happening? One answer could be slowing population growth. A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off. America’s working-age population rose rapidly in the 1960s and 1970s, as baby boomers grew up, and its work force rose even faster, as women moved into the labor market. That’s now all behind us. And you can see the effects: Even at the height of the housing bubble, we weren’t building nearly as many houses as in the 1970s. 

Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away. 

Why does all of this matter? One answer is that central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt, which run along the lines of “It may not be a problem now, but just wait until interest rates rise.” 

More broadly, if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics — in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off — for a long time. 

In other economics talk of note, Tim Colebatch gives the thumbs up to a new book by Garnaut about what Australia should be doing:

What to do? The first priority, Garnaut insists, is to try to bring the dollar down, a lot. It's not the only thing we have to do, but without that, all else is in vain. Newman's contrary view that the dollar is only a minor issue is silly, as his muddled comparison of Australian and US wages shows. In $A, our average manufacturing wage rose 11 per cent between 2009 and 2012. In $US, it rose 42 per cent. Three-quarters of that rise came from the rising dollar. We cannot restore our lost competitiveness without bringing it down.

Garnaut hopes that more interest rate cuts could do the trick. Experience suggests that's optimistic: in my view, the Reserve Bank needs to intervene in the markets to drive the dollar down, with the government helping by removing the $2 billion a year tax break to foreign owners of government bonds.

What about the budget? Garnaut's forecasts imply that, without action, the deficit could blow out horribly ahead - yet to cut spending and/or raise taxes would slow the economy further. He advocates doing both, trimming middle class welfare while closing tax breaks, but offsetting this (as Hockey plans to do) by a strong push to build productivity-enhancing infrastructure - chosen on economic merit, not for political reasons.