PAUL KRUGMAN


Whatever the new administration does, we’re in for months, perhaps even a year, of economic hell. After that, things should get better, as President Obama’s stimulus plan - O.K., I’m told that the politically correct term is now “economic recovery plan” - begins to gain traction. Late next year the economy should begin to stabilize, and I’m fairly optimistic about 2010.

But what comes after that- Right now everyone is talking about, say, two years of economic stimulus - which makes sense as a planning horizon. Too much of the economic commentary I’ve been reading seems to assume, however, that that’s really all we’ll need - that once a burst of deficit spending turns the economy around we can quickly go back to business as usual.

In fact, however, things can’t just go back to the way they were before the current crisis. And I hope the Obama people understand that.

The prosperity of a few years ago, such as it was - profits were terrific, wages not so much - depended on a huge bubble in housing, which replaced an earlier bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the precrisis years isn’t coming back either.

To be more specific: the severe housing slump we’re experiencing now will end eventually, but the immense Bushera housing boom won’t be repeated. Consumers will eventually regain some of their confidence, but they won’t spend the way they did in 2005-2007, when many people were using their houses as cash machines, and the savings rate dropped nearly to zero.

So what will support the economy if cautious consumers and humbled homebuilders aren’t up to the job?

A more plausible route to sustained recovery would be a drastic reduction in the United States trade deficit, which soared at the same time the housing bubble was inflating. By selling more to other countries and spending more of our own income on goods produced in the United States, we could get to full employment without a boom in either consumption or investment spending.

But it will probably be a long time before the trade deficit comes down enough to make up for the bursting of the housing bubble. For one thing, export growth, after several good years, has stalled, partly because nervous international investors, rushing into assets they still consider safe, have driven the dollar up against other currencies - making United States production much less costcompetitive.

Anyway, the rest of the world may not be ready to handle a drastically smaller U.S. trade deficit. As my colleague Tom Friedman recently pointed out, much of China’s economy in particular is built around exporting to America, and will have a hard time switching to other occupations.

In short, getting to the point where our economy can thrive without fiscal support may be a drawn-out process. Right now, with the economy in free fall and everyone terrified of Great Depression 2.
0, opponents of a strong federal response are having a hard time finding support.

But once the economy has perked up a bit, there will be a lot of pressure on the new administration to pull back, to throw away the economy’s crutches. And if the administration gives in to that pressure too soon, the result could be a repeat of the mistake Franklin Delano Roosevelt made in 1937 - the year he slashed spending, raised taxes and helped plunge the United States into a serious recession.

The point is that it may take a lot longer than many people think before the United States economy is ready to live without bubbles. And until then, the economy is going to need a lot of government help.