Monday, February 16, 2009

No Guaranteed Right to Affluence

Krugman again:

If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn’t just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government’s debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.

Here's my take on that. It wasn't WWII that brought us out of the depression, so much as it was the fact that WWII destroyed virtually every other major industrial nation and then we had the whole planet to ourselves. Why wouldn't our economy have rebounded when we had no competition?

But that isn't going to happen again. So large public works is not the solution at all, it's just a stop-gap measure that may or may not help, depending upon whether others will loan us the money to do it.

What we're going to have to do is go back to square one, become a creative, manufacturing (of what others want to buy) economy again. If we don't, then we're just going to have to get used to being basically poor again, like we're were before the 20th century.

Poverty is the normal state of affairs for humanity through history, unless you build something others want to buy. (I will grant you that abundant oil energy and technology really help here). We have no built-in right to wealth that guarantees that America will always be affluent.

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