When you have an excellent map, but drive into a ditch anyway.
 | | President Trump signs one of four executive orders addressing the economic fallout from the COVID-19 pandemic.Susan Walsh/Associated Press |
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I guess we all have our vices, although maybe not on a Jerry Falwell level. Anyway, one of mine is an aversion to clichés. Back in the day, when I served on a committee evaluating student research proposals, I (jokingly) suggested automatic rejection of any student declaring themselves “passionate” about whatever the topic was. These days I groan whenever someone declares that “we’re in uncharted territory.” |
OK, I’m being unfair. In a lot of ways we are indeed in uncharted territory. I’ve never before been this afraid of a stolen election. And even in economics, the coronavirus slump in the first half of 2020 was truly something new under the sun. |
But right now, at least as far as economics goes, we are in fact entering very well-charted territory. What seems all too likely to happen to the U.S. economy over the next few months is all too familiar to those of us who studied the aftermath of the 2008 financial crisis. We actually have a very good road map telling us which policies are likely to be helpful and which will do great damage. |
Unfortunately, both Senate Republicans and the Trump White House seem determined to ignore that map. |
Until now, 2020 has been a tale of two economies. One sector — call it the C-sector either for coronavirus or contagion, take your pick — suffered terribly. The other — call it K for Keynesian — suffered far less damage. Here’s a picture showing changes in employment in the main sectors that suffered from lockdown, and in everything else: |
 | | Two pandemic economiesBureau of Labor Statistics |
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One great worry among economists was that the C-sector crisis would spill over to the economy at large. After all, millions of workers were going without wages, thousands of businesses had no customers. Wouldn’t they be forced to cut spending across the board, creating a generalized depression? |
So far, however, we have avoided that fate. But we weren’t lucky; we (or at least Nancy Pelosi and her allies) were smart. By providing generous aid to those temporarily put out of work by the pandemic, they not only alleviated suffering, they sustained spending and protected the broader economy. |
But now the aid has gone away, with no sign of a workable replacement. What this means is that the U.S. economy as a whole is about to look something like the way it did in 2009-2010, when a housing bust produced a broad-based slump. And we know a lot about policy in that kind of economy! |
First, the Federal Reserve can’t save us. In both recent crises the Fed was very aggressive about printing money and buying assets, and in so doing helped limit the damage. But once interest rates are close to zero, the Fed is “pushing on a string” and can’t engineer a recovery. |
Second, government spending can save us. Economists surveyed by the University of Chicago overwhelmingly agreed that the Obama stimulus helped reduce unemployment; it’s just too bad that it wasn’t bigger. |
Third, in a depressed economy deficits aren’t a problem. Remember all those predictions that government borrowing would lead to soaring inflation and interest rates? It never happened. |
Finally, austerity policies — slashing government spending over phantom debt fears — are disastrous, greatly deepening the slump. |
So we are, as I said, currently in very well-charted territory. We know what is likely to help and what will make things worse. |
But you can probably guess the punchline: Donald Trump seems determined to take advice from people who got everything wrong during the last crisis and learned nothing from the experience. We have a very good road map to guide us, but we’re being led by people dead set on driving us into a ditch. |
Austerity was a major drag on recovery during the Obama years. |
If you’re enjoying what you’re reading, please consider recommending it to friends. They can sign up here. If you want to share your thoughts on an item in this week’s newsletter or on the newsletter in general, please email me at krugman-newsletter@nytimes.com. |
 | | Maybe the human race is runYouTube |
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Roger Waters, Holly and Jess of Lucius singing backup. Awesome. |
Twenty-somethings in Wisconsin. Suburban women in Arizona. Seniors in Florida. Join Miami Bureau chief Pati Mazzei and reporters Alex Burns, Astead Herndon and Nick Corasaniti as they discuss the voters that may end up deciding the 2020 presidential race with deputy politics editor Rachel Dry. R.S.V.P. for the live event on Wednesday, Aug. 12, at 6 p.m. Eastern. |
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