Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.
Which brings us to the still grim fundamentals of the economic situation.
During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers ”” who are $11 trillion poorer than they were before the housing bust ”” are in no position to return to the buy-now-save-never habits of yore.
What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.
Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.
I love the comparison to the problems in 1937. I think he’s taking a tiptoe through the facts though. The recession at the end of 1937 was a result of the market adjustment after FDR’s plans had created an artificial economy.
Milton Friedman blamed the Federal Reserve’s tightening of the money supply in 1936 and 1937, which Klugman equates with budget cuts. They are not the same thing. Likewise, Ludwig Von Mises, of all people, actually assigned blame to inflationary bank credit encouraged by Central Banks as the best explanation.
Klugman, likewise, does not take into account that FDR’s policies had been increasingly hostile to private business expansion, in favor of governmental expansion. Case in point, I remember my Great Grandfather telling stories of how he absolutely hated when groups like the WPA or whatever came to town because they (by government financial backing, ironically money borrowed on credit) basically had a pool of slave labor and could underbid any private contractor in town, and take jobs away from private sector businesses.
Also, ironically, with the New Deal’s penchant for being in bed with Unions, a lot of labor strikes and problems flaired up, something the Federal Government Workers’ Programs never had to worry about, as it was illegal for Federal employees to unionize.
This, when 1937 came around, and the Federal Government tightened the money supply, the artificial economy that it had created corrected itself. Thus, Klugman is largely blaming a failure of Federal policy for a meltdown created by policies that the Federal government created to begin with. In other words, he’s blaming the government for not continuing to prop up the bubble the government itself had created.
Likewise, Krugman completely ignores the fact that unemployment and industry recovered primarily because of the boom created out of necessity by World War II, and not because of massive, inflationary government “bail outs” as we call them now.