Krugman: The pessimists were right

Paul Krugman
January 8, 2010, 11:51 am

Payrolls and paradigms

Disappointing job number this morning. Still, a month is just a month, right? Well, not quite.

Here’s the way I think about the economic news: each piece of data tells us something about which model of recovery is right. More specifically, each disappointing piece of data strengthens the case of the pessimists.

From the beginning, there have been two schools of thought about the likely path of recovery. One school — strongly represented among Wall Street economists — said that the 2008-2009 recession should be compared with other deep US recessions: 1957 (the “Edsel” recession), 1974-5, 1981-2. These recessions were followed by rapid, V-shaped recoveries.

The other school of thought said that this was a postmodern recession, very different in character from those prior deep recessions, and that it was likely to be followed by a prolonged “jobless recovery”. Added to that were worries based on the historical aftermath of financial crises, which tends to be prolonged and ugly.

The debate a year ago over the size of stimulus was in part an implicit debate between these two views; those who argued that the stimulus was much too small did so because they had a pessimistic view about the likely pace of recovery.

Sad to say, each successive bad jobs report adds to the evidence that the pessimists were right.

http://krugman.blogs.nytimes.com/2010/01/08/payrolls-and-paradigms/

“We’re still losing jobs,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “It’s nothing like we had in the freefall of last winter, but we’re not about to turn around. We’re still looking at a really weak economy.”

The report intensified pressures on the Obama administration to show progress for the $787 million spending bill it championed last year to stimulate the economy. In recent months, the administration has emphasized initiatives aimed at encouraging jobs, while cognizant that concerns about the federal deficit limit its ability to pursue further spending.

“It certainly isn’t the best report, because we continue to lose jobs,” the Labor secretary Hilda L. Solis, said. “But last year at this time we were losing over 700,000 jobs a month. The recovery act continues to help.”

Some economists fixed on a potentially positive trend tucked within the data: For a fifth consecutive month, temporary help services expanded, adding 47,000 positions in December. The increase burnished the notion that companies are recognizing fresh opportunities and are inclined to add labor, even as they hold off on hiring full-time workers.

“We’re going in the right direction,” said Michael T. Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. “If we just have a little bit of patience, we’ll start see monthly increases of 200,000 to 300,000 jobs within six months.”

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