Things Are Not O.K. By Paul Krugman

February 5, 2012

PAUL KRUGMAN

In a better world — specifically, a world with a better policy elite (Better than Goldman Sachs? Perish the notion) — a good jobs report would be cause for unalloyed celebration. In the world we actually inhabit, however, every silver lining comes with a cloud. Friday’s report was, in fact, much better than expected, and has made many people, myself included, more optimistic. But there’s a real danger that this optimism will be self-defeating, because it will encourage and empower the purge-and-liquidate crowd.

So, about that jobs report: it was genuinely good, certainly compared with the dreariness that has become the norm. Notably, for once falling unemployment was the real thing, reflecting growing availability of jobs rather than workers dropping out of the labor force, and hence out of the unemployment measure.

Furthermore, it’s not hard to see how this recovery could become self-sustaining. In particular, at this point America is seriously under-housed by historical standards, because we’ve built very few houses in the six years since the housing bubble popped. The main thing standing in the way of a housing bounce-back is a sharp fall in household formation — econospeak for lots of young adults living with their parents because they can’t afford to move out. Let enough Americans find jobs and get homes of their own, and housing, which got us into this slump, could start to power us out.

That said, our economy remains deeply depressed. As the Economic Policy Institute points out, we started 2012 with fewer workers employed than in January 2001 — zero growth after 11 years, even as the population, and therefore the number of jobs we needed, grew steadily. The institute estimates that even at January’s pace of job creation it would take us until 2019 to return to full employment.

And we should never forget that the persistence of high unemployment inflicts enormous, continuing damage on our economy and our society, even if the unemployment rate is gradually declining. Bear in mind, in particular, the fact that long-term unemployment — the percentage of workers who have been out of work for six months or more — remains at levels not seen since the Great Depression. And each month that this goes on means more Americans permanently alienated from the work force, more families exhausting their savings, and, not least, more of our fellow citizens losing hope.

So this encouraging employment report shouldn’t lead to any slackening in efforts to promote recovery. Full employment is still a distant dream — and that’s unacceptable. Policy makers should be doing everything they can to get us back to full employment as soon as possible.

Unfortunately, that’s not the way many people with influence on policy see it.

Very early in this slump — basically, as soon as the threat of complete financial collapse began to recede — a significant number of people within the policy community began demanding an early end to efforts to support the economy. Some of their demands focused on the fiscal side, with calls for immediate austerity despite low borrowing costs and high unemployment. But there have also been repeated demands that the Fed and its counterparts abroad tighten money and raise interest rates.

What’s the reasoning behind those demands? Well, it keeps changing. Sometimes it’s about the alleged risk of inflation: every uptick in consumer prices has been met with calls for tighter money now now now. And the inflation hawks at the Fed and elsewhere seem undeterred either by the way the predicted explosion of inflation keeps not happening, or by the disastrous results last April when the European Central Bank actually did raise rates, helping to set off the current European crisis.

But there’s also a sort of freestanding opposition to low interest rates, a sense that there’s something wrong with cheap money and easy credit even in a desperately weak economy. I think of this as the urge to purge, after Andrew Mellon, Herbert Hoover’s Treasury secretary, who urged him to let liquidation run its course, to “purge the rottenness” that he believed afflicted America.

And every time we get a bit of good news, the purge-and-liquidate types pop up, saying that it’s time to stop focusing on job creation.

Sure enough, no sooner were the new numbers out than James Bullard, the president of the St. Louis Fed, declared that the new numbers make further Fed action to promote growth unnecessary. And the sad truth is that the good jobs numbers have definitely made it less likely that the Fed will take the expansionary action it should.

So here’s what needs to be said about the latest numbers: yes, we’re doing a bit better, but no, things are not O.K. — not remotely O.K. This is still a terrible economy, and policy makers should be doing much more than they are to make it better.