Krugman says slump is the new normal

Big Money

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The financial crisis that started the Great Recession is now far behind us.

Indeed, by most measures it ended more than four years ago.

Yet our economy remains depressed.

Before the crisis we had a huge housing and debt bubble.

Yet even with this huge bubble boosting spending, the overall economy was only so-so — the job market was O.K. but not great, and the boom was never powerful enough to produce significant inflationary pressure.

We have an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles.

Look at household debt relative to income.

That ratio was roughly stable from 1960 to 1985, but rose rapidly and inexorably from 1985 to 2007, when crisis struck.

Yet even with households going ever deeper into debt, the economy’s performance over the period as a whole was mediocre at best, and demand showed no sign of running ahead of supply.

Looking forward, we obviously can’t go back to the days of ever-rising debt.

Yet that means weaker consumer demand — and without that demand, how are we supposed to return to full employment?

The evidence suggests that we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing.