Things Paul Krugman want tell you

Krugman's column in today's NY Times is full of his usual gloomy vision of depression era America.

But there is much that is going well with the economy and Kevin Hassett lists a few:


1) Equity markets posted solid gains and price multiples are still low. As of last Friday morning, the Dow Jones Industrial Average had gained about 7 percent for the year, while yielding about 2.25 percent, providing investors with a total return of more than 9 percent. The Nasdaq Composite Index had climbed more than 10 percent, while the Standard & Poor's 500 Index had provided a total return in the 5.5 percent range. There are no signs of irrational exuberance. The price-to- earnings ratio for the S&P 500, for example, finished the year at less than 19, safely nestled in the historical comfort range.

2) Households are wealthier. In part because of rising equity markets, household net worth increased in 2007, according to the latest numbers from the Federal Reserve. At the start of the year, net worth was $56.1 trillion. By the third quarter, this climbed to $58.6 trillion and probably rose again in the fourth quarter. If changes in wealth affect the economy through consumption, then the affect will be favorable.

3) Congress did nothing. Gridlock has historically been good for the U.S. economy for a simple reason: New laws are invariably worse than the ones they replace. Witness Sarbanes- Oxley. With the Democrats taking control of Congress, there was a real risk that taxes, in particular, would be increased. With the economy softening already, it is great news that this didn't happen.

4) The Federal Reserve did something. From interest rate reductions to the introduction of a new auction mechanism to get needed reserves to struggling banks, the Fed has responded to the weakening economy with multiple policy moves. Thus, we have learned that Ben Bernanke's Fed will likely be a competent actor should things get worse. This is good news for nervous markets, though there was no guarantee this would be the case. The Fed did, after all, aggravate -- and may have caused -- the Great Depression.

5) The world economy had another blow-out year. According to the latest Moody's forecast, world gross domestic product grew by 3.9 percent in 2007 after rising 3.6 percent in 2006. In spite of the gloom in the headlines, the most important news in 2007 was that economic freedom is spreading, and the benefits to the world's citizens of this are skyrocketing.

6) The trade deficit declined. As our trading partners become wealthier, they demand more of our products. At the same time, the weaker dollar has made U.S. exports cheaper. Exports have boomed, and the real trade deficit has narrowed, from $624.4 billion in 2006 to an estimated $562.4 billion in 2007.

7) Even in the face of the housing-market bust, economic growth was solid. If someone told me last December that construction of single-family homes would drop in 2007 by 27 percent, about the current estimate from, then I would have expected the economy to be in recession. But a collapse of that scale did occur, and annual GDP growth, according to the latest estimate, was about 2.5 percent. There are plenty of developed countries that would take that type of growth every year.

8) Job creation was robust....

9) The federal budget deficit declined....

10) Inflation risk is low....
In Krugman's America "... The “Bush boom,” such as it was, bypassed most Americans — median family income, adjusted for inflation, has stagnated in the Bush years, and so have the real earnings of the typical worker. Meanwhile, insecurity has increased, with a declining fraction of Americans receiving health insurance from their employers. And things seem likely to get worse as the election approaches...."

He wonders why the Republican candidates support the Republican economic model. Perhaps he should look at items 1-10 above and recalculate. The fact is that the economy has recovered from the Clinton recession and the hits of major disasters like 9-11 and Katrina and would have itself been a disaster if we had followed Krugman's high tax model and his rationed health care prescription.


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