The Cost that Crippled Growth

Paul Krugman of 26 September:

I have no problem in principle with the idea that shifts in the economy can temporarily lead to a large rise in the “natural” rate of unemployment. Let me offer a case in point: it was quite clear, circa 1990, that Britain was no longer capable of running unemployment rates as low as those of the 1960s and early 1970s.

But how did we know this? First, through experience: the Lawson boom of the late 1980s never brought unemployment below 7 percent, yet it was accompanied by a sharp rise in inflation. Clearly, the economy was hitting speed limits even at relatively high unemployment by previous standards.

Clearly it was.

I don't know why this Krugman post fascinates me. Why it bothers me. Clearly it does.

I think it's this: It's just matter-of-fact. There were "shifts in the economy," and then POOF!! -- the "natural" rate of unemployment had changed.

And then when Krugman explains it, he doesn't explain it. He only says it again, in that second paragraph. He offers no explanation.

An explanation would go something like this: During the so-called "golden age of post-war capitalism," increasing credit-use propelled economic growth. But increasing credit-use also propelled the accumulation of debt.

At some point -- specifically, 1973 -- the cost of that accumulating debt suddenly took precedence over the animal spirits that had been driving growth. Thus ended the golden age.

Since that time, economists and policymakers have done all in their power to restore credit-use to a level that would again drive golden-age growth. They tried everything. Everything except reducing the accumulation of debt.

They failed to reduce the cost that crippled growth. So the economy has never again achieved the kind of growth it achieved in the good years.