Krugman: We're in for a Year of 'Economic Hell'

Paul Krugman writes Monday that, no matter what President-elect Barack Obama does, we're in for up to a year of "economic hell" -- and that things will never go back to how they were.

Whatever the new administration does, we're in for months, perhaps even a year, of economic hell. After that, things should get better, as President Obama's stimulus plan -- OK, I'm told that the politically correct term is now "economic recovery plan" -- begins to gain traction. Late next year, the economy should begin to stabilize, and I'm fairly optimistic about 2010.

But what comes after that? Right now everyone is talking about, say, two years of economic stimulus -- which makes sense as a planning horizon. Too much of the economic commentary I've been reading seems to assume, however, that that's really all we'll need -- that once a burst of deficit spending turns the economy around we can quickly go back to business as usual.

In fact, however, things can't just go back to the way they were before the current crisis. And I hope the Obama people understand that.

The prosperity of a few years ago, such as it was -- profits were terrific, wages not so much -- depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn't coming back, the spending that sustained the economy in the pre-crisis years isn't coming back either.

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[O[nce the economy has perked up a bit, there will be a lot of pressure on the new administration to pull back, to throw away the economy's crutches. And if the administration gives in to that pressure too soon, the result could be a repeat of the mistake FDR made in 1937 -- the year he slashed spending, raised taxes and helped plunge the United States into a serious recession.