Financial writer: Paul Krugman 'got it right' about the COVID-19 recession

When the COVID-19 pandemic caused a painful recession in the United States in 2020, liberal economist and New York Times columnist Paul Krugman argued that the recession didn't have to be a long-lasting one — if the U.S. would have a New Deal-like response rather than responding with austerity measures. Meanwhile, financial journalist Noah Smith (best known for his work for Bloomberg News) feared that the COVID-19 recession would not end quickly and that the U.S. would suffer economic hell for a long time. But in a Substack blog posted on June 16, Smith says that thankfully, he was wrong — and Krugman was right.

Krugman, upon seeing Smith's article, tweeted:

Earlier this year, Krugman applauded Democrats in Congress for passing the American Rescue Plan Act of 2021 and President Joe Biden for singing it into law, emphasizing that austerity measures made the Great Recession more painful than it had to be. Krugman's advice to Biden, House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer was "go big."

According to the U.S Bureau of Labor Statistics, the United States' unemployment rate fell to 5.8% in May. Many Americans are still hurting economically, to be sure. And the COVID-19 pandemic is still killing people all over the world. According to Johns Hopkins University in Baltimore, the worldwide death toll from COVID-19 is more than 3.8 million —and that includes over 600,000 deaths in the U.S.

But the state of the U.S. economy, all things considered, could be much worse. The fact that Biden has been so aggressive about urging Americans to get vaccinated for COVID-19 certainly hasn't hurt. Around 65% of U.S.-based adults, according to the New York Times, have been at least partially vaccinated for the COVID-19 coronavirus — and Biden's goal is to reach 70% by July 4, 2021.

Smith, whose article is headlined "COVID Doom Predictions That Never Happened," explains, "When unemployment spiked to Great Depression levels in the early days of lockdown, it seemed to me — and to many, many others — like this downturn was destined to turn into a decade of mass economic hardship. Fortunately, that was completely off the mark! I got it very wrong, and Paul Krugman got it right; with no financial crisis and no big overhang of debt, the economy simply wasn't destined for a repeat of 2008-12. Though the recovery has proven bumpy thus far…. most economists still forecast a relatively swift return to the pre-pandemic growth trend."

Smith goes on to describe five "predictions of economic doom" that "failed to materialize." The first one is that "suicides fell." The financial journalist notes that suicides, according to a JAMA Psychiatry article, are 6% lower in 2021 than they were in 2020 — showing that predictions of a long-lasting suicide-filled recession didn't come about. Other positive trends that Smith notes range from "savings and net worth rose" to "people are paying their rents and mortgages" to "state budgets are healthy" to "business formation increased."

"I think those who issued doom-and-gloom predictions got two things wrong," Smith explains. "First, they used the Great Recession as a model. Paul Krugman had this exactly right from Day 1 — this recession was not an aggregate demand deficiency due to a financial crisis and debt overhang. It was something else entirely, and there was no real deep fundamental reason we couldn't bounce back a lot faster from this one. The Great Recession traumatized us and made us pessimistic; perhaps the swift bounceback from COVID will undo some of that trauma."

Smith adds, "Second, forecasters couldn't have predicted the breathtaking size and boldness of the three U.S. relief bills, which together, were far more generous even than what our rich-world peers offered."