Monday, May 9, 2011

An honest assessment of our economic situation

From Greg Mankiw in yesterday's NYT.
After more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers. 
 His column focuses on three key issues:
  1. How long will it take to achieve full employment?  The recovery has been slow, either because (pick one) we did not get enough stimulus, we got the wrong type of stimulus, or the economy was in worse shape than anyone thought.  The average unemployed person has been out of work nearly 40 weeks, which raises questions about how many of today's unemployed will ever be able to recover their pre-recession living standards.
  2. Will inflation remain under control?  Food and commodity prices are soaring, but overall inflation remains tame (thank housing prices).  The Fed continues to keep short term interest rates at rock bottom levels, but that may not continue if inflation becomes more widespread.  
  3. How long will foreigners lend money to the US at rock bottom rates?  If our politicians in Washington are unable to reach some agreement on deficit and debt reduction, we start looking all too much like Greece.  
Mankiw cautions:
If you find an economist who says he knows the answers, listen carefully, but be skeptical of everything you hear.

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