National Commentary

Paul Krugman: Don

Will the next president be the second coming of Jimmy Carter? Given Thursday's economic headlines, full of dire warnings about the return of 1970s-style stagflation, you might think so.

Realistically, though, the parallels between the problems facing the U.S. economy now and those of the late 1970s aren't that strong. That's the good news.

The bad news is that the economy probably will look similar to, but worse than, the economy that undid the first President George Bush. And it's all too easy to see how the next president could suffer a political fate resembling that of both the elder Bush and Carter.

Let's talk first about the Carter-era economy.

Jimmy Carter's overall economic record was much better than most people realize — the average economic growth rate under his administration was 3.4 percent per year, slightly higher than the growth rate under Ronald Reagan and far better than growth under either Bush. Reagan famously asked Americans whether they were better off than they had been four years ago; the answer, actually, was yes — most families had higher real income in 1980 than they did in 1976.

But the good economic news came in the Carter administration's early years, while its final year was marked by rising unemployment and soaring inflation, largely caused by a surge in oil prices.

And once again we have a weakening economy coupled with rising inflation, again thanks in large part to a surge in oil prices.

That said, I don't believe we're really facing anything comparable to 1970s stagflation. For one thing, we're less dependent on oil: America has more than twice the real GDP it had in 1979, but consumes only slightly more oil. For another, there's no sign of the wage-price spiral that once drove inflation into double digits — in fact, wage growth has been declining even as inflation rises.

What's much more likely is that we'll have an economy like that of the early 1990s, only worse.

The first President Bush presided over the 1990-91 recession. But his real problem came during the alleged recovery, which was hobbled by financial problems at many banks, which had been badly damaged by the collapse of the late-1980s real estate bubble, and by sluggish consumer spending, held down by high levels of household debt.

As a result, the unemployment rate just kept rising, not reaching its peak of 7.8 percent until June 1992.

If all this sounds familiar, it should. Many economists have pointed out the parallels between the current situation and the early 1990s: another real estate bubble, subprime playing more or less the same role formerly played by bad loans by savings and loan institutions, financial trouble all around.

The difference is that the problems look a lot worse this time: a much bigger bubble, more financial distress, deeper consumer indebtedness — and sky-high oil prices added to the mix. So if history is any guide, we should be looking at an extended period of economic weakness, probably extending well into 2010, and quite possibly even longer.

Can the next president do anything to avoid that outcome? In terms of straight economics, the answer is a clear yes.

To this day, it's not clear what Carter could have done differently: Stagflation is a problem with no good solutions. But weak spending is a treatable condition. A serious fiscal stimulus plan — one that emphasized public investment and aid to Americans in economic distress rather than across-the-board tax rebates, which many people won't spend — could do a lot to ease the country's economic pain.

Politically, however, it's hard to see this happening.

If the next president is a Republican, he will be captive to the doctrine that tax cuts are the answer to all problems, and therefore won't seek an effective response to the economy's troubles.

And even if the next president is a Democrat, any serious stimulus plan would face intense, ideologically motivated opposition in Congress. Will the next president be prepared to fight for an effective plan? Or will we end up with a compromise like the one congressional Democrats agreed to this year, legislation that assuages conservative objections at the cost of undermining the plan's effectiveness?

Until recently, I thought the biggest political struggle facing the next president was likely to be over health care reform. But right now it looks as if the first thing on the next administration's plate will have to be dealing with a weak economy.

And if effective action isn't forthcoming, the next president will suffer the fate of Jimmy Carter, who began his administration with words of uplift — "Let us create together a new national spirit of unity and trust" — and ended up delivering America into the hands of the hard right.

c.2008 New York Times News Service