That is a confusing statement. He uses the argument to say, that the US will grow only with the long term average growth rate. E.g. With 3%, when this was the average growth in the last 20 years, and will not sprint with e.g. 5% to make up the difference to what would have been the GDP without the crisis.
I think Mankiw is right on this and Krugman is wrong. There was a massive misallocation of capital and training to people. Capacities are not only underused, but as there is need to reallocate and retrain, capacities have been destroyed. Not completely. There maybe some catchup, but I think Krugman is too optimistic. You have read Stiglitz' 'Globalisation and its discontent'. If I remember correctly, he makes exactly the same point. Even if the long term growth trends aren't damaged by the reform, the IMF has asked e.g. Asian countries to do, the reduction in the GDP base will hurt long time. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
This all seems sort of like what we would have expected if Ptolemy had been capable of Fourier analysis when he was accounting for retrograde motions of planets with epicycles. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
There is written in the end:
But to invoke the unit root thing to disparage growth forecasts now involves more than a bit of deliberate obtuseness. How can you fail to acknowledge that there's huge slack capacity in the economy right now? And yes, we can expect fast growth if and when that capacity comes back into use.
And what I say is, that this capacity isn't there or at least not fully, because it is not capacity in producing the things, that are demanded in the future. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
He uses the argument to say, that the US will grow only with the long term average growth rate. E.g. With 3%, when this was the average growth in the last 20 years, and will not sprint with e.g. 5% to make up the difference to what would have been the GDP without the crisis.
What Krugman claims in your quote is that as long as there is unemployment, there is "unused capacity" (remember that Krugman is a semi-classical Keynesianist - he assumes that labour is the critical limiting factor in the political economy. In other words, he assumes an empty world).
So to try to translate what you quote from Krugman above: "Mankiw is saying that growth will remain at the current level. But that is bollocks, because there is unused capacity in the economy, which can be employed to produce capital goods, which can be used to increase the production of goods. Which means that if the unused capacity is employed in this fashion, growth will be higher than it is now."
Of course, once you realise that we in fact do not live in an empty world, the entire exchange becomes surreal, because Mankiw's concept of "long-run [exponential] growth" becomes self-defeating, and Krugman's insistence that labour is the only limiting factor in the economy becomes nonsense.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
