Well, this is cheery news. Paul Krugman fears we’re headed towards another Long Depression. The European and other G-20 leaders are collectively herding themselves like lemmings towards the cliffs of insanity by promising to cut spending and reduce demand before their economies have recovered from a serious global recession. From today’s Krugman column, The Third Depression:
Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending. . . .
As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.
I watched President Obama’s press conference last night after the G-20 meetings. His prepared statement emphasized the current Administration view, that while medium- to long-run deficits warrant corrections that kick in later, our immediate focus should be on assuring the recovery is sound enough to sustain solid growth and declining unemployment. He noted that different countries are at different stages and correctly warned that we “can’t have everyone head for the exits at the same time.” Yet that’s exactly what the G-20 resolution seemed to endorse: everyone commits to curtail spending and cut their deficits in half by 2013, even though there’s no coherent theory under which they can all do that at the same time and come out well.
For some unexplained reason, the White House seemed to downplay their concerns over this lemming-like behavior. It’s not clear what harm there is in loudly proclaiming they’re making a horrendous mistake and they’ll regret it. Why coddle this folly? (cont’d.)
The final press question asked Obama what assurances he could give that the US would meet the Administration’s own promise to cut US deficits in half by 2013 — that’s right, the 2013 target was originally their idea, a sop to the deficit hysteria mob. Here, the President missed an opportunity.
He knows the Bush tax cuts are expiring (at least for those making above $200-250,000), and he’d already noted that much of recent deficit explosion was driven by the recession and responses to it, but those causes should phase out.
But instead of reemphasizing these points that our media too often forgets, he recalled OMB Orszag’s trivial cuts on non-discretionary spending and gave a nod to the deficit reduction (cat food) commission, gratuitously adding that we have to solve “the entitlements problems” in Medicare/Medicaid and Social Security. As Dean Baker and others have repeatedly shown, Social Security is in surplus and not a deficit issue, and lumping it in with the health cost issue is an egregious misstatement of whatever long-run deficit issues we face.
The President also missed an opportunity to hammer home again that the most important steps in reducing long-run deficits start with a fully recovered economy and putting people back to work. We’re not remotely close to that yet. That’s what the US had been telling the Europeans, and what the Administration’s economic advisers reportedly believe. But too often when it matters, they forget that’s the right answer even though today’s deficit hysteria public dialogues cry out for it’s repetition.
So instead of, or in addition to, merely challenging the Republicans to put up or shut up when the Deficit Reduction commission comes out with actual reduction proposals, Obama should have blistered the Republicans before the media for blocking efforts to sustain the economy and prevent more people from being layed off. After all, budget-strapped states are imposing austerity and crippling the US recovery exactly the same way Europe’s individual nations are proposing to do over the Administration’s objections.
But what do I know? Being merely an unknown, brainless straw man spared me the ridicule of an official from the Richmond Federal Reserve, who arrogantly chastised everyone from Matthew Yglesias to Paul Krugman and Brad DeLong, because these unworthy souls have no business opining on macroeconomics — read: they should not be arguing that more stimulus is needed and that austerity is both cruel and bad economic policy now — because, uh, economics is hard.
Writers who have not taken a year of Ph.D. coursework in a decent economics department (and passed their Ph.D. qualifying exams) cannot meaningfully advance the discussion on economic policy…
Brad DeLong is more patient than I:
I am speechless. Economics–like math–is not that hard. And just as one should ignore Malibu Barbie when she tells one not to try to do math so, I think, one should ignore Kartik Athreya.
I’m not worried about DeLong losing his voice. I suspect he and others who actually got it mostly right will eventually recover to remind those who are lecturing him and Krugman and friends that those economists who were in charge got it mostly wrong, probably because of their particular PhD training in economics.
The grownups in charge back then claimed they knew what they were doing, even though they couldn’t see an $8 trillion housing bubble, didn’t think it was a problem, didn’t think the Federal Reserve or anyone else should do anything about it, didn’t want states enforcing laws against lending fraud, didn’t think the shadow banking system and its fraudulent CDO/CDS trading were a systemic threat that required intervention, didn’t realize major banks/investment banks had become too big to fail/reform/control, and believed deep in their souls that the markets were self correcting . . . and then watched helplessly as the financial system collapsed and took the economy and millions of people, their homes, their jobs, their savings down with it.
Economics can seem hard to non-economists, but it doesn’t take a PhD economist to recognize the last 30 years of ruling economic advisers and their apologists should never be trusted again. So the fact too many of them are still influential tells us the problem is much deeper than “economics is hard.”
John Chandley (not an economist, though some of my best friends . . .)
Economics made easier:
Dean Baker explains economics to Robert Samuelson and shows the US et al are not about to exceed their debt capacity
Brad DeLong, expanding on Krugman, also explains the US et al are not about to exceed their debt capacity.