Depression

[j_b]

Deficit hawks won't be able to claim that "nobody knew".

 

The Third Depression

By PAUL KRUGMAN

Published: June 27, 2010

 

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

 

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.

 

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

 

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

 

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

 

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.

 

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

 

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

 

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

 

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

 

http://www.nytimes.com/2010/06/28/opinion/28krugman.html?dbk

[prole]

Have these people gotten anything right in the last 40 years? Apparently, it's time to double-down on stupid. We should also elect a bunch of Republicans and start a new war in the Middle East...

[j_b]

or elect Herbert Hoover posing as FDR, then expand the war on terra since GW recently told us that war is the solution to all good depressions. baa

[prole]

Help is here.

[j_b]

Naomi Klein's take: Sticking the Public With the Bill for the Bankers' Crisis

 

"How else can we interpret the G20's final communique, which includes not even a measly tax on banks or financial transactions, yet instructs governments to slash their deficits in half by 2013. This is a huge and shocking cut, and we should be very clear who will pay the price: students who will see their public educations further deteriorate as their fees go up; pensioners who will lose hard earned benefits; public sector workers whose jobs will be eliminated. And the list goes on. These types of cuts have already begun in many G20 countries including Canada, and they are about to get a lot worse. For instance, reducing the projected 2010 deficit in the U.S. by half, in the absence of a sizeable tax increase, would mean a whopping $780-billion cut.

 

They are happening for a simple reason. When the G20 met in London in 2009, at the height of the financial crisis, the leaders failed to band together to regulate the financial sector so that this type of crisis would never happen again. All we got was empty rhetoric, and an agreement to put trillions of dollars in public monies on the table to shore up the banks around the world. Meanwhile, the U.S. government did little to keep people in their homes and jobs, so in addition to hemorrhaging public money to save the banks, the tax base collapsed, creating an entirely predictable debt and deficit crisis."

[prole]

Oh j-b, you know the pendulum only swings back after the world war...

[j_b]

You mean this time around perhaps or so it seems considering the level of apathy. I wonder if they'll try to sell us a world war like they are now selling Afghanistan: untold riches to be had ...

[j_b]

Ireland: the High Cost of Austerity

 

DUBLIN — Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.

 

“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”

 

Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

 

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

 

Now, the Irish are being warned of more pain to come.

 

[..]

 

Politicians here have raised taxes and cut salaries for nurses, professors and other public workers by up to 20 percent. About 30 billion euros ($37 billion) is being poured into zombie banks like Anglo Irish, which was nationalized after lavishing loans on developers.

 

The budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3 percent of gross domestic product last year — worse than Greece. It continues to deteriorate. Drained of cash after an American-style housing boom went bust, Ireland has had to borrow billions; its once ultralow debt could rise to 77 percent of G.D.P. this year.

 

[..]

 

http://www.nytimes.com/2010/06/29/business/global/29austerity.html?th=&emc=th&pagewanted=all

[prole]

What, you mean no one wants to invest in a country where its citizens are being pauperized? I'm shocked. Well, as usual per the neoliberal's argument, these stubborn Irish just haven't gone far enough. I mean they're supposed to be competing with Chinese and African labor for foreign capital now, right? Where's their commitment? No pain, no gain!

[j_b]

Funny how they forget to mention that they used to point at Ireland as one of the good student of the neoliberal way. I guess we won't hear regurgitated ad-infinitum that California is like Ireland.

 

Here is some news from that other showcase piece of neoliberal order across the big pond (the UK):

 

 

Budget will cost 1.3m jobs - Treasury

 

Exclusive: Leaked government data concerning next five years shows hidden costs of austerity drive

 

George Osborne's austerity budget will result in the loss of up to 1.3m jobs across the economy over the next five years according to a private Treasury assessment of the planned spending cuts, the Guardian has learned.

 

Unpublished estimates of the impact of the biggest squeeze on public spending since the second world war show that the government is expecting between 500,000 and 600,000 jobs to go in the public sector and between 600,000 and 700,000 to disappear in the private sector by 2015.

 

Read more: http://www.guardian.co.uk/uk/2010/jun/29/budget-job-losses-unemployment-austerity

 

Note: Unemployment in the UK is already grossly under-reported at ~9%