Monday, June 28, 2010

Krugman Heralds the Arrival of the "Third Depression"

Steve Harper hosted the G8/G20 chinwag intent on pushing one policy - a pledge of halving member deficits by 2013. And he got his way.

However a real economist (Princeton professor, New York Times columnist and Nobel Prize winner) Paul Krugman believes what we watched over the past three days was the launch of the "Third Depression."

"...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.

...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.

...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.

...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.

Krugman concludes with this scathing indictment of Harper's deficit slashing policy:

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."


Greg Fingas said...

So does this mean we'll need to change the "Recession Stephen" moniker to "Depression Stephen" for the sake of accuracy? I'm sure that will be classified as part of Harper's mastery of the political chess game.

The Mound of Sound said...

I think that goes without saying. Harper is so doctrinaire, so ideologically hidebound, that he's incapable of foreseeing consequences or rapidly adapting to fast moving circumstances. Despite the madness underway in the US, he absolutely did not see the initial recession coming in 2008. He then panicked and introduced, with Ignatieff's support, a pathetic stimulus/recovery budget that delivered no long term benefit for a nation and people who would have to repay those funds, with interest, in the future.

As a supposed economist, Harper is a complete and persistent failure. That we're not in the same mess as the Euros is thanks entirely to Steve not having had time to undo Paul Martin's fiscal prudence.

Anonymous said...

It's upsetting that Krugman still peddles the idea that this is a crisis of poor policy. A longer-term structural analysis is required - ie: a look into the last forty years in which the long post-war boom collapsed and returned the global economic system to a more "classical" capitalist routine of cyclical economic growth and collapse, a cycle that characterized the entire 19th century and the first half of the 20th. Policy certainly affects the specifics of this boom-bust cycle, but it's damn clear that it's built-in to capitalism: overproduction/underconsumption always gluts the market and a certain point, the economy crashes. In doing so, it clears away the "dead wood" (human and infrastructure) and proceeds to rebuild again until the same crisis of overproduction/underconsumption occurs again except on a more centralized/monopolized scale in which bank and business failures become "too big to fail" as has happened recently. I believe we are entering a third great depression, but to attribute it to policy decisions is like dealing with drunk driving by training people to drive better when they're drunk.

lemmy said...

If we were living in a world where most governments were not already in terrible debt than short term stimulus might be rational but with so many nations stretched to the limit there are few real sources to borrow from. If you cannot legitimately borrow the money you must print it which creates inflation and devalues the savings of those rational people who were prudent.

Adding more stimulus creates larger debts, more interest payments and a greater need for austerity later. You cannot indefinately push off the pain something Martin realized and acted on.

The west has had several recessions and each time has bought its recovery without every paying off the debts. This pattern gives false recoveries that endanger the future with even larger problems. Spending to get out of debt is akin to drinking oneself sober, it will end badly

The Mound of Sound said...

Well Lemmy, I think I'm going with Krugman and Stiglitz on this one. As for available money, it's there only it sits backed up in financial institutions that have temporarily gone out of the lending business.

Anon 7:35, what we're experiencing isn't an ordinary function of a capitalist cycle. That cycle fell apart with the transition of America from a culture of production to a culture of consumption marked by a shift to a FIRE (finance, insurance, real estate) driven economy.

This is the hallmark of Reagan's "Age of Ruin" illustrated when Cheney backed further tax cuts to the rich, arguing to Bush that "Reagan showed that deficits don't matter."

The classical economic models we learned at university aren't matched to our rapidly changing realities. The economic principles that guided a postwar, industrialized North America have lost some of their relevance today. They've become the square peg that doesn't quite fit the round hole.

Anonymous said...

Considering the 'Post-War Boom' lasted from the forties to the seventies (three decades worth of boom), it defied the high waste, low return, so-called 'conservatives' favorite so-called critiques of Keynes' economic theories. In the past five presidencies, the USA has had five recessions and the start of a depression. And 0% net job growth!

Carter, the last New Deal president at least had overall job growth toward the end of his only term, while what the four Republican leaders have had is negative, with only Clinton, yet another Reagonite, making up the difference for job growth to ease up close to 0%.

I'm no liberal, but rather a socialist, and still I gotta agree with Keynes on a point or two. Deficits are not a concern if the government works toward 100% employment. Borrowing on jobs, as the New Deal presidents have done, will keep a nation's finances mostly stable with few hiccups (Carter's term), while borrowing to continue borrowing, which has been the staple since Reagon, creates the situation we're in now: the permanent loss of jobs.

I've been living on the rez my whole life, so things aren't gonna change a whole lot here, but pretty damn soon, the people from the 'burbs are gonna be living life like me: day to day, meal to meal. It's gonna hurt you all, folks. Trust me on this.