Not normally my thing to go around quoting Paul Krugman but his column today has put the issue squarely before us. According to Krugman what we are now looking at is a mass fall off in spending that will lead to deflation and pull the whole economy down around our ears.
His article The Third Depression is about why we are about to descend into an economic abyss, essentially because we pulled back from our spending commitments too soon. Here is the man himself and these are his words:
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.
I suppose there are two ways to explain why public spending has led us into such treacherous shoals. We can either argue, as I do, that the entire Keynesian enterprise was incoherent and sure to fail. Or you can argue, along with Krugman, that the problem was that we have only adopted half measures and that by pulling back too soon the retreat will be the actual cause of failure.
Listen carefully to what he says:
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.
Absolutely right. No sign whatsoever of unemployment coming down rapidly which really ought to raise the question why this is so. It is one thing to recognise that we have accumulated an immense level of debt. But having done so why has all this spending not at least had a temporary effect on the level of employment?
Krugman thinks it’s because there wasn’t enough spent. I think it’s because you cannot raise the level of demand without first raising the real level of production.
But both of us can at least agree on this. Reducing the size of the “stimulus” will create an adjustment problem that will cost jobs. The shift from an unproductive economic structure to one that pays its way is unambiguously painful. It is the process that we should have immediately embraced in 2008-09 when the recession began but if we are ever to regain our economic health, it is a process that must commence at one time or another.
Lower taxes, lower interest rates, less regulation, reductions in wasteful forms of public spending along with anything else that could have been done to allow the economy to find the road towards higher prosperity should have been the agenda. Instead we decided to add even greater structural imbalances to the ones that existed already. Better late than never to start along a path towards self-sustaining growth since to continue as we are will only make things worse.
Krugman, however, wants to unbalance our economic structures even more than they already are. The history books are not going to be kind to Keynesian economics and to those who so publicly supported the stimulus. I suppose for him arguing we reversed the stimulus too soon is better than just having to admit that Keynesian economics is useless and that he himself was actually wrong.
The failure of policy must nevertheless prey on his conscience. It is he and those other Keynesians who are responsible for the “tens of millions of unemployed workers” he speaks of, “many of whom” he rightly notes “will go jobless for years, and some of whom will never work again.” Butchering macroeconomic policy can be catastrophic.
I agree except for the inference that interest rate policy should be geared towards economic growth. So long as interest rates are dictated by monetary policy they ought to be geared towards nothing other than a stable value for the unit of account. The noton that economic growth can be stimulated in anything other than a distortionary manner using interest rate levers is part of the dud Keynesian legacy we ought to be discarding.
TerjeP (say Taya)
29 Jun 10 at 12:22 am
It seems to me, Steve that he’s attempting his best to mis-charatcherize a depression by focusing his attention on long term unemployment and also directing his feigned ire at Europe.
In other words, if Europe carries a long -term unemployment problem he can say this a depression and then be able to successfully claim that he was right.
We know that throughout the 90′s, during the last European down cycle, long term unemployment in Europe lasted for well over a decade in the most regulation heavy labor markets. So this is nothing new.
Krugman is the most dishonest economist around. He’s so brazenly dishonest it’s amusing to watch swing his bat.
JC
29 Jun 10 at 12:42 am
well Forrest is an expert on dishonesty.
Al Kruggers is doing is showing up the folly of introducing the wrong polices at the wrong time.
Afterall we have seen the example of countries that have used them and they show naturally Kruggers right and glass Jaw and Forrest wrong.
and if anyone is going to be HONEST then you should acknowledge the MAJOR reason for the rise in debt is the weak economies which were recovering.
Just the shot to help a recovering economy.
Contract it.
Only at Catallaxy would such nonsense be paraded
Butterfield, Bloomfiled & Bishop
29 Jun 10 at 10:03 am
He’s taking the Stiglitz/Zandi/Krugman line.
A good antidote:
http://www.imf.org/external/np/vc/2002/070202.HTM
“Let’s look at Stiglitzian prescriptions for helping a distressed emerging market debtor, the ideas you put forth as superior to existing practice. Governments typically come to the IMF for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government’s debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.”
Of course, more proof that this is moonbattery is here:
http://michaelscomments.files.wordpress.com/2010/06/stimulus-vs-unemployment-may-dots.gif
.
29 Jun 10 at 10:08 am
Damn you moderator/spaminator!
.
29 Jun 10 at 10:11 am
“Krugman, however, wants to unbalance our economic structures even more than they already are.”
Steve – I suspect there is a chance you are more correct with this statement than you think.
The ostensible question is “which policy is the correct way back to business-as-usual ?”
Krugman wanting to light the afterburners on debt-fuelled stimulus may possibly be about pushing the system beyond any hope of a return to BAU.
Myrddin Seren
29 Jun 10 at 12:47 pm
Some good news.
In the WSJ: Why Friedrich Hayek Is Making a Comeback.
With the failure of Keynesian stimulus, the late Austrian economist’s ideas on state power and crony capitalism are getting a new hearing.
Further excerpt at The Corner:
C.L.
29 Jun 10 at 12:53 pm
The end of the fiscal irresponsibility will lead to falling GDP. But it will also lead to falling unemployment. So they may say that they are in a depression when that happens. But in reality they are in a depression now. When the fiscal madness ends that will be the start of the recovery. And yet the GDP figures will turn nasty.
It is so very sad when paid professionals cannot even get the metrics right.
Robinson
29 Jun 10 at 1:01 pm
we have a recovery but GDP is still nasty.
Tell Forrest he has a competitor
Butterfield, Bloomfiled & Bishop
29 Jun 10 at 3:32 pm