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July 3, 2010
Paul Krugman's The third Depression sure makes depressing reading. The background is market failure in the form of the global economic crisis and the claims of the Right that a minimally regulated economy is the only way to avoid the danger now.The assumption here is that that the market is a self-organizing, self-regulating system that optimizes freedom and benefits if the state confines itself to adjusting the money supply, waging war, and punishing crime etc.
Krugman says that recessions are common but depressions are rare. As far as he 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 (Long Depression) and the years of mass unemployment that followed the financial crisis of 1929-31 (Great Depression). He adds:
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.
He adds that 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.
He ends thus:
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.
This is the consequence of fiscal austerity that has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.The rhetoric is one of austerity-with-growth ----though pending cuts may hurt, they will spark economic recovery.
Why so? Because fiscal austerity improves business confidence!
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