Nobel laureate economist Paul Krugman says that we’re in the beginning stages of the third great depression

Paul Krugman now joins a long list of people characterizing our economic circumstances as another Great Depression.  There’s a reason why so many folks are coming out now to admit this.  It’s a way of preparing the public’s mind for what’s about to beset us.

The existence of a depression is something I accepted long ago.  We’ve had economic problems for quite some time, it was just masked by easy credit.  When they write the history books on this period,  the current economic malaise we’re in will have been considered to have started with the loss of the manufacturing base in the 1970’s which was replaced with money printing and  Wall Street financial alchemy.  Reagan’s new fangled supply side voodoo economics figures prominently into our problems as well, but acute financial instability came with the bursting of the internet bubble which was promptly replaced by the real estate bubble and supported by wild credit expansion.  Now we’re largely out of bullets, although the US Federal Reserve will likely make one last ditch effort to save the day.  Unfortunately, the cake has been baked and there’s little they can do at this point.

Krugman, like Obama, is a Keynesian and bemoans the movement around the world by governments to curtail spending.  Keynesians subscribe to the belief that the fiscal response to depressions must involve government spending to replace what’s not being done by the private sector to spur jobs and economic growth—even if it involves in running deficits.  Normally, this wouldn’t be a bad idea except for the fact that we’ve been running huge deficits since Reagan, so the credit line is nearly tapped out.  Had we been banking surpluses all of these years, then a little deficit spending wouldn’t be a big deal now, but the fact of the matter is that’s not the case.  So, because our government failed to create and set aside surpluses in better economic times, there’s no money now to help us through this rough spot.  Of course, had we been doing the economically prudent things to begin with, there’d be no rough spot now.  The economic malaise we find ourselves in is entirely of our own making. It’s a epic political and economic failure.  Reagan crowed about spending the Soviet Union into the ground causing its economic collapse and breakup, but he might have planted the seeds for our own demise at the same time. 

If you’re unemployed or know of someone who is, there’s nothing earth shattering about Krugman’s acknowledgement of our dire economic circumstances.   For many people, he’s a bit late to the party. 

The Third Depression

By PAUL KRUGMAN

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

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5 Responses to “Nobel laureate economist Paul Krugman says that we’re in the beginning stages of the third great depression”
  1. For better or for worse, ours is a “consumer economy.” For better or for worse, ours is a “service economy,” and not a manufacturing economy. Constructive Feedback sees the demise of the manufacturing sector as owing to “greedy” unions, and not rapacious corporations whose focus is on the bottom-line and not on the workers who contribute to it.

    Thanks to manufacturing following cheap labor around the world, Big Business has outsourced many American jobs to China, India, and other emerging third world countries. At some point, the supply of cheap labor will fail, and corporations will turn, almost exclusively, to automation to keep the wheels of industry turning.

    In the long-term, all workers are screwed, and some means will have to be found to give people the wherewithal to consume what’s being produced. I’ll leave that to SciFi movies to give us a view of that tomorrow. In the short-term, we need to continue to re-create ourselves. A green economy is one answer, provided we jump in first, and ride the wave as far as it will allow. At that point, we can think up something else to spur growth.

    The resistance to a green economy is that it will destroy the “fossil-fuel” economy. And those who great wealth is derived from it, will do everything in their power to prevent, and delay, that eventuality.

    Klugman is right about one things: Our economic model, which is capitalism, thrives on consumerism and growth. Austerity measures of any kind is not the answer.

    “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.”

    We’re seeing a lot of that “leadership in tough times” coming from Republicans who’re adamantly opposed to extending unemployment insurance to hundreds of thousands, claiming that it will contribute to further deficit spending. So will the wars in Iraq and Afghanistan. They, too, seem to believe in targeted reductions in spending, as long as certain other spending cuts aren’t curtailed.

    The irony here is this: As those on the street who are currently employed rail against unemployment insurance extensions, and deride those “lazy bums” who’re not really looking for work in our jobs-a-plenty market, further causing a widening of the recession, they’re contributing, unwittingly, of course, to the economic conditions that will soon put them in the ranks of the unemployed.

    Such is the ignorance with which most Americans seek to weather this economic free-fall. They understand very little about how the government and greedy corporations conspire to facilitate the fleecing of the common man.

    • Greg L says:

      Thanks to manufacturing following cheap labor around the world, Big Business has outsourced many American jobs to China, India, and other emerging third world countries. At some point, the supply of cheap labor will fail, and corporations will turn, almost exclusively, to automation to keep the wheels of industry turning.

      This is quite true.� The quest for cheap labor is a theme from feudalism, to slavery and to outsourced labor.� The thing I have difficulty grasping revolves around the idea of “how much is enough?”.� After you’ve made millions, what does it really do to make a few more other than to satisfy one’s greed?� There has to be a balance between profits and doing that which is sustainable for everyone–the worker and the shareholder.� We just don’t seem to be able to strike that balance and this is the primary reason why we seem to be moving�toward a merger of government and corporate powers.� What many are forgetting is that their employees are also consumers and if one drives down�wages far enough, consumption dries up.� Cheap credit was an attempt to make up for the wage shortfall while encouraging continued consumption at the same time, but that day has clearly ended.� � We�need to figure out how we’re going to remake the economy such that it works for everyone, but unfortunately is discussion about that is drowned out�by people bellowing about Nazism, socialism and�etc.� �

      We’re seeing a lot of that “leadership in tough times” coming from Republicans who’re adamantly opposed to extending unemployment insurance to hundreds of thousands, claiming that it will contribute to further deficit spending. So will the wars in Iraq and Afghanistan. They, too, seem to believe in targeted reductions in spending, as long as certain other spending cuts aren’t curtailed.�

      This is an outrage.� As you point out, they’ll pass the defense appropriation without a whimper about whether it’s “paid for” while holding up on something far smaller while screaming it needs to be paid for.� That’s just like spending a million bucks like a drunken sailor, while screaming about spending a dollar.� A clear attempt here at grandstanding while doing really nothing.� This is why this country is going to hell in a handbasket.� Not only are the failures epic, but they keep doing the same thing.

  2. “Not only are the failures epic, but they keep doing the same thing.”

    I guess Albert Einstein had it correct:

    “Insanity: doing the same thing over and over again and expecting different results.”
    Albert Einstein, (attributed)
    US (German-born) physicist (1879 – 1955)

    I’m afraid, there’s no end to greed. Michael Douglas’ character in Wall Street, the movie, assures us: “Greed is good!” There’s a sequel to the movie soon to be released. I’m eager to learn if it is repentant in light of how Big Banks have grown to a size almost half of our GNP, and are now “too big to fail.”

    The movie, when it was first released, no doubt provided inspiration for many of Wall Street’s famous grifters, and gave rise to the tactic of winning by any means necessary.

    Now, it’s “Winning through Intimidation.” If our financial system fail, it can take us down with it.

  3. Greg L:

    Can you specifically articulate how “Reagan” has so much power in the context of our co-equal branches of government?

    Doesn’t the US House originate the budget process? The president puts forth budget priorities. Am I missing something or are you trying to hammer home a larger point with your incessant references to “Reagan”?

    You mention the loss of the US manufacturing base and the jobs that were lost to China etc. Do you believe that the increases in the COSTS OF PRODUCTION in these prime spaces that are now called “The Rust Belt” had anything to do with this departure?

    The US South is winning many large new production plants because it offers a far less hostile and costly center of operations for business. Just look at the articles regarding the US and foreign owned firms with domestic manufacturing plants that are shifting away from MI/OH and CA down to Southern states. Certainly the South is not “China”.

    With Bill Clinton in for 8 years and Democratic congresses in control for a balance of the 22 years since Reagan has departed the White House – why is it that the corrective policies that you and your new friend Paul Krugman have not been implemented? Surely Sean Hannity wan’t around all of those years to tell them that they are violating the principles of Reagan.

    You clearly are missing how local economies (Trenton, Camden, Detroit, Cleveland, Rochester, Gary) have had political victories cemented by people with certain economic theories and government spending practices that can’t be sustained by their present economic output today.

    President Obama is going to successfully strip away any argument about “Republican Voodoo Economics” leading to catastrophic debt because he is on track to double the debt that Bush has laid down.

    For some strange reason Reagan will still be dug up out of the grave and faulted for all of this debt come the elections of 2016 as America is about $19,000 billion in debt.

    Let’s talk about the key programs that are RUNNING UP this debt Greg L and consider who are their main sponsors.

    Confronting the Unsustainable Growth of Welfare Entitlements: Principles of Reform and the Next Steps
    http://www.heritage.org/Research/Reports/2010/06/Confronting-the-Unsustainable-Growth-of-Welfare-Entitlements-Principles-of-Reform-and-the-Next-Steps

    • Greg L says:

      CF,

      Not iggning you here my friend. See my post on Yankee Uptopians in a Chinese Century where I deal with one point you raise above. I’ll respond later on Reagan and supply side economics, which is little more than the conservative version of Keynesian theories.

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