The Third Depression

From the New York Times, Nobel Prize winning economist Paul Krugman opines on the self-destructive attitudes of right-wing economic orthodoxy:

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.

And

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.

More here.

I've already started telling anyone in casual conversation who is willing to listen that we're in for about a decade or so of a sluggish economy with very little growth and high unemployment. I'm also starting to wonder what the investment angle is for someone like me who has a pretty good understanding of how fucked up the macro-economy will be for the next ten years: can I make some money off this?

At any rate, even though I have, at this point, accepted its inevitability, the coming third depression is very disturbing, and by "coming," I mean "already here."

That is, as Krugman has been observing relentlessly for months now, it just doesn't have to be this way. The austerity people, who are the majority of politicians and economists worldwide, are afraid of inflation caused by deficit spending. And, to be fair, inflation and deficits are problems, in the abstract. It's just that there isn't any imminent danger from deficit spending, while there is imminent danger from massive spending cuts.

Here's how deficit spending fucks the economy.

There are a finite number of dollars out there. When the government borrows beyond a certain threshold, a certain percentage of the GDP, the massive scale of these loans start to squeeze the overall dollar supply. The government borrows so much money that there is necessarily less available for everybody else, which means businesses can't expand and can't hire more people. So economic growth becomes stagnant. Factor in population growth, which creates more workers needing more jobs, and unemployment becomes a problem.

Now, the government could simply print up more money to deal with how deficit spending squeezes the dollar supply, but when it does so, each dollar, because there are more floating around the overall economy, becomes worth less, which causes inflation, which has its own set of horrific economic problems. So, in the long run, deficits screw the economy by forcing stagnation, or by causing inflation, and both are really bad.

In the short run, of course, deficits do no harm. And in the current economy, deficits are actually quite beneficial, and these benefits go way beyond any sort of compassion oriented arguments.

Have you been reading the headlines about states laying off teachers and shutting schools down because they don't have the money to keep them open? The reason the states don't have any money is because of the recession: people have lost jobs, and business activity is way down. That is, during a recession, tax revenues drop off sharply. Virtually all the states are bound by their constitutions to keep balanced budgets, so they have to cut spending. The Feds, however, have no such constraint. They can borrow not only to keep the government functioning, but also to spread the wealth around, which keeps tax revenues from shrinking further.

Are you following this? Cutting spending right now will necessarily result in a smaller tax base, thereby destabilizing the financial picture for state and federal government alike. In other words, the austerity strategy will do nothing but cause the need for more austerity as government income is dried up by foolhardy austerity measures. The deficit hawks want to make things worse, not better.

None of this even addresses the need to spend a whole shitload more than we're spending now, in order to make up for the fact that nervous consumers aren't spending, which makes nervous businesses avoid expansion. That is, in classic Keynesian form, massive government spending, on a scale that dwarfs what Obama and the Congress have been willing to do thus far, creates an economic environment such that businesses and consumers alike feel much better about parting with their dollars.

Ideally, when the crisis has passed, the government can then cut spending and start to pay off its debt, but with a much better and self-sustaining economy, which results in much higher tax revenues. So the real way out of the Great Recession is to spend like crazy now, which revives the economy, which then pays off, over the long run, the debt incurred today. Conversely, cutting spending right now will do nothing but worsen the situation.

None of the deficit hawks have directly responded to this argument. They just kind of fear monger about how bad it is to run deficits, and then they all nod their heads in agreement, an economist's echo chamber. That's why Krugman says that the call to cut spending has "little to do with rational analysis." It's all based on "DEFICITS BAD!"

I continue to be very frightened that, apparently, I, a guy who waits tables for a living, understand this stuff better than the people who make big bucks to do it.

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