21/07 The Lesser Depression


OP-ED COLUMNIST
By 
Published: July 21, 2011

These are interesting times — and I mean that in the worst way. Right now we’re looking at not one but two looming crises, either of which could produce a global disaster. In the United States, right-wing fanatics in Congress may block a necessary rise in the debt ceiling, potentially wreaking havoc in world financial markets. Meanwhile, if the plan just agreed to by European heads of state fails to calm markets, we could see falling dominoes all across southern Europe — which would also wreak havoc in world financial markets.
Fred R. Conrad/The New York Times
Paul Krugman
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We can only hope that the politicians huddled in Washington and Brussels succeed in averting these threats. But here’s the thing: Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse.
In fact, policy makers seem determined to perpetuate what I’ve taken to calling the Lesser Depression, the prolonged era of high unemployment that began with the Great Recession of 2007-2009 and continues to this day, more than two years after the recession supposedly ended.
Let’s talk for a moment about why our economies are (still) so depressed.
The great housing bubble of the last decade, which was both an American and a European phenomenon, was accompanied by a huge rise in household debt. When the bubble burst, home construction plunged, and so did consumer spending as debt-burdened families cut back.
Everything might still have been O.K. if other major economic players had stepped up their spending, filling the gap left by the housing plunge and the consumer pullback. But nobody did. In particular, cash-rich corporations see no reason to invest that cash in the face of weak consumer demand.
Nor did governments do much to help. Some governments — those of weaker nations in Europe, and state and local governments here — were actually forced to slash spending in the face of falling revenues. And the modest efforts of stronger governments — including, yes, the Obama stimulus plan — were, at best, barely enough to offset this forced austerity.
So we have depressed economies. What are policy makers proposing to do about it? Less than nothing.
The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable. It’s not a response to public opinion. In a recent CBS News/New York Times poll, 53 percent of the public named the economy and jobs as the most important problem we face, while only 7 percent named the deficit. Nor is it a response to market pressure. Interest rates on U.S. debt remain near historic lows.
Yet the conversations in Washington and Brussels are all about spending cuts (and maybe tax increases, I mean revisions). That’s obviously true about the various proposals being floated to resolve the debt-ceiling crisis here. But it’s equally true in Europe.
On Thursday, the “heads of state or government of the euro area and the E.U. institutions” — that mouthful tells you, all by itself, how messy European governance has become — issued their big statement. It wasn’t reassuring.
For one thing, it’s hard to believe that the Rube Goldberg financial engineering the statement proposes can really resolve the Greek crisis, let alone the wider European crisis.
But, even if it does, then what? The statement calls for sharp deficit reductions “in all countries except those under a programme” to take place “by 2013 at the latest.” Since those countries “under a programme” are being forced into drastic fiscal austerity, this amounts to a plan to have all of Europe slash spending at the same time. And there is nothing in the European data suggesting that the private sector will be ready to take up the slack in less than two years.
For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937: the premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last until World War II finally provided the boost the economy needed.
Did I mention that the European Central Bank — although not, thankfully, the Federal Reserve — seems determined to make things even worse by raising interest rates?
There’s an old quotation, attributed to various people, that always comes to mind when I look at public policy: “You do not know, my son, with how little wisdom the world is governed.” Now that lack of wisdom is on full display, as policy elites on both sides of the Atlantic bungle the response to economic trauma, ignoring all the lessons of history. And the Lesser Depression goes on.
A version of this op-ed appeared in print on July 22, 2011, on page A21 of the New York edition with the headline: The Lesser Depression.


26.
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Karl Thompson
Pennington, NJ
July 22nd, 2011
9:48 am
While I'm certainly very worried about the current "Lesser Depression" and the pain it is causing millions, I am very skeptical of Krugman's usual solution of gov't stimulated growth.

Krugman's analysis to what got us to this point, the collapsing housing bubble, is factual (even if it is not complete). But advocating gov't stimulus to correct the problem for lack of demand could very well end up replacing one collapsing bubble with yet another.

By this point, we've all heard the number, the gov't is borrowing about $0.40 for every dollar it spends. Accelerating this trend will only lead to an even larger problems. That is, how do we reverse the unsustainable trend of our gov't being responsible for more and more of our economic activity? Look at us now. Our leaders are fighting over how to reduce our deficit by maybe $3 trillion dollars over 10 years when we are adding $1.5 trillion dollars of debt every year.

Even if we accept that this trend can continue for some time, it can not continue forever. So supporting the economy with even more and more spending isn't really a solution because we will be left in the same situation we are in now when the spending stops -- a lack of demand.

And yes, I know there are those that say "but it's the gov't that got us out of the Great Depression by spending on WWII". True, but only to an extent. WWII was followed by a huge need to rebuild Europe, Japan and the rest of the Pacific Rim. Furthermore, WWII was followed by the baby boom which itself led to a huge amount of demand for consumer items.

I just don't see this kind of demand reoccurring again (let's hope we don't have to rebuild Europe). So, the question is, what replaces the gov't spending once the spigots get turned off?

There is a solution, but no one wants to hear it.
51.
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meed1
Houston, Tx
July 22nd, 2011
10:58 am
One of the things I find most interesting about your opinion pieces is that you have data to back up your conclusions that the current efforts to reduce deficit should be secondary to efforts to spend and revive the economy. In my field, medicine, such conclusions would be called evidence based medicine. As you well know there is a movement to teach and practice evidence based medicine across the US. Yet there seems to be no move to practice evidence based economics. Each day that I read about the negotiations between the White House, the Democrats, and the Republicans, I feel as though I am reading the headlines at the checkout counter in the grocery store with celebrity names exchanged for congressional leaders bickering, walking out etc. I cannot believe the misguided infatuation with cutting the deficit while so many Americans are continuing to suffer from the lack of employment and and ultimately the lack of cash flow in especially small but also selected large businesses. I make exception here for banks and energy that seem to thrive no matter what the economy, with little to offer the people who make their businesses successful except some crumbs of cake (a la Marie Antoinette). In the meantime I have one daughter starting college and a second three years behind. My 529 savings accounts for them, now I realize to have been a mistake because there is no profit to shelter from taxes, barely recovered from decimation in 2008 are locked away and vulnerable to losses if the US defaults. My 401k in similar straits. Truly Speaker Boehner, just who are you representing because I certainly don't think it is me or anyone like me.
52.
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Jeff B.
Chicago
July 22nd, 2011
11:06 am
What frightens me the most (and scares me even more) is what percentage of the population can even understand and comprehend the readers' comments in articles such as this. I fear our society is becoming increasingly polarized in education and access to intelligent and accurate information.

I am only 22 and can already attest, many of my peers cannot pinpoint these historical references mentioned much less comprehend their significance. Although my conclusions are my personal opinion, I do not believe they are held without merit. While we debate the inner workings of our increasingly polarized government we are neglecting to realize how many people in this country are being left out of the debate. There are 300+ million people living in this country, they all deserve a voice! Lets make sure they are all equally valid and heard.
109.
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Ted
Show Low, AZ
July 22nd, 2011
11:30 am
Those who ignore history are bound to repeat it, or words to that effect. It's interesting that on major economic decisions, common sense and common good give way to common politics. Down the road we go, chasing the can we can never catch because someone is always kicking it again.
119.
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Norman Pollack
East Lansing, Mich.
July 22nd, 2011
11:43 am
When a society and economy so blithely ignore the pressing social problems of unemployment, mortgage foreclosure, and the drastic maldistribution of wealth, then perhaps it is time to let the Lesser Depression emerge into the Great Depression 2. Default, from a moral standpoint, may well be salutary, for how else knock sense into public and private policy makers, so cruelly bent on fostering regressive measures in the face of widespread poverty and a growing lack of hope.

Let's give the current generation a taste of its own medicine and follow the advice of Herbert Hoover and Andrew Mellon in 1930-31: Purge the system of its wastes! Only in this case, its crucial wastes are militarism and contempt for democratic principles--with both parties equally at fault.
120.
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CMJCollier
Holly Springs, NC
July 22nd, 2011
11:48 am
The anti-FDR faction of this country have been agitated since the implementation of New Deal programs. Over the years their attacks were termed as a defense against encroaching socialism, if not communism and finally a repeal of the nanny state. Given enough time, extreme right has a strangle hold on public discourse and the political process. It has found its opportunity to wreck decades of progressive policies that enabled workers to share in this nation's prosperity and find protection against the excesses of the power elites.
Now, in these times, the fanatical right are intent on reverting to a system of governance and policies that pre-date the 20th century when capitalist barons were king, the political elite knew best and workers were to be content with their lot in life.
Skillfully the public's attention is diverted, engaged in mortal combat over issues that touch their lives not at all.
The diversion serves the aims of the anti-progressive. It is difficult to notice your pocket is being picked while you are strangling your neighbor over a dispute about same sex marriage - the diversion succeeds.
Despite historical proofs, the GOP, conservatives, the Tea Party have persuade far too many US citizens we can rise from tyhe ashes of self-destruction more prosperous, more powerful. In the real world that plot twist only works in the movies, a very bad movie.
121.
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Doc G
Eastport ME
July 22nd, 2011
11:58 am
Social Security could be revived simply by eliminating the salary limit. Why should the poor and middle class pay a flat tax for Social Security and the wealthy be exempted after they reach the earning limit? Collect sufficient revenues to fund health care for all. Income taxes should be used to fund defense, basic research and federal crime agencies. These tax revenues should be sufficient to provide stimulus when recession occurs.

Alternatively, we could split up into four regions that are responsible for their own safety nets, basic research, and resources. The northeastern states of America, the southern states of America, the Mid-western states of America, and the Western States of America. The only taxes the citizens of these regions would pay to the central government of the USA would be those to support the military for national defense.
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