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Wednesday, June 30, 2010

Into the Wayback Machine?

Brad DeLong wonders if we heading into the WABAC (or, "wayback") machine, and if we are, why we don't visit a better time period than 1937-1938:

Wabac

It's 1937 Again!, by Brad DeLong: David Leonhardt:

Betting That Cutting Spending Won’t Derail Recovery: The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome. In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts. ...

Today, no wealthy country is an obvious candidate to be the world’s growth engine, and the simultaneous moves have the potential to unnerve consumers, businesses and investors, says Adam Posen, an American expert on financial crises now working for the Bank of England. “The world may be making a mistake, and it may turn out to make things worse rather than better,” Mr. Posen said. But he added — after mentioning China, India and the relative health of the financial system, today versus the 1930s — that, “The chances we’re going to come out of this O.K. are still larger than the chances that we aren’t.”

I think that Adam Posen has a different definition of "OK" than I do. A jobless recovery and prolonged unemployment above 8% is, to my way of thinking, definitely not OK.

Leonhardt:

[T}he initial stages of our own recent crisis were more severe than the Great Depression. Global trade, industrial production and stocks all dropped more in 2008-9 than in 1929-30, as a study by Barry Eichengreen and Kevin H. O’Rourke found. In 2008, though, policy makers in most countries knew to act aggressively. The Federal Reserve and other central banks flooded the world with cheap money. The United States, China, Japan and, to a lesser extent, Europe, increased spending and cut taxes. It worked. By early last year,... economies were starting to recover. The recovery has continued this year...

That optimistic take, however, is more debatable today than it would have been a month or two month ago. As is often the case after a financial crisis, this recovery is turning out to be a choppy one. ... The Senate has so far refused to pass a bill that would extend unemployment insurance or send aid to ailing state governments. Goldman Sachs economists this week described the Senate’s inaction as “an increasingly important risk to growth.”

The parallels to 1937 are not reassuring.... Given this history, why would policy makers want to put on another fiscal hair shirt today? The reasons vary by country. Greece has no choice.... Several other countries are worried — not ludicrously — that financial markets may turn on them, too, if they delay deficit reduction. ... Then there are the countries that still have the cash or borrowing ability to push for more growth, like the United States, Germany and China, which happen to be three of the world’s biggest economies. Yet they are also reluctant.... The reasons for the new American austerity are subtler, but not shocking. Our economy remains in rough shape, by any measure. So it’s easy to confuse its condition (bad) with its direction (better) and to lose sight of how much worse it could be. The unyielding criticism from those who opposed stimulus from the get-go — laissez-faire economists, Congressional Republicans, German leaders — plays a role, too. They’re able to shout louder than the data.

Finally, the idea that the world’s rich countries need to cut spending and raise taxes has a lot of truth to it. The United States, Europe and Japan have all made promises they cannot afford. Eventually, something needs to change. In an ideal world, countries would pair more short-term spending and tax cuts with long-term spending cuts and tax increases. But not a single big country has figured out, politically, how to do that. Instead, we are left to hope that we have absorbed just enough of the 1930s lesson.

Sometimes, if first you don't succeed try, try again is bad advice. Balancing the budget before the economy was ready to stand on its own didn't work last time we we trying to exit a severe recession, so why try the same thing again? The time to address budget issues will come, but that time is not here yet.

Some people get it -- too bad it's not the politicians in Congress:

Who Will Fight for the Unemployed?, Editorial, NY Times: Without doubt, the two biggest threats to the economy are unemployment and the dire financial condition of the states, yet lawmakers have failed to deal intelligently with either one.
Federal unemployment benefits began to expire nearly a month ago. Since then, 1.2 million jobless workers have been cut off. The House passed a six-month extension ... in May, but the Senate, despite three attempts, has not been able to pass a similar bill. The majority leader, Harry Reid, said he was ready to give up after the third try last week when all of the Senate’s Republicans and a lone Democrat, Ben Nelson of Nebraska, blocked the bill.
Meanwhile, the states face a collective budget hole of some $112 billion, but neither the House nor the Senate has a plan to help. The House stripped a provision for $24 billion in state fiscal aid from its earlier spending bill. The Senate included state aid in its ill-fated bill to extend unemployment benefits; when that bill failed, the promise of aid vanished as well.
As a result, 30 states that had counted on the money to help balance their budgets will be forced to raise taxes even higher and to cut spending even deeper in the budget year that begins on July 1. That will only worsen unemployment... Worsening unemployment means slower growth, or worse, renewed recession.
So if lawmakers are wondering why consumer confidence and the stock market are tanking (the Standard & Poor’s 500-stock index hit a new low for the year on Tuesday), they need look no further than a mirror.
The situation cries out for policies to support ... jobless benefits and fiscal aid to states. But instead of delivering, Congressional Republicans and many Democrats have been asserting that the nation must act instead to cut the deficit. The debate has little to do with economic reality and everything to do with political posturing. A lot of lawmakers have concluded that the best way to keep their jobs is to pander to the nation’s new populist mood and play off the fears of the very Americans whose economic well-being Congress is threatening.
Deficits matter, but not more than economic recovery, and not more urgently than the economic survival of millions of Americans. A sane approach would couple near-term federal spending with a credible plan for deficit reduction — a mix of tax increases and spending cuts — as the economic recovery takes hold.
But today’s deficit hawks — many of whom eagerly participated in digging the deficit ever deeper during the George W. Bush years — are not interested in the sane approach. In the Senate, even as they blocked the extension of unemployment benefits, they succeeded in preserving a tax loophole that benefits wealthy money managers... They also derailed an effort to end widespread tax avoidance by owners of small businesses organized as S-corporations. If they are really so worried about the deficit, why balk at these evidently sensible ways to close tax loopholes and end tax avoidance? ...
Congress leaves town on Friday for a weeklong break. What’s needed, and what’s lacking, is leadership, both in Congress and from the White House, to set the terms of the debate — jobs before deficit reduction — and to fight for those terms, with failure not an option.

    Posted by on Wednesday, June 30, 2010 at 12:24 AM in Economics, Fiscal Policy | Permalink  Comments (55)

          


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