We've been worried about the wrong thing:
The Jobless Trap, by Paul Krugman, Commentary, NY Times: F.D.R. told us
that the only thing we had to fear was fear itself. But when future
historians look back at our monstrously failed response to economic
depression, they probably won’t blame fear, per se. Instead, they’ll
castigate our leaders for fearing the wrong things.
For the overriding fear driving economic policy has been debt hysteria...
After all, haven’t economists proved that economic growth collapses once
public debt exceeds 90 percent of G.D.P.?
Well, the famous red line on debt, it turns out, was an artifact
of dubious statistics, reinforced by bad arithmetic. ... But while debt
fears were and are misguided, there’s a real danger we’ve ignored: the
corrosive effect, social and economic, of persistent high unemployment. ...
Five years after the crisis, unemployment remains elevated, with almost 12
million Americans out of work. But what’s really striking is the huge number
of long-term unemployed, with 4.6 million unemployed more than six months
and more than three million who have been jobless for a year or more. Oh,
and these numbers don’t count those who have given up looking for work
because there are no jobs to be found. ...
The key question is whether workers who have been unemployed for a long time
eventually come to be seen as unemployable, tainted goods that nobody will
buy. ... And there is, unfortunately, growing evidence that the tainting of
the long-term unemployed is happening as we speak. ... So we are indeed
creating a permanent class of jobless Americans.
And let’s be clear: this is a policy decision. The main reason our economic
recovery has been so weak is that, spooked by fear-mongering over debt,
we’ve been doing exactly what basic macroeconomics says you shouldn’t do —
cutting government spending in the face of a depressed economy.
It’s hard to overstate how self-destructive this policy is. Indeed, the
shadow of long-term unemployment means that austerity policies are
counterproductive even in purely fiscal terms. Workers, after all, are
taxpayers too; if our debt obsession exiles millions of Americans from
productive employment, it will cut into future revenues and raise future
Our exaggerated fear of debt is, in short, creating a slow-motion
catastrophe. It’s ruining many lives, and at the same time making us poorer
and weaker in every way. And the longer we persist in this folly, the
greater the damage will be.
Posted by Mark Thoma on Monday, April 22, 2013 at 12:33 AM in Budget Deficit, Economics, Unemployment |