The third de­pres­sion

Austin American-Statesman - - OPINION -

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 the 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 pol­i­cy­mak­ers 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 pol­i­cy­mak­ers 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 self­de­feat­ing.

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.

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