Commiting Economic Hari-Kari

The stock markets around the world are staring this week with another big slide. Asia is down 3 to 4%. It is another panic. Over the past month markets worldwide are down between 15% and 18%. This despite generally good economic numbers (slow recovery). But the debt crisis in Europe has triggered fear and panic drives traders in the short run. In the long run fundamentals hold sway, but in the short run markets can go crazy.

But as Paul Krugman pointed out last weekend in his NY Times op-ed. There is a serious problem at the policy-making level. Officials are worrying about "inflation" and "deficits/debts" when they should be worried about keeping people employed and keeping economies away from depression. Sadly, those at the top are rich so they worry more about keeping their wealth than in making sure the great mass of people are productively employed. It is looking more and more like this "Great Recession" will become more and more a "Great Depression":

What’s the greatest threat to our still-fragile economic recovery? Dangers abound, of course. But what I currently find most ominous is the spread of a destructive idea: the view that now, less than a year into a weak recovery from the worst slump since World War II, is the time for policy makers to stop helping the jobless and start inflicting pain.

When the financial crisis first struck, most of the world’s policy makers responded appropriately, cutting interest rates and allowing deficits to rise. And by doing the right thing, by applying the lessons learned from the 1930s, they managed to limit the damage: It was terrible, but it wasn’t a second Great Depression.

Now, however, demands that governments switch from supporting their economies to punishing them have been proliferating in op-eds, speeches and reports from international organizations. Indeed, the idea that what depressed economies really need is even more suffering seems to be the new conventional wisdom, which John Kenneth Galbraith famously defined as “the ideas which are esteemed at any time for their acceptability.”

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Thus, the O.E.C.D. declares that interest rates in the United States and other nations should rise sharply over the next year and a half, so as to head off inflation. Yet inflation is low and declining, and the O.E.C.D.’s own forecasts show no hint of an inflationary threat. So why raise rates?

The answer, as best I can make it out, is that the organization believes that we must worry about the chance that markets might start expecting inflation, even though they shouldn’t and currently don’t: We must guard against “the possibility that longer-term inflation expectations could become unanchored in the O.E.C.D. economies, contrary to what is assumed in the central projection.”

A similar argument is used to justify fiscal austerity. Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea — not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts. And the O.E.C.D. predicts that high unemployment will persist for years. Nonetheless, the organization demands both that governments cancel any further plans for economic stimulus and that they begin “fiscal consolidation” next year.

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The best summary I’ve seen of all this comes from Martin Wolf of The Financial Times, who describes the new conventional wisdom as being that “giving the markets what we think they may want in future — even though they show little sign of insisting on it now — should be the ruling idea in policy.”

Put that way, it sounds crazy. And it is. Yet it’s a view that’s spreading. And it’s already having ugly consequences. Last week conservative members of the House, invoking the new deficit fears, scaled back a bill extending aid to the long-term unemployed — and the Senate left town without acting on even the inadequate measures that remained. As a result, many American families are about to lose unemployment benefits, health insurance, or both — and as these families are forced to slash spending, they will endanger the jobs of many more.

And that’s just the beginning. More and more, conventional wisdom says that the responsible thing is to make the unemployed suffer. And while the benefits from inflicting pain are an illusion, the pain itself will be all too real.

The world needs leaders with vision who have the courage to do the right thing and ignore that idiocy of the bankers and bond holders.

Ultimately deficits and debts can be "fixed" by inflation. What can't be fixed are the lives ruined by unemployment and the lost production from a depressed economy. The bankers and bond holders are concerned about the ultra-rich. The governments of the world need to be concerned about the average people.