Neville Chamberlain, the Hero

You would think in 70 years the world would "progress" and leaders would have incorporated the lessons of the past and we would have a better world.

But, as Brad DeLong points out, despite Chamberlain's horrible appeasement policy with Hitler, he did get one thing right which leaders today in the UK have got horribly wrong:

Neville Chamberlain is remembered today as the British prime minister who, as an avatar of appeasement of Nazi Germany in the late 1930’s, helped to usher Europe into World War II. But, earlier in that fateful decade, relatively soon after the start of the Great Depression, the British economy was rapidly returning to its previous level of output, thanks to Chancellor of the Exchequer Neville Chamberlain’s reliance on fiscal stimulus to restore the price level to its pre-depression trajectory.

Compare that approach to the expansion-through-austerity policy being pursued nowadays by British Prime Minister David Cameron’s government (with Chancellor of the Exchequer George Osborne leading the cheering squad). The country’s real GDP has flat-lined, and the odds are high that British real GDP is headed down again.

Indeed, in less than a year, if current forecasts are correct, Britain’s Cameron-Osborne Depression will not merely be the worst depression in Britain since the Great Depression, but probably the worst depression in Britain…ever.

Willful Ignorance

Here is a bit from a NY Times op-ed by Paul Krugman that slams what he calls "the serious people", the ideological right, that has called for austerity as the magic elixir for recovering from the worldwide George Bush-induced Depression:

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

The tragedy is that policy makers and right wing economists prefer lies and "the confidence fairy" more than the simple truth and hard won economic truths. The economics profession has shown itself to be in the hands of charlatans who are willing to corrupt truths won from the Great Depression experience in order to push a political agenda. Tragic!

As always it is the bottom 99% who die when the 1% "generals" order a charge into an open field where they are gunned down by withering machine gun fire (aka reality). But the generals blame the troops and order up another charge. The 99% are expendable. Everybody knows that the 1% are the "cream of society" and must be protected in their ideological bubble at all costs.

An Indictment of Obama and Most Western Governments

Here is Paul Krugman in a NY Times op-ed laying bare the open secret: Obama and European governments are contemptuous of Keynes, rejecting his advise, and imperiling the tenuous "recovery" that countries have been experiencing by calling for "deficit reduction" which is just another name for austerity:

“The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.

Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover from the slump that followed the financial crisis. And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.

... the real test of Keynesian economics hasn’t come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans — and have suffered Depression-level economic slumps, with real G.D.P. in both countries down by double digits.

This wasn’t supposed to happen, according to the ideology that dominates much of our political discourse. In March 2011, the Republican staff of Congress’s Joint Economic Committee released a report titled “Spend Less, Owe Less, Grow the Economy.” It ridiculed concerns that cutting spending in a slump would worsen that slump, arguing that spending cuts would improve consumer and business confidence, and that this might well lead to faster, not slower, growth.

Sadly a generation will pay the price for this obtuse ideological refusal to accept standard economics in favour if the idiocies of right wing economics that created the deregulation fiasco leading to the S&L crisis, the dot.com bust, and the 2008 financial crisis. These are the failures of government by right wing politicians who have sold the public on the idea that "government is not the solution to our problems; government is the problem". For 30 years bad ideas pushed by right wing politicians have enriched the ultra-rich while the bottom 99% have been left to tread water. Wealth has increased but "trickle down" economics delivered nothing to the poor who are poorer now than since the Great Depression when the lot of the poor was to live in Hoovervilles and stand in bread lines.

The common people need to rise up and say "enough!" and vote in politicians who want to grow the economy for the benefit of the 99% and who want to see a profound redistribution of income so that those who work hard in the 99% get the kind of rewards that for the last 30+ years have only flowed to the ultra-rich. Stop the privatization of government for the bottom 99% with the cutting of services and the raising of "hidden" taxes. Stop the socialization of government for the top 1% with the quiet fraud that lets the rich milk the poor, demand and get sweetheart deals from government, and the continued policy of handouts and bailouts and tax cuts and special tax loop holes for those who can buy government via lobbyists.

Krugman perfectly characterizes the failures of politics today:

We entered 2011 amid dire warnings about a Greek-style debt crisis that would happen as soon as the Federal Reserve stopped buying bonds, or the rating agencies ended our triple-A status, or the superdupercommittee failed to reach a deal, or something. But the Fed ended its bond-purchase program in June; Standard & Poor’s downgraded America in August; the supercommittee deadlocked in November; and U.S. borrowing costs just kept falling. In fact, at this point, inflation-protected U.S. bonds pay negative interest: investors are willing to pay America to hold their money.

The bottom line is that 2011 was a year in which our political elite obsessed over short-term deficits that aren’t actually a problem and, in the process, made the real problem — a depressed economy and mass unemployment — worse.

For three years the political right has been screaming "inflation" and called for austerity to stop the devaluation of "fiat money". In truth, there has been no runaway inflation despite the trillions that the Federal Reserve has pumped into the monetary system.

Keynes called for a coordinated fight on both the monetary and fiscal fronts to fight depression. But since 2008 there has been only a monetary policy in place that is now being withdrawn and there was a very, very small fiscal policy with Obama's 2009 stimulus package. The tools that Keynes outlined have not been used. That is why the Great Recession continues to plague the United States.

Krugman Calls the Depression

Here is a bit from an excellent op-ed by Paul Krugman in the NY Times:

It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege.

On that last point, I am not being alarmist. On the political as on the economic front it’s important not to fall into the “not as bad as” trap. High unemployment isn’t O.K. just because it hasn’t hit 1933 levels; ominous political trends shouldn’t be dismissed just because there’s no Hitler in sight.

Let’s talk, in particular, about what’s happening in Europe — not because all is well with America, but because the gravity of European political developments isn’t widely understood.

Go read the whole article. It will give you a picture of Europe that you are not getting from the mainstream media.

The 1930s should be an object lesson for those who think they can write off 10% or 20% of the population during a financial downturn. Letting the government turn its back and refuse to aid these people and, worse, to refuse to stimulate the economy into a robust recovery condemns that country to a rise of right wing demagogues.

Krugman is sending out a clarion call for a change of course by democracies to save themselves from their own funeral:

Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.

Right-wing populists are on the rise from Austria, where the Freedom Party (whose leader used to have neo-Nazi connections) runs neck-and-neck in the polls with established parties, to Finland, where the anti-immigrant True Finns party had a strong electoral showing last April. And these are rich countries whose economies have held up fairly well. Matters look even more ominous in the poorer nations of Central and Eastern Europe.

Last month the European Bank for Reconstruction and Development documented a sharp drop in public support for democracy in the “new E.U.” countries, the nations that joined the European Union after the fall of the Berlin Wall. Not surprisingly, the loss of faith in democracy has been greatest in the countries that suffered the deepest economic slumps.

And in at least one nation, Hungary, democratic institutions are being undermined as we speak.

One of Hungary’s major parties, Jobbik, is a nightmare out of the 1930s: it’s anti-Roma (Gypsy), it’s anti-Semitic, and it even had a paramilitary arm. But the immediate threat comes from Fidesz, the governing center-right party.

...

Kim Lane Scheppele, who is the director of Princeton’s Law and Public Affairs program — and has been following the Hungarian situation closely — tells me that Fidesz is relying on overlapping measures to suppress opposition. A proposed election law creates gerrymandered districts designed to make it almost impossible for other parties to form a government; judicial independence has been compromised, and the courts packed with party loyalists; state-run media have been converted into party organs, and there’s a crackdown on independent media; and a proposed constitutional addendum would effectively criminalize the leading leftist party.

Taken together, all this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe. And it’s a sample of what may happen much more widely if this depression continues.

...

The European Union missed the chance to head off the power grab at the start — in part because the new Constitution was rammed through while Hungary held the Union’s rotating presidency. It will be much harder to reverse the slide now. Yet Europe’s leaders had better try, or risk losing everything they stand for.

And they also need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the euro may be the least of their worries.

I thought political leaders were "too smart" to let another depression occur. I was wrong. I didn't even consider that the democracies would reprise the horror of the 1930s and allow fascist dictatorships to rise yet again. But it looks like I was far too naive. The idiocy of political leaders plumbs a depth that I stupidly just couldn't believe was possible. Incredible!

For a peek at Krugman's premonitions about the United States, read this.

Getting History Right

As Europe pushes austerity and the Republicans push an austerity agenda in the US, Paul Krugman points out a bit of history that is overlooked:

The Brüning Thing

Joe Weisenthal tells us about an analyst willing to risk a Godwin’s Law citation; Dylan Grice of SocGen points out that it was the deflationary policies of 1930-32, not the inflation of 1923, that brought you-know-who to power.

Indeed. When we hear assertions that Germans are deeply hostile to loose money because of their historical memories, I always wonder why those memories are so selective. Why is 1923 seared into collective memory, while the Brüning disaster has apparently gone down the memory hole?

This is important — and there’s not much time to get the record straight.

The political right thought it could "control" Hitler. He seized power and destroyed Germany. That wasn't the plan that the 1% thought it was so deftly "handling" in 1932. Today the ultra-rich and the political right are sewing the seeds for another disaster. Maybe not a new Hitler, but something disastrous. Sadly, most people don't know enough history to recognize the path the world is on. And sadly, most people -- especially the elites and the politians they have bought lock, stock, and barrel -- don't know enough economics to realize how disastrous their austerity (deficit reduction) plans truly are.

Everybody should read the Joe Weisenthal article that Krugman is pointing at.

Krugman Reviews the State of the "Recovery"

From Paul Krugman's NY Times op-ed column in the NY Times:

But it’s worth stepping back to look at the larger picture, namely the abject failure of an economic doctrine — a doctrine that has inflicted huge damage both in Europe and in the United States.

The doctrine in question amounts to the assertion that, in the aftermath of a financial crisis, banks must be bailed out but the general public must pay the price. So a crisis brought on by deregulation becomes a reason to move even further to the right; a time of mass unemployment, instead of spurring public efforts to create jobs, becomes an era of austerity, in which government spending and social programs are slashed.

This doctrine was sold both with claims that there was no alternative — that both bailouts and spending cuts were necessary to satisfy financial markets — and with claims that fiscal austerity would actually create jobs. The idea was that spending cuts would make consumers and businesses more confident. And this confidence would supposedly stimulate private spending, more than offsetting the depressing effects of government cutbacks.

...

But the doctrine has, nonetheless, been extremely influential. Expansionary austerity, in particular, has been championed both by Republicans in Congress and by the European Central Bank, which last year urged all European governments — not just those in fiscal distress — to engage in “fiscal consolidation.”

And when David Cameron became Britain’s prime minster last year, he immediately embarked on a program of spending cuts in the belief that this would actually boost the economy — a decision that was greeted with fawning praise by many American pundits.

Now, however, the results are in, and the picture isn’t pretty. Greece has been pushed by its austerity measures into an ever-deepening slump — and that slump, not lack of effort on the part of the Greek government, was the reason a classified report to European leaders concluded last week that the existing program there was unworkable. Britain’s economy has stalled under the impact of austerity, and confidence from both businesses and consumers has slumped, not soared.

Maybe the most telling thing is what now passes for a success story. A few months ago various pundits began hailing the achievements of Latvia, which in the aftermath of a terrible recession, nonetheless, managed to reduce its budget deficit and convince markets that it was fiscally sound. That was, indeed, impressive, but it came at the cost of 16 percent unemployment and an economy that, while finally growing, is still 18 percent smaller than it was before the crisis.

So bailing out the banks while punishing workers is not, in fact, a recipe for prosperity. But was there any alternative? Well, that’s why I’m in Iceland, attending a conference about the country that did something different.

If you’ve been reading accounts of the financial crisis, or watching film treatments like the excellent “Inside Job,” you know that Iceland was supposed to be the ultimate economic disaster story: its runaway bankers saddled the country with huge debts and seemed to leave the nation in a hopeless position.

But a funny thing happened on the way to economic Armageddon: Iceland’s very desperation made conventional behavior impossible, freeing the nation to break the rules. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net. Where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital to give itself room to maneuver.

It is tragic that all the countries around the world are in the grip of right wing ideology and simply refuse to use the lessons learned in the Great Depression and nicely summarized by John Maynard Keynes: Central government must lean against the wind. During good times have a surplus for a rainy day. During bad times, spend to replace the missing spending by the private sector.

Austerity appeals to the bond holders because it ensures the "soundness" of the money (and even promotes deflation) which gives the holders of cash an even greater share of the wealth. Meanwhile, the debters burden gets more crushing. Normally you would inflate you way out of a depression because you want to encourage those holding cash to either spend it or invest it.

The "policies" of 2008 to now have been to reward the Wall Street miscreants while punishing the innocent. It is an insane policy. It was the George Bush policy and now it is the Barack Obama policy. Shame!

Putting Your Own Head into the Hangman's Noose

The crazy right wing in the US has many schemes to make life more miserable for the poor and ease "the burden" on the rich.

Here's a bit by Robert Reich on the idiotic economic austerity plan of the political right:

Can we just put ideology aside for a moment and be clear about the facts? Consumer spending (70 percent of the economy) is flat or dropping because consumers are losing their jobs and wages, and don’t have the dough. And businesses aren’t hiring because they don’t have enough customers.

The only way out of this vicious cycle is for the government – the spender of last resort – to boost the economy. The regressives are all calling for the opposite.

But even without these hare-brained Republican plans, we’re heading in their direction anyway. Unless Republicans agree to a budget deal before the end of the year (don’t hold your breath), the temporary payroll tax cuts and extended unemployment benefits we have now will end.

The result will be the most stringent fiscal tightening of any large economy in the world.

Together with ongoing cuts at the state and local government level, the scale of this fiscal contraction would be almost unprecedented.

It will come at a time when 25 million are Americans looking for full-time work, median incomes are dropping, home foreclosures rising, and a record 37 percent of American families with young children are in poverty.

To call this economic lunacy is to understate the point.

And if you think 2011 is bad, you ain’t seen nothin’ yet.

Even if you’re a deficit hawk this is nuts. Instead of reducing the ratio of debt to the size of the overall economy, this strategy increases the ratio because it causes the economy to shrink.

Call it the austerity death trap.

Under these circumstances, the harder a country works to cut its debt, the worse the ratio becomes — because the economy shrinks even faster.

Here's the only effective way to solve the problem:

At the start of the Clinton administration the annual budget deficit was almost $300 billion. But rather than take a meat-axe to spending, we pushed for growth, as did the Fed. The expansion of the 1990s made it easy to get the budget under control. By 2000 we had a $226 billion surplus.

You grow out of a depression. You don't use austerity to dig the hole even deeper!

Morality Trumps Economics

Here is an excellent post by Dean Baker in his Beat the Press blog:

Robert Samuelson has a piece today arguing that China's intervention is necessary to save the world economy. He of course is right in arguing that China has enough economic strength to save the euro and prevent a downward spiral that would throw the world economy back into recession, as some of us have argued.

However, the fact that China may have to play this role is due to the failings of the political leadership in both Europe and the United States. It is essential to remember that this is a crisis of a lack of demand, not supply. For this reason, it is ungodly stupid that so many people are being made to suffer from unemployment and declining living standards.

We know how to get out of this mess, we have known how for 70 years. We just need the government to generate demand. That means spending money. Ideally it would spend money on useful things like education, health care, and infrastructure, but even if it spent money in wasteful ways it would still create jobs and put people to work.

In the 30s we got much of the way back to full employment with the Works Progress Administration and other programs. Much of what was done was useful -- look around, you won't have to go far to find infrastructure built by depression-era programs. However, it took the massive spending associated with World War II to get the economy back to full employment. There is no magic associated with war that makes military spending more effective in creating jobs. The only difference was that the threat to the nation from the Axis powers removed the political obstacles to the necessary spending.

The same situation applies today. We just need to spend money. That applies to both the United States and the euro zone countries. The problem is that we have more people in political leadership positions who want to be morality cops and lecture about balancing budgets rather than focus on policies that will restore economic growth. This includes the top officials at the European Central Bank, many of the voting members of the Federal Reserve Board's Open Market Committee and much of the political leadership in the euro zone countries, the United Kingdom and of course here.

The reason why the world might need China to come to the rescue is that our economic policy is being designed by people who prefer to impose their warped sense of morality rather than pursue serious economic policy. The real humiliation of turning to China is not that we actually need China, it's that our political leaders are prevented us from saving ourselves.

The level of economic ignorance and the sheer audacity of pushing austerity in the face of large scale suffering is astounding and demoralizing. When I was a kid in the 1950s and 60s, all things seemed possible. Today the world is many times more productive and technologically advanced, but the it is infested with politicians who want to preach "limits" and "restraint" and the need to stand by while innocents are being mugged by an economy that was created by the very moralizers who say that their "hands are tied". Nuts!

Krugman Spots Hypocrisy

Here is a post by Paul Krugman in his NY Times blog that tries to wake people up to the ridiculous hypocrisy in the supposed "serious" discussion of the economy and how to fix it:

Stimulus, Austerity, and Double Standards

Just a quick thought: in much discussion of economic policy these days, the presumption is that stimulus had its chance, it failed, and that’s that. Never mind those of us who say that we actually didn’t do nearly enough — and were saying that from the beginning, not as an after-the-fact rationalization. It’s one strike and you’re out.

Meanwhile, the pain caucus keeps telling us that austerity is the way to restore confidence; and confidence keeps not being restored. Ireland, for example, has imposed savage austerity, yet the interest rate on its 10-year bonds is still 6.7 percentage points higher than Germany’s, down from recent peaks but still far above its level when the austerity program began.

Yet somehow nobody in the pain caucus says hey, this was supposed to work but it didn’t, so our theory is all wrong. Instead, they just insist that we double down, continuing the beatings until morale improves.

Just saying.

Funny how the rich and powerful are willing to quickly pooh-pooh stimulus, but they cling to their advocacy of austerity well past the point where it is shown to be wrong-headed. It just shows that politicians and "the serious people" simply don't understand economics. Instead they see the world as a morality play written from the viewpoint of the ultra-rich, i.e. how to punish the peasants until they are willing to fall on their bellies and squirm begging "enough! enough!".

America Running Scared and Paying Through the Nose

Here is a bit from an article by Glenn Greenwald in Salon magazine that holds up America's waste of money on "security":

The Los Angeles Times examines the staggering sums of money expended on patently absurd domestic "homeland security" projects: $75 billion per year for things such as a Zodiac boat with side-scan sonar to respond to a potential attack on a lake in tiny Keith County, Nebraska, and hundreds of "9-ton BearCat armored vehicles, complete with turret" to guard against things like an attack on DreamWorks in Los Angeles. All of that -- which is independent of the exponentially greater sums spent on foreign wars, occupations, bombings, and the vast array of weaponry and private contractors to support it all -- is in response to this mammoth, existential, the-single-greatest-challenge-of-our-generation threat:

"The number of people worldwide who are killed by Muslim-type terrorists, Al Qaeda wannabes, is maybe a few hundred outside of war zones. It's basically the same number of people who die drowning in the bathtub each year," said John Mueller, an Ohio State University professor who has written extensively about the balance between threat and expenditures in fighting terrorism.

Last year, McClatchy characterized this threat in similar terms: "undoubtedly more American citizens died overseas from traffic accidents or intestinal illnesses than from terrorism."

...

Despite these increasing economic insecurities -- actually, precisely because of them -- the sprawling domestic Security State continues unabated. The industry journal National Defense Magazine today trumpets: "Homeland Security Market ‘Vibrant’ Despite Budget Concerns."

...

Meanwhile, much of the anti-Terrorism weaponry in the U.S. ends up being deployed for purposes of purely domestic policing. As the LA Times notes: those aforementioned BearCats are "are now deployed by police across the country; the arrests of methamphetamine dealers and bank robbers these days often look much like a tactical assault on insurgents in Baghdad." Drones are used both in the Drug War and to patrol the border. Surveillance measures originally justified as necessary to fight foreign Terrorists are routinely turned far more often inward, and the NSA -- created with a taboo against domestic spying -- now does that regularly.

Exaggerating, manipulating and exploiting the Terrorist threat for profit and power has been the biggest scam of the decade; only Wall Street's ability to make the Government prop it up and profit from the crisis it created at the expense of everyone else can compete for that title. Nothing has altered the mindset of the American citizenry more than a decade's worth of fear-mongering So compelling is fear-based propaganda, so beholden are our government institutions to these private Security State factions, and so unaccountable is the power bestowed by these programs, that even a full decade after the only Terrorist attacks on U.S. soil, its growth continues more or less unabated.

What is truly tragic is that the billions spent of "security" is happening while teachers, police, and firemen are being laid off, libraries closed, parks and recreation facilities closed, and people hunker down in a new Dark Ages secure in the knowledge that billions are being spent to "protect" them from the big bad bogeyman Al Qaeda while their bargain with the Devil has turned America's future into ashes.

Deliberately Running the Ship of State onto the Shoals

Here is a post by Paul Krugman in his NY Times blog where he is pulling his hair out because the lunatics have taken charge of the asylum. Governments are doing exactly the opposite of what they should in the face of a worldwide depression, the first big one since the Great Depression:

Liberty, Equality, Austerity

Sigh. France cuts growth targets, unveils austerity plan. We’re told that it is doing so because it expects slower growth — which the austerity will make even slower.

But France faces soaring interest rates, right? No:

Click to Enlarge
ECB, Bloomberg
At this point the entire advanced world is doing exactly what basic macroeconomics says it shouldn’t be doing: slashing spending in the face of high unemployment, slow growth, and a liquidity trap. It’s a global 1937. And if the result is another recession, the witch-doctors will just demand more bleeding.

The Recession of 1937 was a completely self-inflicted wound caused by FDR listening to the conservatives calling for "fiscal austerity" and "balanced budgets". It is a wonderful example that demonstrates, in the midst of a depression, that tight money is wrong-headed, that the government has to counteract the increased private saving with public spending to allow the private sector to work of its excessive debts.

Obama's Gift to America

The great hope of 2008 has delivered a goose egg with his strategically mismanaged "compromise" with the Tea Party Republicans over the debt ceiling and the brokered deficit reductions. Here is a bit from Mother Jones magazine to highlight what Obama gave away:

The Obama-GOP plan cuts $917 billion in government spending over the next decade. Nearly $570 billion of that would come from what's called "nondefense discretionary spending." That's budget-speak for the pile of money the government invests in the nation's safety and future—education and job training, air traffic control, health research, border security, physical infrastructure, environmental and consumer protection, child care, nutrition, law enforcement, and more.

The White House's plan would slash this type of spending nearly in half as a percentage of gross domestic product, from about 3.3 percent of America's GDP to as low as 1.7 percent, the lowest in nearly half a century, says Ethan Pollack, a senior policy analyst at the left-leaning Economic Policy Institute. Pollack's calculations suggest the cuts in Obama's plan are almost as deep as those in Rep. Paul Ryan's slash-and-burn budget, which shrunk non-defense discretionary spending down to just 1.5 percent of GDP. The president has claimed that the debt deal will allow America to continue making "job-creating investments in things like education and research." But on crucial public investment, Obama's and Ryan's plans are next-door neighbors. "There's no way to square this plan with the president's 'Winning the Future' agenda," Pollack says. "That agenda ends."

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Jobs programs could also go under the knife. Rick McHugh, a staff attorney at the National Employment Law Project, points to two endangered programs: the Workforce Investment Act, which funds job training programs for young, adult, and dislocated workers, and the Trade Adjustment Assistance program, which provides benefits and training to workers whose jobs were lost due to outsourcing. McHugh says both programs are necessary at a time when 14 million Americans are out of work.

McHugh adds that the bill does not include an extension of federal funding for unemployment benefits, which is set to expire at the end of the year. All told, he fears that already weak job market could be dealt a massive body blow by the Obama-GOP debt deal. "To have this big of an austerity proposal in Washington is disconcerting and misguided," he says.

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Education, environmental protection, and jobs programs are just the start. An array of social safety net programs—the Women, Infants, and Children nutrition program, food stamps, housing assistance for low-income individuals, foster-care money, and basic income-security programs—could lose funding under the debt ceiling plan. So, too, could critical infrastructure investments in better bridges, roads, and rail transportation.

Nor is this the final round of cuts. The Obama-GOP deal also sets up a bipartisan deficit reduction committee that must identify, by the end of 2011, an additional $1.5 trillion in cuts to be spread over 10 years.

Obama's legacy will the a "leaner and meaner" America, one where the rich ride high and the poor litter the street like trash after a parade. The number of homeless will surge. Unemployment will surge. The home foreclosures will continue. It is a grim future. That is Obama's legacy. Sure the Republican fanatics gave him a push, but history will judge that he was eager to make the leap. Obama ran as a progressive in 2008 but ends up being a right-of-centre politician who in the 1960s would have been comfortable taking the reins from Dwight Eisenhower.

Politicians Don't Understand Positive Feedback

Here is a post by Paul Krugman on his NY Times blog pointing out that the road the politicians are heading is one with positive feedback consequences:

The Downgrade Doom Loop

It’s not the whole story, but something like this threatens to develop:

1. US debt is downgraded, sparking demands for more ill-advised fiscal austerity

2. Fears that this austerity will depress the economy send stocks down

3. Politicians and pundits declare that worries about US solvency are the culprit, even though interest rates have actually plunged

4. This leads to calls for even more ill-advised austerity, which sends us back to #2

Behold the power of a stupid narrative, which seems impervious to evidence.

The problem with being on a ship where the captain has gone mad is that there is no way off. I'm being hauled along over the precipice of "austerity" as the fools who govern don't know enough economics to do their job and/or won't attend to what honest economists will tell them. They prefer their in-house "economists" who are political flaks and not real economists. We are all doomed!

McCulley on the Economy

Here is an interview with Paul McCulley that looks at the economy. At 5:00 he explains "The Paradox of Thrift" which is the reason why the federal government needs to run a deficit right now to fill in the missing spending. Sadly, the Republicans and Obama live in lala land and ignore economics and reality and are busy implementing austerity in the hope of "resuscitating" the economy, but this will kill jobs and kill the economy:


At 7:20 McCulley points out that Washington has fallen in love with Herbert Hoover's Secretary of the Treasury, Andrew Mellon, famous for:

...liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.

Economies All Over the World Are Doing a Face Plant

Here is a bit from a Paul Krugman post in his NY Times blog:

Not good news in stock markets — but you really have to look at the bond markets to get the full awfulness of the situation.

The US 10-year bond rate is now down to 2.5%. So much for those bond vigilantes. What this rate is saying is that markets are pricing in terrible economic performance, quite possibly a double dip. And it also says that Washington’s deficit obsession has been utterly, totally wrong-headed.

Meanwhile, Italy’s spread against German bonds is soaring even further. What are markets pricing in here? Default as a real possibility; maybe even euro breakup. The latter certainly sounds a lot more plausible now than it did a few months ago.

...

So things are falling apart all over. Maybe someone should do something?

Well... nothing is going to be done in the US. First, Congress is on a 5 week holiday. Second, Congress is convinced that deficit cutting is the right medicine for an ailing economy, so when they get back they will probably administer some more "medicine". Third, Obama continues to tout the success of all his initiatives, so it is hard to understand how he might back up and admit that he is an utter failure as a "recession fighter" and finally undertake some positive measures. The omens are not good. This second dip will make the 2008-9 Little Depression become the 2008-2013 Almost Great Depression.

To understand how bad Obama is in dealing with the recession, here is another post by Paul Krugman on his NY Times blog:

Hope Is Not A Plan

Nor is it good politics. So what the heck are they thinking?

President Barack Obama’s spokesman is discounting talk that the economy may be headed back into recession, despite recent concerns of economists.

Spokesman Jay Carney says there is no question that economic growth and job creation have slowed over the past half year.

But, Carney told a White House briefing, “We do not believe that there is a threat of a double-dip recession.”

Of course there’s a threat. Larry Summers puts the odds at one in three; I might be slightly more optimistic, but the risk is very real. Who, exactly, is at the White House who knows better?

And think about the politics here. For two years the White House has been determinedly cheerful, always declaring that the recovery was on track, that its policies were working fine. And all it did was squander its credibility. Maybe admitting the truth, saying that in fact we hadn’t done nearly enough, would not have helped get useful legislation through Congress. But at least it would have conveyed the message that the WH was living in the same reality as ordinary workers.

Now they’re doing it again. To what purpose? Do they think the markets will be reassured? Do they think consumers will be reassured? At this point, after the “summer of recovery” came and went a whole year ago?

Spin is part of politics. But sometimes you have to know when to stop.

If you had told me in December 2008 when I had so much hope for Obama that he would botch the economy this badly (and not deliver on any of his campaign promises) I would have thought you were crazy. Sadly, I now recognize that I was out of touch with reality. I had -- yet again -- been tricked by a seasoned politician who says one thing and does another, who takes reality and twists it into something you can't recognize, who sells you pie in the sky instead of doing the hard work of making the world a better place.

Krugman: It is Always Good

Here is an interview of Paul Krugman by Keith Olbermann. First they joke about the fact that Newt Gingrich thinks Obama takes his marching orders from Krugman. The fact that Obama has refused all of Krugman's advice and done the opposite of what Krugman has pleaded for him to do, that reality has dinged with Gingrich. Republicans carry a "truth shield" that effectively keeps them shielded from the truth.

The really fun bit is around 3:05 into the video where Krugman points out that Obama has painted himself into a corner with his "it is always good" approach to the economic situation in the US.



Notice that at 4:10 Krugman notes that Barak Obama is giving Herbert Hoover 1932 speeches with the same calls for austerity. Krugman correctly points out that Obama is not Hoover, but he is a lot like FDR in 1937. From Wikipedia:

The Recession of 1937–1938 was a temporary reversal of the pre-war 1933 to 1941 economic recovery from the Great Depression in the United States. Economists disagree about the causes of this downturn, but agree that government austerity reversed the recovery from the 1929 Crash. Keynesian economists tend to assign blame to cuts in federal spending and increases in taxes at the insistence of the US Treasury, while monetarists, most notably Milton Friedman tended to assign blame to the Federal Reserve's tightening of the money supply in 1936 and 1937.

Dowd on Debt and Doom

The "debt ceiling" crisis is a self-inflicted wound for the US. Here's a bit from a Maureen Dowd NY Times op-ed showing how crazy it is:

The world is watching in fearful — and sometimes gleeful — fascination as the Tea Party drives a Thunderbird off the cliff with the president and speaker of the House strapped in the back. The Dow is hiding under the bed with a glass of single malt. Can it get more excruciating? Apple has more cash than the U.S. government.

Amid the chilling anarchy, there’s not a single strong leader to be seen — not even a misguided one. All the leaders are followers. You have to wonder if President Obama at some level doesn’t want to lead. Maybe he just wants to be loved.

The citizens of this country tremble at the thought that these are the people governing them. Should we stick our money under our mattresses? It’s not only the economy that gets nourished by confidence; it’s also politics.

The maniacal Tea Party freshmen are trying to burn down the House they were elected to serve in. It turns out they wanted to come inside to get a blueprint of the historic building to sabotage it.

Like gargoyles on the Capitol, the adamantine nihilists are determined to blow up the country’s prestige, their party and even their own re-election chances if that’s what it takes. (Many are worried about primary races with even more dogmatic challengers, which is a truly scary thought.) If they can drag President Obama off his pedestal, even better. They think he looks down on them and sneers at their values.

Democratic lawmakers worry that the Tea Party freshmen have already “neutered” the president, as one told me. They fret that Obama is an inept negotiator. They worry that he should have been out in the country selling a concrete plan, rather than once more kowtowing to Republicans and, as with the stimulus plan, health care and Libya, leading from behind.

If you want to measure how crazy US politics have become, this pretty well summarizes it:

The Gingrich revolution pulled Republicans to the right of the Reagan revolution and the Tea Party revolution pulled Republicans to the right of the Gingrich revolution. The difference, though, is existentially striking: The Reagan and Gingrich forces wanted a leaner government, but they still believed in government.

...

The laconic president emerges from the sidelines periodically to warn about economic default, but we’re already in political default.

Consider what the towel-snapping Tea Party crazies have already accomplished. They’ve changed the entire discussion. They’ve neutralized the White House. They’ve whipped their leadership into submission. They’ve taken taxes and revenues off the table. They’ve withered the stock and bond markets. They’ve made journalists speak to them as though they’re John Calhoun and Alexander Hamilton.

Obama and John Boehner have been completely outplayed by the “hobbits,” as The Wall Street Journal and John McCain called them.

What if this is all a cruel joke on us? What if the people who hate government are good at it and the people who love government are bad at it?

I blame Obama. He was elected to lead but he has failed and this isn't his first failure. His biggest failure was the big lie he told the electorate in 2008: "change you can believe in". He's delivered 4 more years of Bush "Republicanism". Meanwhile, the crazy Republican party has gotten even more insane. This is a race to the bottom and Obama is only slightly being outdone by the crazy Tea Party as they plunge downward.

Alan Blinder on the Debt Ceiling

Alan Blinder gives some straight talk on the idiocy of the debt ceiling fight.



As he point out, this fight is unnecessary and disruptive. The focus should be on unemployment and getting the economy growing which implies short term spending, not austerity!

I like his bit where he say "Washington is shooting itself in the foot with this 'debate'. The debt is a non-issue. It is a legacy of the past. Unless somebody can figure out how to go back into the past and fix it, it is irrelevant. What is needed is policy for the future that gets spending decreased to control deficits". But all the hysteria in Washington right now ignores this basic fact.

America, A Replay of Japan

Here is Japanese economist Richard Koo discussing how the current financial crisis in the US is a repeat of Japan's lost decade and America's 1930 Great Depression:



Koo explains why the US is dealing with a "balance sheet recession".

The US now faces a lost decade, just like Japan.

Sadly, the current crop of politicians in the US starting with the fanatical and idiotic Republicans, but also the economically ignorant Obama, and the clueless Democrats are all unaware of the relevant economics and history. So they are fighting the wrong battles in Washington. They are caught up in a "debt ceiling" death struggle when in fact they should pull out their Keynesian text and provide the missing spending via government stimulus. Instead of pursing "austerity", they need to be providing spending that will allow the debt restructuring to finish so the economy can recover.

What Passes for Economic "Wisdom" Today

Here is a post by Paul Krugman on his NY Times blog that lays out the facts as clearly as you could ever want. And of course the politicians and political pundits -- and Obama! -- ignore these facts and continue to guide US policy in the wrong direction:

Herbert Hoover Was Hooveresque

Brad DeLong leads us to Herbert Hoover opposing what was, in effect, a mild fiscal stimulus in the form of early payment of veterans’ bonuses.

It cannot be borrowed without impairment of the credit of the National Government and thus destroy that confidence upon which our whole system depends. It is unthinkable that the Government of the United States should resort to the printing press and the issuance of fiat currency as provided in the bill which passed the House at the last session of Congress under the leadership of the Democratic vice presidential candidate. Such an act of moral bankruptcy would depreciate and might ultimately destroy the value of every dollar in the United States.

This should (but won’t) dispel the myth that Hoover was some kind of proto-Keynesian. But look,also, at how closely Hoover’s line of argument follows that of Very Serious People today. Running up debt would cause a collapse of confidence — except that under FDR the US ran up vastly more debt, with no bond vigilantes ever making an appearance:

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And great fear of destroying the value of the dollar, in the midst of an epic deflation that had raised the purchasing power of a dollar almost 50 percent:

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Luckily, we’ve learned from all that, and nobody would fall into similar fallacies today — except, of course, everyone with actual influence on policy.

As a kid I always wondered how countries could make disastrous choices like Germany under Hitler trying to conquer the world or Paraguay trying to simultaneously defeat Brazil, Argentina, and Uruguay in the War of the Triple Alliance. From Wikipedia, the consequences of this political idiocy:

The specific numbers of casualties are hotly disputed. It has been estimated that 300,000 Paraguayans, mostly civilians, died. It has also been written that up to 90% of the male population may have been killed, though this figure is without support. According to one numerical estimate, the prewar population was approximately 525,000 Paraguayans (14 estimates went from 300,000 to 1,337,000... A 1871 census gave 221,079 inhabitants in 1871, of which 106,254 were female, 86,079 were children with no indication of sex or upper age limit and 28,746 were male. These figures, considering the local situation, cannot be more than a very rough estimate; many men and boys fled during the war to the countryside and forests. As such, accurate casualty numbers may never be determined.

Over my lifetime I've seen the insanity of the McCarthy era, watched the 1960s rise of crazy left wing "revolutionary" movements (Maoists, SDS, etc.), the hippie movement of the late 1960s, the insanity of the "self actualization" and "back to the earth" and doomsday "limits to growth" in the 1970s, the efflorescence of greed and idolization of the rich in the 1980s, the right wing militia groups and survivalists and global warming crowd of the 1990s, the get rich quick real estate schemes of the 2000s, and the full flowering of the Republican social conservatism and Tea Party peaking now. All of these claimed some sense of being "serious" movements but were fundamentally all crazy extremists. It is sad to see that Obama is part of today's "austerity mania" that fundamentally misunderstands the difference between a Fed rate tightening recession from a financial panic and credit contraction recession. Sadly, a generation will pay the price of this lunacy at the political top in the US.

The fundamental problem is that a ruling clique walls itself off from outside advice and opinion. They make disastrous choices without understanding the ramifications. That is the problem with Obama's economics.