Paul Krugman warns us that the actions of our global decision-makers could be setting up another economic downturn he calls The Lesser Depression. Global financial markets face two threats. Right-wing fanatics" in the US are threatening to block a rise in the debt-ceiling. And Europeans are failing to stabilize the financial crises facing many southern European states.
Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse.
In fact, policy makers seem determined to perpetuate what I’ve taken to calling the Lesser Depression, the prolonged era of high unemployment that began with the Great Recession of 2007-2009 and continues to this day, more than two years after the recession supposedly ended.
Krugman explains what Reich, Stiglitz, and others have many times before. We are in a demand crisis. After the housing bubble burst, "home construction plunged, and so did consumer spending as debt-burdened families cut back.
Having Federal, State, and local governments here, and in Europe further cut back spending is the worst thing we can do. This demand contraction give businesses no reason to invest. So they either sit on large amounts of cash, or invest in emerging markets in Southeast Asia.
Krugman continues,
Everything might still have been O.K. if other major economic players had stepped up their spending, filling the gap left by the housing plunge and the consumer pullback. But nobody did. In particular, cash-rich corporations see no reason to invest that cash in the face of weak consumer demand.
Austerity programs are making things worse. And, Krugrman can't help but remind us that he advocated for a larger stimulus.
Krugman asks policy makers plan on doing about these depressed economies? His answer, "nothing."
The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable. It’s not a response to public opinion. In a recent CBS News /New York Times poll, 53 percent of the public named the economy and jobs as the most important problem we face, while only 7 percent named the deficit. Nor is it a response to market pressure. Interest rates on U.S. debt remain near historic lows.
Krugman doubts "Rube Goldberg financial engineering, is going to fix the Greek and wider European debt crisis. But, even it they some how do, the drastic austerity measures being imposed across Europe and the globe are going to make things worse, not better.
Krugman sees us repeating the blunders that compounded the Great Depression of the 1930s, when the actions of policy makers exacerbated our economic woes.
For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937: the premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last until World War II finally provided the boost the economy needed.
Paul Krugman believes clueless politicians, and policy makers are leading us off the economic cliffs into another decade and a half of a low-grade depression, he calls a lessor depression.
This is the only part of his logic I do not follow. Why is he this optimistic? Once the financial system collapses, why should we expect this next depression to be less fierce and destructive than the last one?