July 21, 2011
The Lesser DepressionBy PAUL
These are interesting times — and I mean that in the worst way. Right now
we’re looking at not one but two looming crises, either of which could
produce a global disaster. In the United States, right-wing fanatics in
Congress may block a necessary rise in the debt ceiling, potentially
wreaking havoc in world financial markets. Meanwhile, if the plan just
agreed to by European heads of state fails to calm markets, we could see
falling dominoes all across southern Europe — which would also wreak havoc
in world financial markets.
We can only hope that the politicians huddled in Washington and Brussels
succeed in averting these threats. But here’s the thing: 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.
Let’s talk for a moment about why our economies are (still) so depressed.
The great housing bubble of the last decade, which was both an American and
a European phenomenon, was accompanied by a huge rise in household debt.
When the bubble burst, home construction plunged, and so did consumer
spending as debt-burdened families cut back.
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.
Nor did governments do much to help. Some governments — those of weaker
nations in Europe, and state and local governments here — were actually
forced to slash spending in the face of falling revenues. And the modest
efforts of stronger governments — including, yes, the Obama stimulus plan —
were, at best, barely enough to offset this forced austerity.
So we have depressed economies. What are policy makers proposing to do about
it? Less than 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.
Yet the conversations in Washington and Brussels are all about spending cuts
(and maybe tax increases, I mean revisions). That’s obviously true about the
various proposals being floated to resolve the debt-ceiling crisis here. But
it’s equally true in Europe.
On Thursday, the “heads of state or government of the euro area and the E.U.
institutions” — that mouthful tells you, all by itself, how messy European
governance has become — issued their big statement. It wasn’t reassuring.
For one thing, it’s hard to believe that the Rube Goldberg financial
engineering the statement proposes can really resolve the Greek crisis, let
alone the wider European crisis.
But, even if it does, then what? The statement calls for sharp deficit
reductions “in all countries except those under a programme” to take place
“by 2013 at the latest.” Since those countries “under a programme” are being
forced into drastic fiscal austerity, this amounts to a plan to have all of
Europe slash spending at the same time. And there is nothing in the European
data suggesting that the private sector will be ready to take up the slack
in less than two years.
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.
Did I mention that the European Central Bank — although not, thankfully, the
Federal Reserve — seems determined to make things even worse by raising
There’s an old quotation, attributed to various people, that always comes to
mind when I look at public policy: “You do not know, my son, with how little
wisdom the world is governed.” Now that lack of wisdom is on full display,
as policy elites on both sides of the Atlantic bungle the response to
economic trauma, ignoring all the lessons of history. And the Lesser
Depression goes on.