Monday, June 28, 2010

Usually optimistic, Krugman pessimistic after G20

Paul Krugman believes the world is now at the threshold of an all-out depression with spending cutbacks coming at the worst possible time for the economy.

“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,” he said in a Monday column in the New York Times.
“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 last weekend’s 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.” (From The Globe and Mail (from The New York Times), June 28, 2010)

If one were to have to choose between the opinions of the political leadership of the west, and economists like Krugman, there is no question I would opt for the latter. Krugman, from Princeton and the New York Times and Niall Ferguson, of Harvard an economic historian, are two of the principal debaters in the current popular culture about the next phase of the economic drama that is playing out on the backs of our lives.
Krugman's disappointment at the meagre results, as he sees them, of the G20 meetings in Toronto, deficit cutting in half by 2013, rather than more stimulus spending to further the creation of jobs, may have been echoed in advance when Barack Obama stated unequivocally in his press conference on Sunday, "My top priority is jobs!" Obama has also signalled his intention to cut the deficit in half by 2013, and at first blush, from the eyes of this non-economist, that might be a difficult circle to "square". It will take more money to generate more jobs, and to create more family income, and thereby more tax revenue, and that money could easily add to the already ballooning deficit.
Let's hope those whose unemployment benefits will run out in days, in the U.S., because the Congress failed to pass the bill extending them, attached to other items, will find their needs met, when that same Congress agrees to vote on only the extended benefits, without the other baggage in the bill.
As far as Krugman's prediction about a deep and long depression goes, the only hope we all have is to save, save and save some more!
If the next cold frosty blast from the economy lasts longer and cuts deeper than the last, no matter how much we have saved, it will barely cover the damage that the next storm brings.

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