G-20 Update: Conservative economic policies set a course for a double-dip recession, and “long depression”

Posted by AzBlueMeanie:

Never underestimate the power of mythology. Particularly a mythology that is the result of a cottage industry of conservative economists and pundits working for billionaire and corporate funded think tanks to produce a narrative of conservative economic policies as the norm, conservative economic policies which have also been incorporated into the dogma of conservative political ideology.

It is a belief system based upon faith, not science or observable facts. To concede that one's politico-economic beliefs are false is to concede that what one believes is nonsense. Thus, conservative economists and pundits cling to what they believe on faith. Also, they have a self-interest in perpetuating the cottage industry of conservative economics think tanks because that is how they derive their income.

The people who brought you deregulated "free market" corporate globalism and supply side "trickle down" economics policies – policies that nearly destroyed the world's financial and economic system by 2008-2009 – remain in positions of influence. Now that an economic catastrophe has been averted – by resort to tried and true Keynesian economic policies I might add – conservative economists now argue it is time to return to the "orthodoxy" of conservative economic policies. The same conservative economic policies that have been entirely disproved and discredited over the past "lost decade." Ignore the facts, it's a matter of faith. Trust us.

Thus, it is a great disappointment that conservative economists carried the day at the G-20 Summit in Toronto. Their victory is the world's loss. Their Hoover-like austerity program of reducing spending and deficits during a Great Recession sets a course for a double-dip recession, and a "long depression" as Paul Krugman describes. They have failed to learn the lessons of history. G-20 Nations Agree to Cut Deficits by 2013 – NYTimes.com:

The action at the Group of 20 summit meeting here signaled the determination of many of the wealthiest countries, after enacting spending programs to counter the worldwide financial crisis, to now emphasize debt reduction. And it underscored the conviction of European nations in particular that deficits represented the biggest threat to their economic stability.

President Obama and Treasury Secretary Timothy F. Geithner had consistently advocated a measured approach to debt reduction that would not stymie growth and lead to a double-dip recession.

The United States, however, joined other countries at the summit meeting…  by endorsing a goal of cutting government deficits in half by 2013 and stabilizing the ratio of public debt to gross domestic product by 2016. Canada’s prime minister, Stephen Harper, had proposed the targets, backed by Germany and Britain. To assuage objections from the United States, Japan, India and some other countries, the timetable was couched as an expectation, rather than a firm deadline.

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Although Mr. Obama insisted emphatically that there was “violent agreement” on the need to reduce debt over time, the final communiqué included a delicately worded call for deficit reduction “tailored to national circumstances.” In essence, the leaders were blessing their decision to go their own ways.

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In a news conference at the conclusion of the summit meeting, Mr. Obama referred only indirectly to the disagreement with Europe, saying, “We must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs today.”

His concern about stimulus was echoed by some economists who viewed the pledge on deficits as imperiling the prospects for growth.

“China’s growth, specifically, is not seen as sustainable at current rates,” Ronald A. Kurtz, professor of global economics and management at the Massachusetts Institute of Technology, said in an e-mail message. “The G-20 declaration therefore amounts to saying ‘assume a miracle’ for global growth.” He said Europe’s fiscal austerity plans would also slow growth.

But Dominique Strauss-Kahn, head of the International Monetary Fund, said he thought the risks of a new downturn were minimal.

“We don’t forecast any double dip,” he said. “Double dip was not discussed at the meeting.”

This inspires confidence in the world's financial leaders, doesn't it? These are the "smartest guys in the room" who never forecast the sub-prime real estate bubble bursting and the collapse of the world's financial system and economy that followed. Prognosticating is not their strong suit, especially when they don't even consider the most likely scenario resulting from the policies adopted in Toronto. Geezus!

As Paul Krugman explains in his column today, The Third Depression:

As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

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.

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.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

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It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

To paraphrase George W. Bush: "Fool me once, shame on you; fool me twice, shame on me. We don't get fooled again!"