"Economic self-mutilation"

"Economic self-mutilation"

by digby

Krugman's column yesterday is one of the scariest pieces I've read in a long time:

What passes these days for sound policy is in fact a form of economic self-mutilation, which will cripple America for many years to come. Or so say researchers from the Federal Reserve, and I’m sorry to say that I believe them.[...]

How so? According to the paper (with the unassuming title “Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy”), our seemingly endless slump has done long-term damage through multiple channels. The long-term unemployed eventually come to be seen as unemployable; business investment lags thanks to weak sales; new businesses don’t get started; and existing businesses skimp on research and development.

What’s more, the authors — one of whom is the Federal Reserve Board’s director of research and statistics, so we’re not talking about obscure academics — put a number to these effects, and it’s terrifying. They suggest that economic weakness has already reduced America’s economic potential by around 7 percent, which means that it makes us poorer to the tune of more than $1 trillion a year. And we’re not talking about just one year’s losses, we’re talking about long-term damage: $1 trillion a year for multiple years.[...]

And it is, as I said, a bitter irony, because one main reason we’ve done so little about unemployment is the preaching of deficit scolds, who have wrapped themselves in the mantle of long-run responsibility — which they have managed to get identified in the public mind almost entirely with holding down government debt.

This never made sense even in its own terms. As some of us have tried to explain, debt, while it can pose problems, doesn’t make the nation poorer, because it’s money we owe to ourselves. Anyone who talks about how we’re borrowing from our children just hasn’t done the math.

True, debt can indirectly make us poorer if deficits drive up interest rates and thereby discourage productive investment. But that hasn’t been happening. Instead, investment is low because of the economy’s weakness. And one of the main things keeping the economy weak is the depressing effect of cutbacks in public spending — especially, by the way, cuts in public investment — all justified in the name of protecting the future from the wildly exaggerated threat of excessive debt.

Is there any chance of reversing this damage? The Fed researchers are pessimistic, and, once again, I fear that they’re probably right. America will probably spend decades paying for the mistaken priorities of the past few years.

I won't say just how complicit the Democrats have been in this. You already know. And from what we're seeing so far, the most probable next Democratic administration will likely be no better:

Clinton, who has sprinkled her post-administration addresses with consistent calls for nonpartisan, evidence-based, compromise-seeking governance, appeared to flirt with supporting the idea of trimming entitlements in order to reach the infamous grand budget bargain: “What has worked is a compromise where yes, we raise revenues for a certain period, we go and look at entitlements to see what is fair and can be done without really disadvantaging either existing beneficiaries or people who are going to rely on those programs.”

One hopes she and her team are looking at this ongoing government slashing with the alarm that's required and are creating some new policies and rhetoric to reflect the new reality. Austerity and long term debt fetishism as a convenient way to prove your "grown-up" bonafides is killing us.

John Cassidy at The New Yorker has more on this paper and calls the results "hysteresis", something which Krugman was talking about years ago.