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Hullabaloo


Friday, March 23, 2012

 
Purging and Hysteresis

by digby

Maybe this isn't such a good idea after all:
Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people - Andrew Mellon


NY Times:
[A] paper presented Friday at the Brookings Institution warns that recessions may do lasting harm, like an untended house that not only needs a good dusting, but has also started to rot.

The term for this possibility sounds perfectly harsh: hysteresis. (The definition is more benign; it simply means that the past affects the present.)

The authors, Lawrence H. Summers, a former adviser to President Obama, and J. Bradford DeLong, a professor at the University of California, Berkeley, see evidence that the recession is eroding the capacity of workers and of equipment:

Reduced capital investment, reduced investment in research and development, reduced labor force attachment on the part of the long-term unemployed, scarring effects on young workers who have trouble beginning their careers, changes in managerial attitudes, and reductions in government physical and human capital investments as social-insurance expenditures make prior claims on limited state and local financial resources.
[...]
The proper antidote to hysteresis, the authors write, is an increase in government spending.They write that under current conditions there is a good chance such spending would be self-financing, as tax revenues from resulting economic activity would outweigh the cost. But there is little prospect that Congressional Republicans will revisit their opposition to stimulus this year. Which means that our current experiment will run to completion: If hysteresis is real, we will know it by its consequences.

Indeed we will. And one can only imagine the consequences of a turn to austerity instead.

It could happen. I'm sure you remember this:

The House’s second-ranking Democrat on Monday said that a bipartisan group of lawmakers from both sides of the Capitol was preparing to begin yet another effort to reach a “grand bargain” on deficit reduction – and that the fruits of negotiations could emerge within weeks.

Speaking to the centrist group Third Way, Representative Steny H. Hoyer of Maryland, the Democratic whip, sought to bury the widely held belief that any deal on taxes and deficits would have to wait until after the November election.

“Contrary to what some believe, we cannot afford to set this work aside,” Mr. Hoyer said, according to the prepared text of his speech. “I’m here to give urgency to the pursuit now of an agreement designed to achieve fiscal sustainability over the long term,”

Congressional aides confirmed that the so-called Gang of Six in the Senate – now up to eight – has reconvened and is trying to move a bipartisan deficit reduction plan from a broad framework to detailed legislative language. Harry Reid of Nevada, the Senate majority leader, has told the group he will not move forward until he sees real language and real momentum.

I'm guessing even Andrew Mellon wouldn't argue that throwing the country back into recession. But then he was a softie compared to our current "tough love" politicians.

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