With Washington still unable to get its act together on a new round of stimulus spending, warnings about the consequences of inaction are taking on a much more serious tone. And while it may not be a full-fledged meme shift, the word “depression” is starting to creep into the coverage.
Paul Krugman looked to the history books in his Monday column and found “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.”
Then he put his cards on the table:
We are now, I fear, in the early stages of a third depression.
Yes, you have my attention.
Krugman predicted that the coming depression would look more like what he called “the Long Depression of the 19th century” than “the Great Depression of the 20th.” He warned that “the cost—to the world economy and, above all, to the millions of lives blighted by the absence of jobs—will nonetheless be immense.” But what really bothered Krugman was how we’re going to get there:
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.
Jared Bernstein, chief economic adviser to Vice President Joseph Biden, also gave voice to depression worries in a Tuesday op-ed in the FT.
His main purpose was to point out the false choice that seems to dominate Washington debates these days, between job growth and deficit reduction.
That’s particularly unfortunate because America’s economy badly needs two policies that critics say pull in opposite directions: more government support for jobs and a credible path toward fiscal sustainability. The good news is that the critics are wrong. In the current economic moment jobs and deficit reduction are friends, not enemies.
Bernstein argues that short-term spending doesn’t add to medium- or long-term debt burdens. Instead, it’s used “to offset a collapse in private demand,” and gets pulled back as the private sector rebounds.
These economic relationships are not unknown, so why is it proving so hard to pass legislation related to temporary jobs measures? One reason may be that members of Congress believe that, since the worst is over, now is the time to hand the growth baton back to the private sector. This is the same mistake made in the late 1930s, when it threw the country back into depression.
It’s interesting that Bernstein is making this argument on the worldly pages of the FT, just days after the president failed to persuade his G-20 colleagues that it was too soon to give up on economic stimulus and start focusing on deficits.
But it’s also clear that the White House is in the midst of a serious domestic political debate. Just look at Bernstein’s closing plea:
Thankfully, we do not have too many moments when unused capacity creates a friendship between growth and deficits. But if we fail to recognise this one, we risk unnecessarily condemning millions of American families to pain that could, should and must be avoided.
Unfortunately, it’s getting easier and easier for the press to see what that pain would look like.
Here’s one example, from the AP in Kentucky:
Gov. Steve Beshear warned Monday that more than 8,000 Kentuckians will stop receiving jobless benefits unless Congress resolves an impasse that is holding up an additional round of federal funding to financially strapped states.
The AP story quotes a woman who lost her job at an Indiana plant that makes filing cabinets and safes a year ago.
“I have never not had a job this long in my life,” she said. “They say the economy is doing better; I don’t see it.”
That’s nice on-the-ground reporting. Unfortunately, the piece falls down when it turns to a Washington talking head:
Other GOP leaders criticized what they called the Obama Administration’s “big-spending policies,” saying they are pushing the national debt on to the next generation. Republican National Committee spokesman Ryan Tronovitch pointed Monday to the $862 billion federal stimulus package passed last year as part of the problem.
Tronovitch said “Kentucky’s economy is far worse off” since the stimulus package was passed.
Too bad the AP didn’t ask a follow-up question, like, “How is Kentucky’s economy worse off?”
The New York Times offers what could be seen as the counterfactual story, and what could have happened—and, perhaps, still could— without economic stimulus.
The subject is Ireland, where an economic crisis two years ago led to cuts in public spending and increased taxes. But those austerity measures haven’t turned out that well:
Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.
Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.
Now, the Irish are being warned of more pain to come.
It’s not pretty—as an accompanying slideshow makes clear.
Of course, the U.S. isn’t Ireland. But it’s important story to consider, as Congress acts, or fails to act.Holly Yeager is CJR's Peterson Fellow, covering fiscal and economic policy. She is based in Washington and reachable at email@example.com.