Tuesday, May 25, 2010

Planning for an economic "lost decade"

Paul Krugman asks if we have a Lost Decade Looming? New York Times 05/20/2010:

For the past few months, much commentary on the economy — some of it posing as reporting — has had one central theme: policy makers are doing too much. ...

And what about near-record unemployment, with long-term unemployment worse than at any time since the 1930s? What about the fact that the employment gains of the past few months, although welcome, have, so far, brought back fewer than 500,000 of the more than 8 million jobs lost in the wake of the financial crisis? Hey, worrying about the unemployed is just so 2009.

But the truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.
For more on the Japanese bacground see Justin McCurry, Japan's lost decade The Guardian 09/30/2008 and Peter Coy, What the U.S. Can Learn from Japan's Lost Decade Business Week 01/07/2009.

The Obama administration and the Congressional Democrats have been encouraging the deficit worries the Republicans are cynically promoting and seem to be at best oriented toward limiting US government spending growth.

Meanwhile, the European Union countries are responding to the attacks on the euro from banks and hedge funds by embracing budget cuts, severely in Greece and less severely in Spain, Germany and elsewhere. Meanwhile, the new Conservative-Liberal British government is also pushing for significant cuts in public outlays.

This really is a present-day brand of Herbert Hoover economics on both sides of the Atlantic. It's the opposite of what needs to be done to revitalize the economies and address the serious unemployment issues. We aren't exactly back in 1929, because there are a lot of stabilizing elements that have been built in to governmental programs since then.

But this development really creates pessimistic prospects for a strong economic revival. This is really not a good development.


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