Why they’re wrong

Why the economists who think we can cut our way to recovery got it all wrong:

Credit bubbles produce the exact opposite of productive resources. Deleveragers — those folks formerly known as consumers — spend the next decade paying down these obligations, rather than buying additional goods and services. And heavily indebted state and local governments are similarly thrifty, adding further pressure to the post-crisis economy.

Confusion about this is already taking a toll across the pond. The Irish, British and, soon, Greeks have bought into a misguided belief in austerity — that they can somehow cut their way to growth. In the United States, we have seen states and municipalities slashing head counts of teachers, cops and firemen. The “paradox of thrift” has morphed into a misguided economics of austerity. Hence, even when the private sector manages to create some jobs, it’s offset by public-sector job cuts.

In the not too distant past, the market might have been inclined to rally following a horrific data point such as June’s NFP report. The assumption was that the Fed, or perhaps Congress, would respond to economic distress with its usual largess. But the immediate market reaction — selling off on the “surprisingly” bad number, and then having difficulty all last week — suggests that traders are no longer expecting a cavalry charge to save the day.

Indeed, the Federal Reserve is in no position to do much more without great distress. Markets briefly rallied Wednesday when Fed chief Ben Bernanke suggested that a QE3 was possible. But soon after he finished his congressional testimony, Federal Reserve Bank of Dallas President (and FOMC voting member) Richard Fisher said the Fed had “exhausted our ammunition.” And Thursday, Bernanke scared markets further, saying the central bank wasn’t yet ready to take additional steps to boost the economy.

Markets gave up most of their rally on the recognition that the cavalry might not come this time.

Even with the Fed out of the picture, investors should not expect any relief from Congress: The legislative body in charge of taxing and spending seems incapable of accomplishing much these days. We are more likely to see counterproductive austerity measures than anything else.

6 thoughts on “Why they’re wrong

  1. Susie, the link goes to a WaPo page reading “Back to previous page”; clicking that comes back here.

    Link wrong? WaPo has new policy of rejecting links?

  2. Heh. Now your link works for me, but the copy did not load and I tried 3 times, waiting a bit for something to show up. Perhaps I wasn’t patient enough. But it did go back to your post, not to the non-print version.

    Oh, well, I found it, and it’s a good piece to send to friends/Obama supporters to help them understand this is not an overspending issue. It’s what happens when the FIRE sector goes bat guano crazy and destroys the economy.

    And, Rogoff and his co-writer got this in January 2008. What? Timmie G doesn’t read Rogoff? He’s not an “in” economist? Just another “shrill” economist like Krugman, who also got it, iirc.

    We are so ill-served by our current media. And this administration.

    And so well served by your work here. I referenced this in a comment under another of lambert’s “Shared Sacrifice” posts. With that great illustration!

  3. The point is that when people are scrimping to pay back their debt, they are paying it to make their debtors rich. The debtors are extracting money from people that would otherwise be “wasted” on things that would make live easier or more pleasant. That’s why the magazines are full of ideas about discipline and budgeting, and its why these sociopaths thought up the “Chained CPI” that depends on people choosing cheaper and cheaper items when the prices of better things go up.

    The debtors, on the other hand, have more and more money to buy everything they want and to create estates for their children to inherit. They are re-creating the social institution of royalty and nobility. They are also creating the class of peasants and serfs for the people who eventually will lose everything to debt as their wages are pressed farther and farther down.

  4. Creating a 2-class system has been the goal of Our Corporate Owners since the founding of the nation; nobility and serfs. Why do you think they named it the ‘Republican’ Party?

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