Bill Breakstone, June 22, 2010
Any analyst or economist watching the markets in the summer of 2009 must have breathed a sigh of relief as it became apparent that the world was stepping back from the precipice of disaster. There was still a long way to go, but it seemed that the worst had been avoided. We are now a year from that point, and signs of economic recovery continue, more in the United States, China, Japan and the BRIC countries than in Europe.
However, there are still troubling signs on the horizon. Here in the U.S., unemployment continues at an unacceptable level, and with much of the gains coming from the public sector, where Census employment has accounted for much of the gains and are about to end, jobless claims are expected to increase. The housing sector benefited from the tax credit for home buyers, but that incentive ended last month and the data for home sales has begun to decline again, and can be expected to do so even more over the summer.
In Europe, the debt crisis has prompted European Union governments to move toward austerity policies that are aimed at reducing sovereign debt, at the expense of hard-won benefits to their populations, and are resulting in civil unrest that could prove to be a politically destabilizing element to those governments, especially in the United Kingdom, where its new government assumed office with a minimal plurality, as well as in Spain, where a general strike has been called for on September 29th.
Here at home, Federal Reserve Bank Chairman Ben Bernanke is a student of economic policy during the Great Depression, and his Princeton University colleague, Paul Krugman, likewise is keyed into mistakes made in the 1930s as the world struggled to revive from economic catastrophe. A brief historical footnote here may be appropriate. After assuming office in 1932, the Roosevelt Administration implemented policies aimed at economic recovery, and those actions were successful. However, conservative political pressures resulted in Congressional initiatives that resulted in budgetary tightening, thus shorting recovery and prolonging the Depression. Were it not for World War II, that economic downturn may have continued for decades.
There may well be a natural tendency for our average citizen, and politician, to assume that since the worst now appears to be over, we can revert to philosophical positions that actually were responsible for bringing us to the brink, imitating the process of the mid-1930s. Bernanke is not one of them, and as Fed Chairman, his thoughts have a great impress upon Administration policymakers. Treasury Secretary Timothy Geithner has worked shoulder to shoulder with Bernanke throughout the economic crisis, and though his philosophical views are less certain than the Fed Chairman’s, his advice to the Administration is no doubt in line with Bernanke’s. As for Professor Krugman, his is not a voice that is heard within Obama’s economic policymakers. Rather, his podium is as a columnist for one of the world’s leading newspapers. His views are looked upon as coming from the far left of economic thought, unfairly in this writer’s opinion. But I’m sure his columns are read constantly by both Bernanke and Geithner, and by Obama and his economic team.
Krugman has written a number of articles concerning the wisdom of focusing on our national debt problem, given the fragility of the present economic recovery. He views the EU focus on that same priority in the same light. In his Op-Ed piece in yesterday’s NY Times, he addressed that.
He wrote: “Spend now, while the economy remains Depressed; save later, once it has recovered. America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control—without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard—in particular, a modest Value-added tax [VAT], say at a five percent rate, would go a long way toward closing that gap, while leaving overall U.S. taxes among the lowest in the advanced world.”
[As this piece is being written, the British government is proposing an increase in its VAT to between 20 to 30 percent.]
Krugman continues: “But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t. Right now, we have a severely depressed economy—and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.”
“So now is not the time for fiscal austerity. Eventually, however, as unemployment falls—probably when it goes below 7 percent or less—the Fed will want to raise taxes to head off possible inflation. At that point we can make a deal: the government starts cutting back, and the Fed holds off on rate hikes so that these cutbacks don’t tip the economy back into a slump.”
In conclusion, Krugman says” “Yes, we need to fix our long-run budget problems—but not by refusing to help our economy in its hour of need.”
What the author does not address in his article is the effect that EU austerity budgets, such as the one announced by England today, will have upon the world economic recovery. In today’s global economic environment, there will no doubt be repercussions. We here in America are fortunate that our debt concerns are relatively minor compared to EU economies. Still, it seems that those countries are determined to embark on economic policies that do not pay proper attention to the lessons of history.
Will History Repeat Itself?
Bill Breakstone, June 22, 2010
Any analyst or economist watching the markets in the summer of 2009 must have breathed a sigh of relief as it became apparent that the world was stepping back from the precipice of disaster. There was still a long way to go, but it seemed that the worst had been avoided. We are now a year from that point, and signs of economic recovery continue, more in the United States, China, Japan and the BRIC countries than in Europe.
However, there are still troubling signs on the horizon. Here in the U.S., unemployment continues at an unacceptable level, and with much of the gains coming from the public sector, where Census employment has accounted for much of the gains and are about to end, jobless claims are expected to increase. The housing sector benefited from the tax credit for home buyers, but that incentive ended last month and the data for home sales has begun to decline again, and can be expected to do so even more over the summer.
In Europe, the debt crisis has prompted European Union governments to move toward austerity policies that are aimed at reducing sovereign debt, at the expense of hard-won benefits to their populations, and are resulting in civil unrest that could prove to be a politically destabilizing element to those governments, especially in the United Kingdom, where its new government assumed office with a minimal plurality, as well as in Spain, where a general strike has been called for on September 29th.
Here at home, Federal Reserve Bank Chairman Ben Bernanke is a student of economic policy during the Great Depression, and his Princeton University colleague, Paul Krugman, likewise is keyed into mistakes made in the 1930s as the world struggled to revive from economic catastrophe. A brief historical footnote here may be appropriate. After assuming office in 1932, the Roosevelt Administration implemented policies aimed at economic recovery, and those actions were successful. However, conservative political pressures resulted in Congressional initiatives that resulted in budgetary tightening, thus shorting recovery and prolonging the Depression. Were it not for World War II, that economic downturn may have continued for decades.
There may well be a natural tendency for our average citizen, and politician, to assume that since the worst now appears to be over, we can revert to philosophical positions that actually were responsible for bringing us to the brink, imitating the process of the mid-1930s. Bernanke is not one of them, and as Fed Chairman, his thoughts have a great impress upon Administration policymakers. Treasury Secretary Timothy Geithner has worked shoulder to shoulder with Bernanke throughout the economic crisis, and though his philosophical views are less certain than the Fed Chairman’s, his advice to the Administration is no doubt in line with Bernanke’s. As for Professor Krugman, his is not a voice that is heard within Obama’s economic policymakers. Rather, his podium is as a columnist for one of the world’s leading newspapers. His views are looked upon as coming from the far left of economic thought, unfairly in this writer’s opinion. But I’m sure his columns are read constantly by both Bernanke and Geithner, and by Obama and his economic team.
Krugman has written a number of articles concerning the wisdom of focusing on our national debt problem, given the fragility of the present economic recovery. He views the EU focus on that same priority in the same light. In his Op-Ed piece in yesterday’s NY Times, he addressed that.
He wrote: “Spend now, while the economy remains Depressed; save later, once it has recovered. America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control—without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard—in particular, a modest Value-added tax [VAT], say at a five percent rate, would go a long way toward closing that gap, while leaving overall U.S. taxes among the lowest in the advanced world.”
[As this piece is being written, the British government is proposing an increase in its VAT to between 20 to 30 percent.]
Krugman continues: “But if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t. Right now, we have a severely depressed economy—and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.”
“So now is not the time for fiscal austerity. Eventually, however, as unemployment falls—probably when it goes below 7 percent or less—the Fed will want to raise taxes to head off possible inflation. At that point we can make a deal: the government starts cutting back, and the Fed holds off on rate hikes so that these cutbacks don’t tip the economy back into a slump.”
In conclusion, Krugman says” “Yes, we need to fix our long-run budget problems—but not by refusing to help our economy in its hour of need.”
What the author does not address in his article is the effect that EU austerity budgets, such as the one announced by England today, will have upon the world economic recovery. In today’s global economic environment, there will no doubt be repercussions. We here in America are fortunate that our debt concerns are relatively minor compared to EU economies. Still, it seems that those countries are determined to embark on economic policies that do not pay proper attention to the lessons of history.
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