"Imagine that in the worst year of our recent recession, the United States government decided to reduce its federal budget deficit by more than $800 billion dollars -- cutting spending and raising taxes to meet this goal. Imagine that, as a result of these measures, the economy worsened and unemployment soared to more than 16 percent, and then the president pledged another $400 billion in spending cuts and tax increases this year. What do you think would be the public reaction?
"It would probably be similar to what we are seeing in Greece today, including mass demonstrations and riots, because that is what the Greek government has done. ... Because of the massive opposition to further economic self-destruction -- the latest polls show that 80 percent of Greeks are opposed to making any more concessions to the European authorities....
"The IMF's latest review of its agreement with Greece suggests that the Euro, for the Greek economy, is still 20-34 percent over-valued. This makes a recovery through "internal devaluation" -- i.e., keeping unemployment so high and therefore lowering wages to make the economy more internationally competitive -- an even more remote possibility than it would otherwise be. But the big problem is that the country's fiscal policy is going in the wrong direction, and of course they cannot use monetary policy because that is controlled by the ECB." ("Greek Protesters Are Better Economists Than the European Authorities," CEPR)
While the Papandreou government has clinched enough votes in parliament to pass another phase of the EU's austerity plan, this merely puts off the day of reckoning. Greece will not escape default. Eventually, the bondholders will be forced to take a hit on their investments and that will push the EU banking system (particularly English, French and German banks) into crisis. The meltdown may not be as big as Lehman, but it will certainly be enough to push the eurozone back into recession.
Lastly, GOP deficit hawks are threatening to trim government spending even though the economy is still too wobbly to stand on its own. If they succeed, the economy will contract and unemployment will rise. Here's an excerpt from an article by economist Mark Thoma who explains the pitfalls of belt-tightening:
".... widespread weakness in recent economic data makes a double dip much more likely. In May, just 54,000 jobs were added, auto sales declined significantly, retail sales were sluggish even excluding autos, and growth in manufacturing slowed sharply. Meanwhile, house prices continue to decline to new post-bubble lows, home sales have slowed, claims for unemployment insurance have risen, and consumer sentiment has weakened. Both stimulus spending and QE2 are coming to an end, state and local budgets are still a problem, and corporate bond issuance "fell to its slowest pace of the year."...
"...When the recession started, I was certain we wouldn't repeat the mistakes of the past. One mistake in particular looms large right now, the deficit reduction and interest rate increases that sent the economy into a tailspin in 1937-38. Many people do not realize that there were two recessions within the Great Depression. The first, which came in 1929, is well known. This recession lasted until 1933, and then the economy began slowly recovering, much like today. As the recovery continued, people began to worry about the budget deficit and the possibility of inflation -- again much like today. In response, fiscal authorities began reducing the deficit and monetary authorities raised interest rates, and the result was a second recession in 1937-38. This mistake prolonged the economy's troubles considerably, and in part was why this became the 'Great Depression.' ("How the Fed Could Set Off a New Recession," Mark Thoma, The Fiscal Times)
Regardless of the recent uptick in stock prices, the economy remains mired in a long-term slump. Demand is weak, because wages haven't kept pace with productivity and because consumers no longer have easy access to credit. When consumers don't spend, businesses don't invest. It's that simple. Big business is currently sitting on nearly $2 trillion for which there are no profitable outlets for investment. Unless investment picks up, the economy will continue to operate below capacity and unemployment will remain high.
Neither the Obama administration nor Congress believe that the government can play a constructive role in easing the business cycle or reducing unemployment. Policymakers still ascribe to a laissez faire orthodoxy which makes a protracted slowdown unavoidable. The only thing keeping the economy from a double dip recession is government spending. When austerity-minded congressmen slash the deficits, the last thread keeping the economy in positive territory will be cut and deflationary pressures will reemerge.
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
2
1
1
