The Corner We Now Find Ourselves In

I’ve previously made the argument that, due to Larry Summers’ (alleged) major strategic bungle with Romer’s stimulus proposals, and the leadership errors by President Obama that made it possible, policymakers have now painted themselves (and the rest of us) into a corner. And the ascendance of well-meaning but misinformed Tea Partiers to Congress ensures that things will have to get pretty ugly before we change course.

Australian economist Bill Mitchell made the same case rather forcefully this morning for the global economy (emphasis added), and does a nice job assessing the media memes that are currently in vogue:

The problem now is that the neo-liberal paradigm was not killed off in 2008 and in re-asserting itself (at the wrong time) – we have the worst of all worlds. Growth is slowing because spending growth is inadequate because the conservatives have declared fiscal policy a failure – “see, it had its chance” – and monetary policy “had its chance but cannot move any further” and so – according to the mantra – the only thing that we can do now is swallow the bitter pill.

A problem with this is that the ones who are telling us all this will not be the ones who swallow the bitter pill. The tenured academics and those on sinecures from the likes of Peter G. Peterson who are making the most noise will not lose a bean and will probably swoop on the reduced real estate bargains that will emerge if the economy further contracts.

At this point, it doesn’t matter whether the proponents of an austerity push are deluded but well-intentioned patriots or opportunists with horrific ethical and moral codes. It’s critically important that the U.S. electorate prevents recessionary or depression-inducing measures from being pursued.

If we insist on giving them a try, it will likely change people’s minds in short order, as in 1937-38. But we should start having a conversation now about whether proponents will be exposed to civil liabilities for the damages they end up causing. If they know ahead of time that they will be, they might at least reconsider their (1) macroeconomic foundations and/or (2) personal pecuniary interests. As we told our clients earlier in the month:

…the lack of hiring does not have a damn thing to do with the employers’ or markets’ concerns over the U.S. government ‘getting its fiscal house in order’. That’s a tired, threadbare meme, an utter fantasy, and completely irrelevant to solving the problems at hand. It also ensures that our children and grandchildren will be worse off than they would otherwise be, exactly opposite to the plaintive assertions of deficit-phobes (there’s not enough space here to fully explain this, beyond pointing out that every Treasury security is typically purchased with a dollar that the government has already spent into existence; but the upshot is that there is no federal “debt” for our children and grandchildren to “pay off”; it sounds logical, but operationally, it’s utter nonsense). And yet Robert Rubin, who in my opinion ought to be locked up in the Tower of London or banished to the Antarctic until GDP reaches at least 4%, was repeating this nonsense ad nauseum to Charlie Rose[3] as recently as this Tuesday. It made me wonder why economists aren’t more exposed to professional liability and malpractice claims. Almost every other profession is, and for good reason. If you hold yourself out as knowing what is good for people—in the case of [Rubin] and his peers, for millions and even billions of people—then you ought to be held responsible when your errors, however well-intentioned, cause harm. I suspect that the damages caused by the economics profession would be absolutely staggering if you were to add them all up. 

The cumulative damages will be even worse the longer we go with inaction, or worse, severe austerity via the debt ceiling agreement. And of course, there’s almost no way that policymakers, the economists advising them, or the people and institutions underwriting them are going to be exposed to any liability whatsoever. Quite the contrary—if history is any guide, they’ll all make a damn good living at it. But lest they forget, this kind of stuff is the raw fuel for unrest, riots, and insurrections when it goes unchecked for long enough. To riff on a line from the Tea Party’s spiritual founder, “Washington, are you listening?!?”

There does seem to be an incipient change of tone in D.C. But the Republicans have some significant strategic opportunities in front of them in 2012, and tactically, it makes sense for them to try to put the economy through the ringer in the coming year. Whether the American people can last that long without losing faith in the GOP remains to be seen.

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