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Krugman: The Mellon Doctrine, Reich: Toward a Double Dip

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  • Ed Pearl
    http://robertreich.org/post/4218613020 The Truth About the Economy that Nobody In Washington Or On Wall Street Will Admit: We re Heading Back Toward a Double
    Message 1 of 1 , Apr 1, 2011
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      The Truth About the Economy that Nobody In Washington Or On Wall Street Will
      Admit: We're Heading Back Toward a Double Dip

      Robert Reich

      Blog: March 30, 2011

      Why aren't Americans being told the truth about the economy? We're heading
      in the direction of a double dip - but you'd never know it if you listened
      to the upbeat messages coming out of Wall Street and Washington.

      Consumers are 70 percent of the American economy, and consumer confidence is
      plummeting. It's weaker today on average than at the lowest point of the
      Great Recession.

      The Reuters/University of Michigan survey shows a 10 point decline in March
      - the tenth largest drop on record. Part of that drop is attributable to
      rising fuel and food prices. A separate Conference Board's index of consumer
      confidence, just released, shows consumer confidence at a five-month low -
      and a large part is due to expectations of fewer jobs and lower wages in the
      months ahead.

      Pessimistic consumers buy less. And fewer sales spells economic trouble

      What about the 192,000 jobs added in February? (We'll know more Friday about
      how many jobs were added in March.) It's peanuts compared to what's needed.

      Remember, 125,000 new jobs are necessary just to keep up with a growing
      number of Americans eligible for employment. And the nation has lost so many
      jobs over the last three years that even at a rate of 200,000 a month we
      wouldn't get back to 6 percent unemployment until 2016.

      But isn't the economy growing again - by an estimated 2.5 to 2.9 percent
      this year? Yes, but that's even less than peanuts. The deeper the economic
      hole, the faster the growth needed to get back on track. By this point in
      the so-called recovery we'd expect growth of 4 to 6 percent.

      Consider that back in 1934, when it was emerging from the deepest hole of
      the Great Depression, the economy grew 7.7 percent. The next year it grew
      over 8 percent.

      In 1936 it grew a whopping 14.1 percent.

      Add two other ominous signs: Real hourly wages continue to fall, and housing
      prices continue to drop. Hourly wages are falling because with unemployment
      so high, most people have no bargaining power and will take whatever they
      can get. Housing is dropping because of the ever-larger number of homes
      people have walked away from because they can't pay their mortgages. But
      because homes the biggest asset most Americans own, as home prices drop most
      Americans feel even poorer.

      There's no possibility government will make up for the coming shortfall in
      consumer spending. To the contrary, government is worsening the situation.
      State and local governments are slashing their budgets by roughly $110
      billion this year. The federal stimulus is ending, and the federal
      government will end up cutting some $30 billion from this year's budget.

      In other words: Watch out. We may avoid a double dip but the economy is
      slowing ominously, and the booster rockets are disappearing.

      So why aren't we getting the truth about the economy?

      For one thing, Wall Street is buoyant - and most financial news you hear
      comes from the Street. Wall Street profits soared to $426.5 billion last
      quarter, according to the Commerce Department. (That gain more than offset a
      drop in the profits of non-financial domestic companies.) Anyone who
      believes the Dodd-Frank financial reform bill put a stop to the Street's
      creativity hasn't been watching.

      To the extent non-financial companies are doing well, they're making most of
      their money abroad. Since 1992, for example, G.E.'s offshore profits have
      risen $92 billion, from $15 billion (which is one reason it pays no U.S.
      taxes). In fact, the only group that's optimistic about the future are CEOs
      of big American companies. The Business Roundtable's economic outlook index,
      which surveys 142 CEOs, is now at its highest point since it began in 2002.

      Washington, meanwhile, doesn't want to sound the economic alarm. The White
      House and most Democrats want Americans to believe the economy is on an

      Republicans, for their part, worry that if they tell it like it is Americans
      will want government to do more rather than less. They'd rather not talk
      about jobs and wages, and put the focus instead on deficit reduction (or
      spread the lie that by reducing the deficit we'll get more jobs and higher

      I'm sorry to have to deliver the bad news, but it's better you know.


      &emc=tha212> &emc=tha212

      The Mellon Doctrine

      Paul Krugman

      NY Times Op-Ed: April 1, 2011

      "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real
      estate." That, according to Herbert Hoover, was the advice he received from
      Andrew Mellon, the Treasury secretary, as America plunged into depression.
      To be fair, there's some question about whether Mellon actually said that;
      all we have is Hoover's version, written many years later.

      But one thing is clear: Mellon-style liquidationism is now the official
      doctrine of the G.O.P.

      Two weeks ago, Republican staff at the Congressional Joint Economic
      Committee released a report, "Spend Less, Owe Less, Grow the Economy," that
      argued that slashing government spending and employment in the face of a
      deeply depressed economy would actually create jobs. In part, they invoked
      the aid of the confidence fairy; more on that in a minute. But the leading
      argument was pure Mellon.

      Here's the report's explanation of how layoffs would create jobs: "A smaller
      government work force increases the available supply of educated, skilled
      workers for private firms, thus lowering labor costs." Dropping the
      euphemisms, what this says is that by increasing unemployment, particularly
      of "educated, skilled workers" - in case you're wondering, that mainly means
      schoolteachers - we can drive down wages, which would encourage hiring.

      There is, if you think about it, an immediate logical problem here:
      Republicans are saying that job destruction leads to lower wages, which
      leads to job creation. But won't this job creation lead to higher wages,
      which leads to job destruction, which leads to ...? I need some aspirin.

      Beyond that, why would lower wages promote higher employment?

      There's a fallacy of composition here: since workers at any individual
      company may be able to save their jobs by accepting a pay cut, you might
      think that we can increase overall employment by cutting everyone's wages.
      But pay cuts at, say, General Motors have helped save some workers' jobs by
      making G.M. more competitive with other companies whose wage costs haven't
      fallen. There's no comparable benefit when you cut everyone's wages at the
      same time.

      In fact, across-the-board wage cuts would almost certainly reduce, not
      increase, employment. Why? Because while earnings would fall, debts would
      not, so a general fall in wages would worsen the debt problems that are, at
      this point, the principal obstacle to recovery.

      In short, Mellonism is as wrong now as it was fourscore years ago.

      Now, liquidationism isn't the only argument the G.O.P. report advances to
      support the claim that reducing employment actually creates jobs. It also
      invokes the confidence fairy; that is, it suggests that cuts in public
      spending will stimulate private spending by raising consumer and business
      confidence, leading to economic expansion.

      Or maybe "suggests" isn't the right word; "insinuates" may be closer to the
      mark. For a funny thing has happened lately to the doctrine of "expansionary
      austerity," the notion that cutting government spending, even in a slump,
      leads to faster economic growth.

      A year ago, conservatives gleefully trumpeted statistical studies supposedly
      showing many successful examples of expansionary austerity. Since then,
      however, those studies have been more or less thoroughly debunked by careful
      researchers, notably at the International Monetary Fund.

      To their credit, the staffers who wrote that G.O.P. report were clearly
      aware that the evidence no longer supports their position. To their
      discredit, their response was to make the same old arguments, while adding
      weasel words to cover themselves: instead of asserting outright that
      spending cuts are expansionary, the report says that confidence effects of
      austerity "can boost G.D.P. growth." Can under what circumstances? Boost
      relative to what? It doesn't say.

      Did I mention that in Britain, where the government that took power last May
      bought completely into the doctrine of expansionary austerity, the economy
      has stalled and business confidence has fallen to a two-year low? And even
      the government's new, more pessimistic projections are based on the
      assumption that highly indebted British households will take on even more
      debt in the years ahead.

      But never mind the lessons of history, or events unfolding across the
      Atlantic: Republicans are now fully committed to the doctrine that we must
      destroy employment in order to save it.

      And Democrats are offering little pushback. The White House, in particular,
      has effectively surrendered in the war of ideas; it no longer even tries to
      make the case against sharp spending cuts in the face of high unemployment.

      So that's the state of policy debate in the world's greatest nation: one
      party has embraced 80-year-old economic fallacies, while the other has lost
      the will to fight. And American families will pay the price.


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