Krugman: The Mellon Doctrine, Reich: Toward a Double Dip
The Truth About the Economy that Nobody In Washington Or On Wall Street Will
Admit: We're Heading Back Toward a Double Dip
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
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
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.
The Mellon Doctrine
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
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.
No virus found in this message.
Checked by AVG - www.avg.com
Version: 10.0.1209 / Virus Database: 1500/3543 - Release Date: 03/31/11
[Non-text portions of this message have been removed]