For some inexplicable reason (for Keynesians, unfamiliar with being out of economic fashion), the recent G-20 meeting resulted in some consensus (at least outside the US) of controlling inflation and curbing deficits. Paul Krugman, dismayed at such at outcome, called the conference “deeply discouraging”. In his anguish at watching the world leaders contort themselves ever-so-slightly towards controlling their budget deficits and reigning in spending, he penned some his dire predictions in the NYT:
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.
Krugman points the finger of blame for this nightmare scenario firmly at the “old school”:
In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.
As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence.
Such behaviour by politicians, who for decades have been the willing zombies of Keynesian thought, is, for Krugman, the abandonment of Reason and a return to the dark magic of economic principles which have clouded their otherwise rational fiscal minds with the archaic ritual of austerity:
It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.
So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.
And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.
You heard it here first, folks. Now sit back, eat your popcorn and watch the destruction of the world economy at the hands of the otherwise faithful statist, collectivist, Keynesian world leaders who decided to experiment a little with balanced budgets and slightly-less-insane monetary policies…
