“The fundamentals of the world economy aren’t, in themselves, all that scary; it’s the almost universal abdication of responsibility that fills me, and many other economists, with a growing sense of dread.”
here has long been a great divide among those who seek to explain both the cause and the duration of the Great Depression. What side you are on almost always says something about your politics: liberals have one view, conservatives tend to have another.
Brad DeLong and Barry Eichengreen have written an interesting new preface to the 40-year anniversary edition of Charles Kindleberger’s The World in Depression 1929-1939. The book, as Wikipedia deftly summarizes it,
advances an idiosyncratic, internationalist view of the causes and nature of the Great Depression. Blaming the peculiar length and depth of the Depression on the hesitancy of the US in taking over leadership of the world economy when Britain was no longer up to the role after WWI, he concludes that ‘for the world economy to be stabilized, there has to be a stabilizer—one stabilizer’, by which, in the context of the interwar years at least, he means the United States.
In a column yesterday, Paul Krugman—whose latest book is titled, End This Depression Now!—worries that policy makers both in Europe and here in the U.S. are repeating past mistakes and failing to act decisively to rescue the world’s economy from the mess that financial recklessness created.
He took a swipe at the European leaders, who have failed to take meaningful action to bail out Spanish banks (“Forget about Greece, which is pretty much a lost cause; Spain is where the fate of Europe will be decided“), and he jabbed domestic Republicans, “who often seem as if they are deliberately trying to sabotage the economy.”
But since Krugman, like all of us should be, is most concerned about the crippling effects of long-term unemployment, he directed his latest attack squarely at the Federal Reserve:
The Fed has a so-called dual mandate: it’s supposed to seek both price stability and full employment. And last week the Fed released its latest set of economic projections, showing that it expects to fail on both parts of its mandate, with inflation below target and unemployment far above target for years to come.
This is a terrible prospect, and the Fed knows it. Ben Bernanke, the Fed’s chairman, has warned in particular about the damage being done to America by the unprecedented level of long-term unemployment.
So what does the Fed propose doing about the situation? Almost nothing. True, last week the Fed announced some actions that would supposedly boost the economy. But I think it’s fair to say that everyone at all familiar with the situation regards these actions as pathetically inadequate — the bare minimum the Fed could do to deflect accusations that it is doing nothing at all.
Why won’t the Fed act? My guess is that it’s intimidated by those Congressional Republicans, that it’s afraid to do anything that might be seen as providing political aid to President Obama, that is, anything that might help the economy.
That’s a fairly serious charge, but recall that GOP candidate for president Rick Perry said this about Ben Bernanke and the Federal Reserve:
If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion.
That stupidity and attempt at intimidation was endorsed by the likes of Tea Party spokesman Sarah Palin and represents the sentiments of many right-wingers. But no one on that side seems to be concerned at all about the Fed’s lack of aggressiveness in addressing unemployment (not to mention the failure of conservatives in Congress to do anything at all), particularly long-term unemployment.
Look at this graph Krugman has previously presented:
We ignore this at our peril, both here and in Europe. The world economy is sick and trying to heal it with budget austerity is making it sicker. That is the equivalent of prescribing lots of calisthenics for a bedridden patient, and it may, as Krugman and others continue to argue, prove economically lethal.