This morning Paul Krugman is thrilled to pronounce the start of what he refers to as the Third Depression in American history:
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 I certainly agree with this pronouncement:
And this third depression will be primarily a failure of policy.
However, I suspect that the policies he’s referring to aren’t the policies that are actually at the root of our problems.
Our present economic downturn isn’t at depression levels for any indicator other than employment. If unemployment were defined the same way now as it was three quarters of a century ago, we would be approaching the levels of unemployment seen then. Don’t let any of my comments fool you into thinking that I’m unconcerned about the plight of the unemployed. That isn’t the case. The question is why isn’t employment growing?
You can’t understand the fix we’re in until you recognize that the late 1990’s were an aberration. Several things, including the enormous capital investments that had been made by governments and businesses over many years in computer and communications technologies finally paying off, the end of the Cold War, the rise of sovereign wealth funds, the centralization of finance, all happened at once. Once you discount the Internet bubble and the sudden and, unfortunately, temporary increase in income it produced it’s clear that income growth (except among the very highest income earners) and job growth have been phlegmatic in the United States for a quarter century or more.
We can’t return to the late 1990’s. It was the exception, not the rule.
What are the factors that are dragging our economy down? Here are a few:
- We have been investing very heavily in the healthcare sector, a sector which creates fewer jobs per dollar than most others, without being willing to control costs there. The doctor fix making its way through the Congress as we speak is the latest example of that lack of willingness.
- We have persisted in subsidizing things, e.g. housing construction, oil consumption, that are not in our long-term interests. The long-term eventually arrives.
- We subsidize the incomes of people who don’t need subsidies.
- We undertake too much with our military and spend too much on it.
- We have imposed an increasing administrative burden on businesses in the form of regulations, especially the execrable Sarbanes-Oxley. I know of no business that has improved its actual accountability by implementing it. But I know of lots that are bearing substantial costs by doing so.
- Government at all levels is mired in the 1950’s in business methods, personnel policies and procedures, and, most of all, costs.
- We should never have admitted China to the WTO or granted it permanent most favored nation trading status without exacting much more stringent actions from the country including abandoning their peg on the dollar and allowing currency to be freely traded in China. China is so vast it can shake the world economy and, since it continues to be authoritarian, it can do so as a matter of policy.
- The policies of the Fed, contributing to asset inflation, made us think we were better off than we were.
Dr. Krugman may not like what the Europeans are doing but they have little choice. They’re tapped out. Borrowing is drying up for them. And their austerity plans will have the perverse effect of nullifying whatever effect our own fiscal stimulus strategies may have. If the rest of the world concentrates on production while we concentrate on consumption, there will be job creation but it won’t be here. We undertake increasing debt at enormous risk.
I’m not an anarcho-capitalist (maybe not even a minarchist), I think that some government regulations are necessary to keep the market free and make for a civil society, and I don’t think that isolationism will solve our problems. I do think we need to do whatever we do a lot more prudently than we have been. To me that means less influence from Fabian theoreticians who’ve never created a business or made a payroll.