Heartless Bastards (a backlash?)

Dean Baker on why Robert Samuelson's latest column is wrong.

In these circumstances, a reduction in the deficit could produce a substantial stimulus through two channels. First, it would lower interest rates, which would provide a direct boost to domestic investment and consumption. Second, lower interest rates would lower the value of the currency, which in turn would make its goods more competitive internationally, thereby increasing net exports.

These conditions do not apply for most countries at present and certainly not to the United States. It is very doubtful that even the strongest deficit reduction measures will have a noticeable effect on lowering already low interest rates. It is also not clear that there would be any substantial investment response to lower interest rates by businesses that already are sitting on huge amounts of retained earnings. Heavily indebted consumers are also not likely to substantially boost consumption.

The trade route also does not look especially promising. If interest rates fell in the United States it is unlikely that it will lead to much of a decline in the dollar in a context where has been pushed up by a flight to safety in uncertain times. Furthermore, it is not clear that the United States will be able to increase its net exports by much at a time when every other country is trying to go the same route and is also constricting demand through fiscal contraction.

Governments need to boost aggregate demand. At least America is somewhat tepidly showing leadership. Bernanke isn't doing anything to aggravate the situation, unlike some other actors (the IMF, ECB sort of, etc.), but is risking a lot by not doing more. Obama is saying the right things at the G-20 conference in Toronoto:

We must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs today.

But the Republicans + 1 are blocking more stimulus in the Senate, even as the states cut budgets, raise taxes and reduce demand.

Krugman writes that it's almost as if the financial markets - bond vigilantes or Tom Friedman's Golden Straightjacket - understand what policy makers don't:

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

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.

From a glass half-full perspective, at least America is somewhat showing some leadership, via Obama and Bernanke (within the confines of our dysfunctional political system). Europe is performing stress tests on its banks to increase confidence. (And at least the Germans are honest about their deficit-cutting - for example by raising taxes on banks, unlike, say, American Republicans.) China is making noises about allowing its currency to rise, which demonstrates their confidence that the worst is over. They may be control freaks, but they've also proven to be pretty business-savvy. Dominique Strauss-Kahn says the IMF isn't forcasting a double-dip recession.

Japan and India sided with the United States in trying to moderate the austerity tough talk of the G-20 group statement and advocated a measured approach to debt reduction. Maybe all of this austerity talk and sticking it to the lower orders is simply a backlash reaction* to the concerted efforts of the world's governments in successfully staving off the panic of 2008 which was a massive failure of the private sector and markets? Maybe it's a reaction by the usual proponents of orthodoxy to the powerful memes put in circulation by the democratic liberal-left after 2008? If so, in a sense that's a good thing.

Meanwhile Spanish unions plan for a general strike in September even as the French raise their retirement age from 60 to 62, which will probably cause strikes.
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*see title of blog post. Anything good on the political front will cause a backlash. Obama's election for instance. (But good things also breed good things. I volunteered to parade with Alexi Giannoulias at Chicago's Gay Pride Parade yesterday and there were tons of energetic young volunteers there pumped up to fight the good fight. Maybe it was Giannoulias's basketball friend Obama who got them interested and motivated? By the way I'm not gay and haven't been to the parade in a few years, but I remember it being much more raunchier in past years. It was fun as I remember though! And I saw Brent Sopel parading with the Blackhawk's Stanley Cup!)