There is an old story from the heyday of the Soviet
Union. As part of their May Day celebrations they were parading their latest
weapon systems down the street in front of the Kremlin. There was a long column
of their newest tanks, followed by a row of tractors pulling missiles. Behind
these weapons were four pick-up trucks carrying older men in business suits
waving to the crowds.
Seeing this display, the Communist party boss turned
to his defence secretary. He praised the tanks and missiles and then said that
he didn't understand the men in business suits. The defence secretary explained
that these men were economists and "their destructive capacity is
incredible".
People across the world now understand what the
defence secretary meant. The amount of damage being inflicted on countries
around the world by bad economic policy is astounding. As a result of
unemployment or underemployment, millions of people are seeing their lives
ruined. The current policies have led to trillions of dollars of lost output.
Bad policy
From an economic standpoint this loss is every bit as
devastating as if it building had been destroyed by tanks or bombs. And people
have lost their lives, due to inadequate healthcare, food and shelter, or as a
result of the depression associated with their grim economic fate.
If an enemy had inflicted this much damage on the
United States, the countries of the European Union, or the countries elsewhere
in the world that have been caught up in this downturn, millions of people
would be lining up to enlist in the military, anxious to avenge this outrage.
But, there is no external enemy to blame. The villains are the economists,
still mostly men, in business suits.
The New York Times reported last month that
formerly middle class workers in Spain are now picking through dumpsters
looking for food. There are similar accounts from Greece. Both countries have
unemployment rates hovering near 25 per cent, with
youth unemployment rates that are nearly twice as high.
And, the expectation is that things will only get
worse. The latest projections from the IMF show the economies of both countries
continuing to shrink through the rest of 2012 and for the whole of 2013. It is
also important to remember that the IMF's growth projections have consistently
been overly optimistic.
There are similar stories across the euro zone and now
also in the United Kingdom as that nation's leaders have pursued economic
policies that have thrown it back into recession. And of course the US is also
losing close to $1 trillion in output each year, with close to 23 million
unemployed, underemployed or out of the workforce altogether because of poor
job prospects.
The economists in policy positions are doing their
best to convince the public that the economic catastrophe that they are living
through is a natural disaster that is beyond human control. But that is what
Vice-President Biden would call "malarkey". This is a disaster that
is 100 per cent human caused and is being perpetuated by bad policy.
Social wreckage
The original collapse was the result of central
bankers who were at best asleep at the wheel, or at worst complicit in the
financial sectors' wheeling and dealing, ignoring the risks that massive
housing bubbles obviously posed to the economy. However, the response to the
downturn has made a bad situation far worse than necessary.
As the evidence keeps telling us, the basic
story is about as simple as it gets. The housing bubbles were driving demand
prior to the collapse both directly through building booms and indirectly from
the consumption generated by bubble generated housing equity. When the bubbles
burst the construction booms went bust. And when the bubble generated housing
equity vanished so did the consumption for which it provided a basis.
The basic economic problem in this context was finding
a way to replace the lost demand. The right-wing politicians and their allied
economists can repeat all the nonsense the like about promoting business confidence
and tax breaks for job creators, but there is no remotely plausible story in
which it would be possible to generate enough demand from investment to make up
for the demand lost from the collapse of the bubbles.
This means that in the short-term the only way
to make up the demand is from the government budget deficits. This is not even
economic theory, it is simply accounting.
In the longer term, the shortfalls in demand will have
to be made up from a rebalancing across countries. Countries with large trade
deficits, like the United States, Greece and Spain will have to move toward
more balanced trade.
In the case of the US this can only plausibly be
done with a decline in the value of the dollar. In the case of the euro zone,
there is no plausible alternative than to have the surplus countries, most
importantly Germany, have more rapidly rising wages and prices in order to
allow the deficit countries to regain competitiveness.
All of this
is pretty straightforward, but the economists are instead steering the world
toward more years of stagnation and rising unemployment and poverty. The human
and social wreckage they have caused puts our enemies to shame.
