Summary: We’re living in an time of deja vu. Our Af-Pak War repeats the mistakes of Vietnam; Europe’s economic policy repeats mistakes of the 1930’s. Slow and stupid are the two sins God always punishes.
(1) Mark Thoma (Prof economics, U Oregon) coined a term for the advocates of austerity now (i.e., increase savings during a recession; they fit no current school of economic theory) — Correction on 21 June: it was coined by Rob Parenteau of The Richebacher Letter (source).
Who is correct, Keynes who argued that budget cuts in a recession make things worse — his “paradox of thrift” — or the austerians who say that budget cuts restore “confidence in the markets” and make things better? {source}
As usual, John Maynard Keynes gives us a pithy answer. He wrote to American journalist Walter Case on 14 September 1931:
To read the newspapers just now is to see Bedlam let loose. Every person in the country of super asinine propensities, everyone who hates social progress and loves deflation, feels that his hour has come, and triumphantly announces how, by refraining from every form of economic activity we can become prosperous again.
(2) For a clear explanation of the issues, I recommend “Now and Later“, Paul Krugman, op-ed in the New York Times, 20 June 2010 — Opening:
Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?
Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse. They’re eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems.
But maybe a clear explanation of the issues can change some minds …
(3) For deeper analysis of our situation
- About the resemblance of our economic debates to those of 1931 see “Once again we must ask: ‘Who governs?’“, Robert Skidelsky (Prof of political economy, U Warwick), op-ed in the Financial Times, 16 June 2010.
- About the intersection of politics and economics that defines both our view of this recession and appropriate treatment, see “The Stimulants and the Austerians and the War on Double Dips“, Edward Harrison, Credit Writedowns, 20 June 2010.
(4) Other posts about the theory of economics and its importance today
- The greatness of John Maynard Keynes, our only guide in this crisis, 4 December 2008
- About the state of economic science, and advice from a famous economist, 8 December 2008
- “A depression is for capitalism like a good, cold douche.”, 17 December 2008
- Words of wisdom about the global recession, from the greatest economist of our era, 29 December 2008
- A very important article by an expert, discussing the necessary next step to solve the financial crisis, 17 February 2009
- Economic theory as a guiding light for government action in this crisis, 10 March 2009
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