” The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.” Paul Krugman. The rest of his impassioned column below the fold. Of course Australia’s economy is not in the kind of dire straights the US one is in (at least not now, but we’ve got our foreign debt to think about if we think it’s going to be a walk in the park for us.) But it still made me think of how much we might pay for business as usual from the Opposition. When was the last time the Liberals in national opposition were responsible? Well the ALP aren’t paragons in Opposition either of course, but somehow , I can’t see them playing such an obviously spoiling role when the chips are down. No doubt some others will disagree.
On the Edge, by Paul Krugman, Commentary, NY Times: A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.
Its as if the dismal economic failure of the last eight years never happened yet Democrats have, incredibly, been on the defensive. … Somehow, Washington has lost any sense of whats at stake of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.
Its hard to exaggerate how much economic trouble were in. The … implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world. …
Meanwhile, our main line of defense against recessions the Federal Reserves usual ability to support the economy by cutting interest rates has already been overrun. The Fed has cut the rates it controls basically to zero, yet the economy is still in free fall.
Its no wonder, then, that most economic forecasts warn that in the absence of government action were headed for a deep, prolonged slump. … Worst of all is the possibility that the economy will, as it did in the 30s, end up stuck in a prolonged deflationary trap.
Were already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s, and there will be much more of that if the economy continues to weaken.
As the great American economist Irving Fisher pointed out almost 80 years ago, deflation, once started, tends to feed on itself. As dollar incomes fall…, the burden of debt becomes harder to bear, while the expectation of further price declines discourages investment spending. These effects of deflation depress the economy further, which leads to more deflation, and so on.
And deflationary traps can go on for a long time. Japan experienced a lost decade of deflation and stagnation in the 1990s and the only thing that let Japan escape from its trap was a global boom that boosted the nations exports. Who will rescue America from a similar trap now that the whole world is slumping at the same time?
Would the Obama economic plan, if enacted, ensure that America wont have its own lost decade? Not necessarily: a number of economists, myself included, think the plan falls short and should be substantially bigger. But the Obama plan would certainly improve our odds. And thats why the efforts of Republicans to make the plan smaller and less effective to turn it into little more than another round of Bush-style tax cuts are so destructive.
So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.
Its time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nations future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.