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Dean Baker
Published: Tuesday 16 October 2012
The amount of damage being inflicted on countries around the world by bad economic policy is astounding.

The Wrecking Society: Economics Today

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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 defense secretary. He praised the tanks and missiles and then said that he didn’t understand the men in business suits. The defense secretary explained that these men were economists, and “their destructive capacity is incredible.”

People across the world now understand what the defense 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. From an economic standpoint this loss is every bit as devastating as if a building had been destroyed by tanks or bombs. And people have lost their lives, due to inadequate health care, 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 percent, 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 eurozone 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 United States 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 percent human caused and is being perpetuated by bad policy.

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 United States this can only plausibly be done with a decline in the value of the dollar. In the case of the eurozone, 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.



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ABOUT Dean Baker
Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. He is the author of several books, including Plunder & Blunder: The Rise and Fall of the Bubble Economy, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer and The United States Since 1980. He was the editor of Getting Prices Right: The Debate Over the Consumer Price Index, which was a winner of a Choice Book Award as one of the outstanding academic books of the year. He appears frequently on TV and radio programs, including CNN, CBS News, PBS NewsHour, and National Public Radio. His blog, Beat the Press, features commentary on economic reporting. He received his B.A. from Swarthmore College and his Ph.D. in economics from the University of Michigan.

Every financial panic in U.S.

Every financial panic in U.S. history (1837, 1873, 1893,1907, 1929, 2008) has resulted from the excessive use of credit to overbuild, whether railroads or housing, leading to collapse. Who did that? Not the middle class. The financial titans of our society did it. The "job creators."

If economists are a dangerous

If economists are a dangerous weapon, politicians are more than ready to use it. Instead of buying the malarkey about cutting spending to balance the budget, they need to increase spending during a contraction and increase taxes during boom times, countering the cyclical ebb and flow. Many economist have said this, but politicians are listening to a different drummer.

Sunflowerbio: John Maynard

Sunflowerbio:
John Maynard Keynes vs. Friedrich Von Hayek. In the war of economic philosophy,Keynes was proven correct in his spend against the tide philosophy and pulled us out of the great depression. But the Hayek true believers like Reagan and Thatcher could not accept the truth they were sure that economies could self regulate and self correct.So they proceeded to implement strategies to continue Carters deregulation of the airlines to include every possible economic endeavor,including banks and stock markets . They like all fascists saw unions as the enemy of "free market" capitalism and moved to destroy them. These policies continued through the Clinton administration and climaxed with the elimination Glass Steagall Act. Years later the dung hit the fan. Intelligent economist that were formally true believers of Hayek. Like Alan Greenspan came to realize that markets could not self regulate and testified before congress to that reality. But for the 1% who had gotten rich from the warped Hayek philosophy and had control of the fascist government would not accept reality. So now we are stuck with this economy until it leads to revolution. Unfortunately we have had measures like the Bush/Obama Tax cuts that did add about a $1trill. to the demand side but also took $3trill out of circulation by giving it to the wealthy who instead of investing it decided to hoard it away. So we will get a short term benefit but a long term drag on the economy.

Nicely said. The way out of

Nicely said. The way out of the great depression was WWII, but a nation can declare war on whatever it wants to, such as unemployment, shifting to green energy, insuring proper health care, infrastructure rehab, or monetary reforms etcetera...

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