Doing Nothing is Unacceptable

In this age when lies and prejudices masquerade as truth as never before, it can be very difficult to figure out what’s factual, and which sources to trust.

Nowhere is this more the case than in macroeconomics, yet we must decide upon which economic policies and legislation to support — soon.

One of my sources is Paul Krugman, because of what he’s demonstrably gotten right over the past four years. Krugman was one of the people to call the housing bubble a bubble, when other leading economists were claiming that the age of bubbles was past. He was able to explain to me, a child of the 70s, why hyperinflation was not going to happen this time. He correctly predicted where the stimulus would be found wanting, and that austerity measures at the federal level would lead to continued high unemployment.

Today in his blog, Krugman warns that the situation appears to be taking a turn that would make climbing out of the hole harder.

The slump in the United States and other advanced economies is the result of a failure of demand — period, end of story. All attempts to claim that it is somehow structural, or maybe the result of reduced incentives to produce, have collapsed at first contact with the evidence.

But there is a real concern that if the slump goes on long enough, it can turn into a supply-side problem, because investment will be depressed, reducing future capacity, and because workers who have been unemployed for a long time become unemployable. This is the issue of hysteria “hysteresis”.
[…]
Hysteresis can mean that the costs of failing to pursue expansionary policies are much greater than even the direct effects on employment. And it can also mean, especially in the face of very low interest rates, that austerity policies are actually self-destructive even in purely fiscal terms: by reducing the economy’s future potential, they reduce future revenues, and can make the debt position worse in the long run.

He shows how this process has begun in the manufacturing sector.

You probably have already heard the stories about how companies are placing help wanted ads that say the currently unemployed need not apply.