If The Doctor Isn't Any Good, The Medicine Can Kill The Patient-- And Our Leaders ALL Pretty Much Suck

Late yesterday we stuck the above video onto the bottom of a post. If you already watched it, you don't have to do so again... although I hope you got all the way to the end, where they explain how similar the U.S. has become in terms of economic inequality to not just China, where "half the population are rural peasants, not part of the modern world" but to countries in sub-Saharan Africa-- where dictators are taking a lot of the wealth from normal people. "The U.S. has really reached an extraordinary level of income inequality."



Now, perhaps you've sensed a recurring DWT theme of late, namely that the mad rush to Austerity that our plutocratic overlords are forcing on the world is destroying social cohesion. This week former U.S. Labor Secretary and one of the last really good presidential economic advisors, Robert Reich points out that it is also ushering in a global recession. He's very clear why: "Austerity is the wrong medicine." But is anyone (besides David Frum) listening?

We all know about the weaknesses in Europe’s “periphery”-- Greece, Ireland, Spain, Portugal, and Italy. But the drop in Europe’s core is dizzying.



Germany grew at an annualized rate of just half a percent last quarter, down from 5.5 percent in the first quarter of the year. France didn’t grow at all.



What’s going on in Europe’s core? Partly it’s a loss of confidence due to debt crises in the periphery. But that’s hardly all.



Europe depends on exports-- especially to Asia, India, Latin America, and the United States. But exports to China and other emerging markets have been dropping. China, worried about inflation, has pulled in the reins on its sizzling economy. Brazil has been pulling back as well.



And as the United States economy sputters, exports to America have been slowing.



But chalk up a big part of Europe’s slowdown to the politics and economics of austerity. Europe-- including Britain-- have turned John Maynard Keynes on his head. They’ve been cutting public spending just when they should be spending more to counteract slowing private spending.



The United States has been moving in the same bizarre direction. Cutbacks by state and local governments have all but negated the federal government’s original stimulus, and no one in Washington is talking seriously about a second. The pitiful showdown over increasing the debt limit has produced the opposite: a Rube-Goldberg-like process for capping spending rather than increasing it, and a public that’s being sold the Republican lie that less government spending means more jobs.  



Yes, governments on both sides of the Atlantic are deeply in debt. But policy makers on both sides seem to have forgotten that economic growth is the most important tonic.



Public debt has meaning only in relation to a nation’s GDP. When more people are working, more companies are profiting, and economies are expanding, revenues pour into national treasuries.



When economies stop growing or contract, the opposite occurs. Economies can fall into vicious cycles of slower growth, lower tax revenues, spending cuts, and even slower growth.

That’s what we’re seeing now.



What’s worse, nations are so intertwined that when every major economy is slowing the cumulative effect is larger.



With anemic growth in America and Europe, the Japanese economy comatose, and emerging markets (including China) pulling in their reins, the vicious cycle could become worldwide. If global demand for goods and services continues to fall behind the potential supply we’ll see unemployment rise further and growth slow even more-- especially in Europe and the U.S.



Central banks may try to reverse this course. Ben Bernanke and company at the Fed have committed themselves to near-zero interest rates for the next two years (not exactly a rousing endorsement of America’s economic prospects in the near term). Given the sharp slowdown in Germany, the European Central Bank might now feel some pressure to lower interest rates there-- or at least delay the next increase.



But when growth is slowing so dramatically and unemployment is already high, monetary policy can’t possibly do it alone.



Without an expansionary fiscal policy, low interest rates have little effect. Companies won’t borrow in order to expand and hire more workers unless they have reasonable certainty they’ll have customers for what they produce. And consumers won’t borrow money to spend on goods and services unless they’re reasonably confident they’ll have jobs.



Fiscal austerity is the wrong medicine at the wrong time.

Joseph Stiglitz Should Be Heading Obama's Economic Team-- Instead Of Warning Us About Another, Perhaps Worse, Recession

Obama has surrounded himself with a coterie of Wall Street hacks as an economic team. None of them are especially "better" than Republicans. All of them are free-market ideologues who follow the fascistic line pushed as American religion by the DuPonts starting in the 1920s and '30s. Credible economists, like Nobel winners Paul Krugman and Joseph Stiglitz, were excluded from the administration. And now Obama's only chance to win reelection is predicated on the GOP's tendency to nominate someone beyond the pale. Stiglitz wrote about what looks like a coming disaster in Slate earlier today.

Just a few years ago, a powerful ideology-- the belief in free and unfettered markets-- brought the world to the brink of ruin. Even in its heyday, from the early 1980s until 2007, American-style deregulated capitalism brought greater material well-being only to the very richest of the richest country of the world. Indeed, over the course of this ideology's 30-year ascendance, most Americans saw their incomes decline or stagnate.

Moreover, output growth in the United States was not economically sustainable. With so much of U.S. national income going to so few, growth could continue only through consumption financed by a mounting pile of debt.

I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government. Alas, that has not been the case. On the contrary, a resurgence of right-wing economics, driven by ideology and special interests, once again threatens the global economy-- or at least the economies of Europe and North America, where these ideas continue to flourish.

In the United States, this right-wing resurgence, whose adherents evidently seek to repeal the basic laws of math and economics, is threatening to force a default on the national debt. If Congress mandates expenditures that exceed revenues, there will be a deficit, and that deficit has to be financed. Rather than balancing the benefits of each government expenditure program with the costs of raising taxes to finance those benefits, the right seeks to use a sledgehammer-- not allowing the national debt to increase forces expenditures to be limited to taxes.

This leaves open the question of which expenditures get priority. If expenditures to pay interest on the national debt are not prioritized, a default is inevitable. Moreover, to cut back expenditures now, in the midst of a crisis brought on by free-market ideology, would inevitably prolong the downturn.

A decade ago, in the midst of an economic boom, the United States faced a surplus so large that it threatened to eliminate the national debt. Unaffordable tax cuts and wars, a major recession, and soaring health care costs-- fueled in part by the commitment of George W. Bush's administration to giving drug companies free rein in setting prices, even with government money at stake-- quickly transformed a huge surplus into record peacetime deficits.

The remedies to the U.S. deficit follow immediately from this diagnosis: Put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich. But the right will have none of this, and instead is pushing for even more tax cuts for corporations and the wealthy, together with expenditure cuts in investments and social protection that put the future of the U.S. economy in peril and that shred what remains of the social contract. Meanwhile, the U.S. financial sector has been lobbying hard to free itself of regulations, so that it can return to its previous, disastrously carefree, ways.

...Regrettably, the financial markets and right-wing economists have gotten the problem exactly backward: They believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government's fiscal position, or at least yielding less improvement than austerity's advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion.

Do we really need another costly experiment with ideas that have repeatedly failed? We shouldn't, but increasingly it appears that we will have to endure another one nonetheless. A failure of either Europe or the United States to return to robust growth would be bad for the global economy. The failure of both would be disastrous-- even if the major emerging-market countries have attained self-sustaining growth. Unfortunately, unless wiser heads prevail, that is the way the world is heading.