Friday, August 10, 2012

US side of the Depression threat: small update

Concerns about the risk of Great Depression II involve three batches of things
about to hit the fan -- stuff in Europe we've talked about before, stuff in China
which is leaking out into the Financial Times, and, in the US, the fear that
abrupt action to reduce debt will be done in a way which raises unemployment
and creates negative debt.

I received an interesting piece today about the sequestration threat which is due to hit in full force in January (with many pink slips to come at about election day). I saw
an estimate somewhere that unemployment may tick up to about 9.5 percent immediately.
What I saw today was a more optimistic piece, citing a more bleak assessment:

The optimistic piece seems to be assuming "Well, if government spending in
some sector is reduced by X dollars, total demand won't go down by X; there must be balancing effects, such that it goes down by X/2, or even .9X -- a kind
of natural adaptation."

That's really sad. Economists have their arguments, but empirical studies have verified again and again that there are multiplier effects -- that the reduction in total demand would be more like 3X.

That's if we do things the dumb way. However, current news does indeed suggest we are on path to doing things the dumb way, in part because partisan warfare makes it hard for people to act on analytical and creative approaches to minimizing the risk. But... that doesn't justify giving up ...

No comments:

Post a Comment