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Dean Baker

Dean Baker is co-director of the Center for Economic and Policy Research

October 15th, 2012 12:16 PM

The wrecking society: Economics today

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 defence secretary. He praised the tanks and missiles and then said that he didn't understand the men in business suits. The defence secretary explained that these men were economists and "their destructive capacity is incredible".

People across the world now understand what the defence 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.

Bad policy

From an economic standpoint this loss is every bit as devastating as if it building had been destroyed by tanks or bombs. And people have lost their lives, due to inadequate healthcare, 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 per cent, 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 euro zone 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 US 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 per cent human caused and is being perpetuated by bad policy.

Social wreckage

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 US this can only plausibly be done with a decline in the value of the dollar. In the case of the euro zone, 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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