Monday, August 23, 2010

Never miss an opportunity to miss an opportunity

I fear that historical evidence of poor economic performance in the wake of asset price bubbles bursting is creating a mood of dangerous complacency. You can read that as evidence that we’re destined to experience an extended period of poor growth, but you can also read it as evidence that what normally happens after a bust is that policymakers implement an ineffective response. And as Posen argues, accepting the view that slow growth is inevitable is a major cause of ineffective policy and becomes self-fulfilling. Japan started growing once it got some policymakers who believed it was possible for Japan to grow, and thus that they would try pro-growth things and try them on a large scale.
Meanwhile, in Greece:
This dire prognosis comes even despite Athens' massive efforts to sort out the country's finances. The government's draconian austerity measures have managed to reduce the country's budget deficit by an almost unbelievable 39.7 percent, after previous governments had squandered tax money and falsified statistics for years. The measures have reduced government spending by a total of 10 percent, 4.5 percent more than the EU and International Monetary Fund (IMF) had required.

The problem is that the austerity measures have in the meantime affected every aspect of the country's economy. Purchasing power is dropping, consumption is taking a nosedive and the number of bankruptcies and unemployed are on the rise. The country's gross domestic product shrank by 1.5 percent in the second quarter of this year. Tax revenue, desperately needed in order to consolidate the national finances, has dropped off. A mixture of fear, hopelessness and anger is brewing in Greek society.
And back in the US, the one signature Obama program on easing the economic crisis was a deliberately cruel hoax:
Was HAMP a bait-and-switch? Did Treasury know all along that it was likely to fail in its stated aim, but go ahead with it anyway because of its second-order effects? That seems to be the message they’re sending — that HAMP was a way of encouraging owners to apply for loan modifications, not because they were likely to get those modifications, but just because the sheer fact of applying for the modifications would help out homeowners generally, by reducing the rate of foreclosures, and banks too.
When Jared Diamond's book Collapse came out, a lot of people focused on the first part of the argument (hey, collapse happens!) and ignored the second part of it: namely, that governments are frequently unwilling or unable to make the social changes needed to stave off calamity. Indeed, they often make the exact wrong choices that make conditions worse.

I'd say the last two years have given a lot more evidence to that argument.


Catelli said...

I wonder if the only options are to let the collapse happen (or hasten it) or just delay it for a few years. The latent inertia from a poorly manged economic situation may well lead to the inevitable collapse.

That's just my read of things. Akin in many ways to the ecological/environmental collapse we're building for ourselves.

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