The Fiscal Policy of Herbert Hoover
Krugman and the Firebaggers: Hippie Punching Department

A Colossal Failure of the American Political System

That Republicans in Washington are trying to make the country weaker and poorer is a bad thing, but not a surprising thing: anybody who has been paying attention to the evolution of the Republican Party since at least 1991 will not be surprised.

That the Obama wing of the Democratic Party has joined them is both a bad thing and, to me, a great surprise.

Duncan Black:

Eschaton: Fringe Views: It really doesn't matter all that much whether the economy, according to somewhat arbitrary criteria, has another "recession." I think the true fringe view, where fringe means outside the Village, is that unending 9.0%+ unemployment is horrible and requires an appropriate policy response. The point is we never got out of the last recession, and whether GDP growth is barely positive or barely negative doesn't matter all that much.

I still do not understand how it happened.

Ezra Klein marvels as well:

A ‘policy-induced slowdown’: The markets are tanking. Again. And it’s in part because they expect us to screw up. Again…. J.P. Morgan… announced that it was cutting its global growth forecasts by a full percentage point for 2011 and 2012. Why? I'll let them explain:

There are three main reasons for our downgrade. First, the recent incoming data, especially in the US and the euro area, have been disappointing, suggesting less momentum into 2H11 and pushing down full-year 2011 estimates. Second, recent policy errors – especially Europe’s slow and insufficient response to the sovereign crisis and the drama around lifting the US debt ceiling – have weighed down on financial markets and eroded business and consumer confidence. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US. This should be aggravated by the prospect of fiscal tightening in the US and Europe.

In other words: Growth is weak and policymakers are hurting rather than helping. The debt-ceiling debate hurt. The dithering response to the euro zone’s debt crisis hurt. And the expected austerity in both the United States and Europe is going to hurt even more…. What we are entering, J.P. Morgan says, is a “policy-induced slowdown.” Another way of saying that is we’re entering an unnecessary slowdown. This implies that if we reversed course, we could see a policy-induced recovery, or at least acceleration. So how about it, Congress?

And Josh Marshall:

Wall Street Knows It: Wall Street is telling us (now noting Morgan Stanley's explanation of its growth outlook downgrade) that two key factors in the increasingly gloomy outlook for the economy are Washington's high-wire antics (i.e., Republican hostage taking on the budget) and the prospect of fiscal tightening in the USA....

There are three main reasons for our downgrade. First, the recent incoming data, especially in the US and the euro area, have been disappointing, suggesting less momentum into 2H11 and pushing down full-year 2011 estimates. Second, recent policy errors - especially Europe's slow and insufficient response to the sovereign crisis and the drama around lifting the US debt ceiling - have weighed down on financial markets and eroded business and consumer confidence. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US. This should be aggravated by the prospect of fiscal tightening in the US and Europe. Personally, I don't have any doubt who's to blame at a policy level. But at a certain point you just step back and grimace as you see the ship approaching the waterfall with calls of "full speed ahead!"

It really is a downturn made in Washington. Mind-numbing to behold. But then, who hires Washington?

And Paul Krugman:

Awesome Wrongness: [T]hings are looking really terrible, And crucially, they’re looking terrible in the wrong way, at least if you wanted to believe that political and policy debate over the past year and a half made any sense at all. We’ve been utterly preoccupied with deficits, deficits, deficits; there was supposedly a crisis looming, but a crisis that would take the form of an attack by the bond vigilantes. And here we are, with markets now deeply worried not by deficits but by stalling growth, fearing not fiscal profligacy but fiscal austerity, and with interest rates at historic lows. Instead of turning into Greece, we’ve turned into Japan, except much worse. And policy is replaying 1937.

In the past, you could make excuses on the grounds of ignorance. In the 1930s they didn’t have basic macroeconomics. Even in Japan in the 1990s you could argue that it took a long time to realize that the liquidity trap was a real possibility in the modern world.

But we came into this crisis with a pretty good understanding of what was at stake and pretty good analysis of the policy options — yet policy makers and, I’m sorry to say, many economists just chose to ignore all that and go with their prejudices instead.

And the worst of it is that the people who got this so wrong have not and probably won’t admit to their awesome wrongness; on the contrary, they’ll dig in. And the Lesser Depression will go on and on and on.

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