Bizarroworld economics

by digby

So I’m reading this James Pethokoukis blog post at Reuters about Goldman Sachs’ grim new outlook on unemployment. This is the wrap up:

Goldman Sachs doesn’t have to tell you things are bad. I don’t have to tell you things are bad. Everybody knows things are bad. Unemployment is at 9.2 percent (11.4 percent if the official labor force hadn’t collapsed since 2008 and 16.2 percent if you include discouraged and underemployed workers.) Moreover, the economy grew at just 1.9 percent in the first quarter of this year and may have grown less than 2 percent in the second. Wages and income are going nowhere fast.

So what’s the recommendation?

When will the White House signal a change of economic direction? Will cutting tax rates and regulation ever make it on the agenda? That may be the only way Obama can win another term. And time is running short.

He’s also for slashing spending, but the real answer to our prayers is tax cuts. Seriously.

Here’s Krugman discussing the same Goldman Sachs analysis (along with some other data):

… terrible growth prospects; low inflation; oh, and low interest rates, with no sign of the bond vigilantes. Ordinary macroeconomic analysis tells you very clearly what we should be doing: fiscal expansion and monetary expansion by any means we can manage; in fact, the case for a higher inflation target pops right out of just about any model capable of producing the kind of mess we’re in.

And what are we talking about in policy terms? Spending cuts and an end to monetary expansion.

I know the arguments — fear of invisible bond vigilantes, fear that 70s-style stagflation is just around the corner despite the absence of any evidence to that effect. But why do such arguments have so much traction, while everything economists have spent the last three generations learning is brushed aside?

One answer is that macroeconomics is hard; the idea that if families are tightening their belts, the government should do the same, is as deeply intuitive as it is deeply wrong.

But the susceptibility of politicians — including, alas, the president — and pundits to these wrong ideas demands a deeper explanation.

Mike Konczal ratchets up my rentier argument, arguing that what we’re seeing is

a wide refocusing of the mechanisms of our society towards the crucial obsession of oligarchs: wealth and income defense.

That has to be right. It doesn’t necessarily take the form of pure cynicism; it’s more a matter of the wealthy gravitating toward views of economic policy that make immediate sense in terms of their own interests, and politicians believing that only these views count as Serious because they’re the views of wealthy people.

But the upshot is terrible: more and more, this really does look like the Lesser Depression, a prolonged era of disastrous economic performance. And it’s entirely gratuitous.

Well that’s bracing. And it perfectly illustrates the problem.

Again, this is so reminiscent of the run up to the Iraq war when quite suddenly it was a completely mainstream opinion to endorse invading a country that hadn’t attacked us — and would likely make the real threat even worse. On the left you had people saying it was insane and counter-productive and on the right you had the neo-cons saying “real men go to Iran.” In Goldilocks land that made Iraq the “serious” position.

Now we have Krugman and other voices of sanity saying that spending cuts are counterproductive and that we need stimulus and on the right we have fiscal hawks like Pethokoukis saying that the answer is to slash taxes and regulations. That makes deficit reduction the “serious” position.

Up is down, black is white.