What can we do?

Is this an economic (ECON 101) or emotional subject? As it turns out, when we get into it, surprisingly, it is both!

It's economic when we spend beyond our means and have to later play the piper. Its emotional for exactly the same reason.

The getting into it is the hard part. Only a true nerd could feel reward in its study. So why should we post? The cliff is why. Or maybe we should say was why. The cliff was/is a metaphor for a bankrupt America. But is this not just a political "scare" term? Uncle Sam has easily borrowed as needed for decades and it is no different now. A Bankrupt nation cannot do that. But even a rich nation can shoot itself in the foot, or walk into quisksand.

What follows is out of Econ. 101.

• Bubbles In Brief.
• Austerity Effects: Historical Perspective.
• Morality Play: Or what?
• Will we ever learn: ?

Bubbles come in many varieties. The 2008 crash from the heights was created by an unfettered boom in housing prices that was fostered by sub-prime mortgages that almost anyone employed could get. Of course building contractors won and won big. Their confidence ran high--and so also for first-time and upward-mobile buyers. Some in the latter group made out as well as the contractors. Confidence was high and almost universal. Only a few perceptive economists, steeped in the experiences of the Great Depression and the recovery therefrom sensed it was otherwise. Even the great Paul Krugman admits to being surprised by the very speed by which the housing market collapse happened.

On the surface, it seems economic theory is still in its infancy compared with physics, chemistry, biology and the like--at least by the standard of policy-making. But here is more to this. Politicians owe their very positions to how well they can capture votes, and it is they who set policies. Whether Right or Left on the political spectrum, they win authority by appealing to the emotions of the public--history and data be damned. And of course economics in practice is not a science. Its only "law" is that of the jungle. "What is in it for me?" is all that matters. Still that issue can be understood, even understood on a statistical basis. But the voting publics of the world remain largely unschooled in both economics and statistics, much less the psychologies of exuberance and disappointment, much less in how they might fit together. Ever since the rise of the market economies, humanity has been battered by boom-and-bust cycles with no end in sight.

Well not quite--after you look into it. Like the hard sciences, where knowledge comes slowly, economic knowledge nevertheless does come. The problem is its slowness aggravated by naive politicians and publics alike.


If the Great Depression taught anything, it is that austerity does not work. Well, the very richest do distance themselves farther than ever from the other 99%. But if a national bankruptcy does happen, even the rich will suffer if their turf effectively disappears. Austerity only hastens that day for history says that austerity dampens investment because it dampens mood of investor and consumer alike. Here is how it works: Austerity basically amounts to saving, and there is a strong emotional element in saving. But when we save too much, our storekeeper comes on hard times and lays off staff. If our storekeeper cuts his inventory for austerity reasons, we suffer for lack of supplies.

The European experience since 2008 bears this out. Those nations forced into austerity measures experienced further downturns. Moreover, their downturns roughly paralleled the degree of their austerity. The US experience was mild by comparison, but then The Cliff is yet to come in full-force. Meanwhile there is ample evidence that the stimulus, as light as it was compared with the total domestic product, had a positive effect. In consequence we are experiencing a mild but continuing recovery. Of course that recovery could reverse if the Cliff is too strong on the austerity side. Time will tell. One basic issue is the question: Does slow growth bring on high debt, or is it the other way around? They correlate, but which is cause and which is effect?


Some history here helps. Contrast the advice Franklin Roosevelt received early in the Great Depression.

From Andrew Mellon, the great financier and philanthropist in his later years: "Let the depression run itself out by purging its rottenness."

From John Maynard Keynes, an influential economist much disliked by the one percent: "We have magneto trouble." By this, he was saying: "The system is generally sound; find the root problem and fix it." [Quotes ours.] Keynes turned out to be right and was widely acclaimed--among economists--not politicians. The former accept hard data as at least a provisional truth, the latter only accept what will resonate with voters unschooled in both economics and the statistics it takes to discern right from wrong. So the Keynesians had and still have a strong hand in the logic of economics.

Here we borrow from Paul Krugman (New York Review of Books, 6 June 2013): "Everyone loves a morality play. 'For the wages of sin is death' is a much more satisfying message than 'Shit happens.' We all want events to have meaning." Charismatic politicians of whatever ilk understand well how to capture emotional voters, which includes most of us.


It may be another century before economics and emotions reach a peaceful balance. We have made progress--slowly. The Great Recession presented the same warning signals the great Depression did, but Keynes' idea worked in America and Europe in spite of intense opposition. The Cliff has yet to run its course, but our take is that Keynes will once again have it right in the end. A second stimulus may well be needed before Obama leaves office.

For more on this vital subject see Paul Krugman (New York Review of Books, 6 June 2013) from which this page is an excerpt. For more depth, read: Neil Irwin's "The Alchemists", Mark Blyth's "The History of a Dangerous Idea", and David Stockman's "The Great Deformation." The Cliff is a critical issue and it must be dealt with properly or we could indeed eventually be staring a real bankruptcy in the face.