The Third Depression May Be the Real Fallout from G-20, G-8

Paul Krugman laid the cards on the table in his column yesterday: the meetings of the G-8 and G-20 on the weekend were a disaster, and not only because of the demonstrations, enormous cost and police over-reaction.

More importantly for the entire world, Krugman says, the pledges to cut deficits and cut off stimulus funds are a recipe for creating a full blown depression from the recession we might have been recoveering from. He calls this the Third Depression, following the Long Depression which began in 1873 and the Great Depression which started in 1929 and continued until World War II. It will be caused primarily by "a failure of policy. Around the world...governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending."

He continues: "As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence.."

This is, he says, "the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times... And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again."

This is a pretty depressing analysis, and one coming from a Nobel prize winner. Who is listening to him, though? Not the guys making the decisions, it seems. And in Canada the entire debate has been hijacked by the demonstrators. The talk shows yesterday were all about police reaction, which is nothing to sneeze at. But the bigger questions, as nearly always, are economic.