More depression talk

This isn't the 1930s, but some lawmakers are doing their best to bring back the bad old days - and that has several columnists wondering whether the economy could indeed be headed for another tailspin. Here's what it comes down to: Will spending cuts in the name of deficit reduction cause economic growth to sputter out before it gets going? This is behind much of the squabbling in Congress over the ballooning short-term deficit: Some say it's dangerously out of control and others say that it's a small price to pay if it helps stimulate growth. NYT columnist Dave Leonhardt lays out the pros and cons:

The private sector in many rich countries has continued to grow at a fairly good clip in recent months. In the United States, wages, total hours worked, industrial production and corporate profits have all risen significantly. And unlike in the 1930s, developing countries are now big enough that their growth can lift other countries' economies.

On the other hand, the most recent economic numbers have offered some reason for worry, and the coming fiscal tightening in this country won't be much smaller than the 1930s version. From 1936 to 1938, when the Roosevelt administration believed that the Great Depression was largely over, tax increases and spending declines combined to equal 5 percent of gross domestic product. Back then, however, European governments were raising their spending in the run-up to World War II. This time, almost the entire world will be withdrawing its stimulus at once.

The LAT's Michael Hiltzik notes the fragility of the current recovery and how important the federal stimulus has been.

John Maynard Keynes, it should be noted, was unafraid of government deficits. "At the present time, all governments have large deficits," he wrote in 1931, as his biographer Robert Skidelsky observed recently. "They are nature's remedy for preventing business losses from being ... so great as to bring production altogether to a standstill." A few years later, Franklin D. Roosevelt bowed to his era's deficit hawks and cut back on federal programs to bring the federal budget more into balance. He got the recession of 1937 for his pains. The deficit-cutting craze of the modern day threatens another such double dip. Its promoters say they're out to protect long-term economic prospects, but without a short-term recovery there may not be a long term to protect. If they get their way, we may not feel the consequences of their error before it's too late to fix.

NYT columnist Paul Krugman was among the most discouraging, writing that "future historians will tell us that this wasn't the end of the third depression, just as the business upturn that began in 1933 wasn't the end of the Great Depression." He cites, among other things, long-term unemployment that is not coming down anytime soon. (In fact, forecasters expect big job losses when the June numbers are released on Friday morning.)

The Fed seems aware of the deflationary risks -- but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity -- but because Republicans and conservative Democrats in Congress won't authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

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It's almost as if the financial markets understand what policy makers seemingly don't: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

Economists (and columnists) do not run the show, of course - politicians do. And politicians are less focused on the plight of the unemployed and more on the vast majority of Americans who do have jobs and who mistakenly fear large deficits. That's the problem.