Unlikely economic threats creating actual economic problems
The economic danger that people are best able to imagine is some form of collapse. The financial system goes the way of Lehman. The government goes the way of Greece. So far as calamities go, these are pretty simple ones, and noticeable enough that we can all call up examples. We've also been taught to fear inflation, as that was the big problem in the '70s, and is also what the Federal Reserve takes to be its archenemy.
But as Paul Krugman argues today, neither collapse nor inflation is the most relevant threat. That, instead, is Japan: a country that isn't some economic hellhole, but nevertheless has experienced a long period of unnecessarily low economic growth and high unemployment owing to a long period of unnecessarily stifled demand.
The problem here is that some of the things you do to combat fears of debt crises and inflation cut against some of the things you do to avoid becoming Japan. In April, for instance, we had deflation. But the New York Times is writing articles trying to get the Federal Reserve to implement policies to prevent its opposite, inflation. And if the Federal Reserve does that, it'll choke off the recovery.
Similarly, we're still in a period where it makes sense to increase deficits in order to increase economic demand in order to get the country back to work and the juices flowing through the economy again. But sharp fears over deficits -- which are a long-term problem, but not a short-term problem -- are preventing policymakers from moving in that direction. "Fear of imaginary threats has prevented any effective response to the real danger facing our economy," sighs Krugman.
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