Plan to cut deficits in half in three years means austerity or higher taxes which will drive the economy into a depression

Irish housing project abandoned when real estate market colllapsed image: Eoin O'Conaill for the International Herald Tribune.

The ink is barely dry on the last minute agreement of President Obama to reduce the US deficit by $750 billion dollars in three years. Driven by the desperation of the European Union and Canada’s posturing on fiscal restraint, Obama is already backtracking on the promise with good reason.

The US is still in a depression from the bank collapse of 2008 and things are only marginally better. Unemployment is a historic highs. Housing sales tanked after the Federal grants ended. Other than high-profile iPhones and gadgets, consumption of consumer goods is not improving.

The New York Times is carrying an op-ed piece by economist Paul Krugman who believes we are already slipping into a “third depression.”

“We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.”

But 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. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

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.So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, 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.” NY Times

The European Union is being driven by the near collapse of Greece’s monetary system to adopt austerity measures. They are following Ireland who went through a market collapse two years ago. The effects of Ireland’s austerity has been to deepen the recession into a depression with more than a 7.1% decline in the GDP and 13% unemployment. That is misery on a depression era scale. The Irish government is warning the worst is yet to come. In Ireland, a Picture of the High Cost of Austerity

Andrew Coyne argues in this week’s MacLeans Magazine that “in financial matters, it’s usually best for countries to look after themselves.” Canada’s financial situation is not the same as the US nor is the same as the EU. Adopting a one-size fits all austerity plan will probably ensure that Krugman’s Third Depression is a world wide reality.