Robert Reich (FT June 1) argues that America is back to another double dip recession. His argument is very simple: America is not growing enough to reduce mass unemployment which now stands above 10%; corporate profits are soaring, but the problem is on the demand side, with falling house prices and consumption; businesses are reluctant to hire more workers or raise wages of current workers feeding the vicious circle of deflation; external sources of demand are also reduced, with Europe's debt crisis and embrace for austerity, Japan's tragedy and China's fiscal tightening; federal stimulus to the US economy has exhausted its course with purchase of Treasury bills and cuts in local government programmes.
Are we in a new phase of the crisis? P.Krugman points out that we are in a 1937 like situation, with high unemployment but with rising prices due to a (temporary) swing on commodity prices. The fear of (permanent) inflation led to an increase of interest rates and fiscal tightening which led to the recession of 1937-38. This decision offset the recovery period between 1933 and 1937 which was backed by an increase in government spending, the abandonment of the gold standard and monetary easing*.
Economists and policy makers should have learnt the lesson of 1937. But this is not the view of the ECB, which is under pressure to increase interest rates. Maybe the next president, who will succeed to Jean Claude Trichet, Mario Draghi, - who studied at the MIT with Nobel prize F.Modigliani - will pay less attention to inflation and not repeat that mistake. The economic consequences could otherwise be dramatic, as the prospect of reducing unemployment will vanish and our politicians will find some stupid arguments to justify why this has not happened.
The real issue is jobs and governments need to focus on creating jobs. It is not about core inflation. The anger about unemployment, especially among young people, is widespread and is contributing to undermine confidence.
As the Romans used to say, errare humanum est, perseverare diabolicum - to err is human, to persist in erring is diabolical
P.S: The measure of unemployment is still subject to controversy, even if we use modern standards. R.Schiller, an economics professor at Yale University declared recently that the rate of unemployment is not estimated properly and is more likely to be around 16%, so even higher than European levels.