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In 2009, former International Monetary Fund (IMF) Chief Economist and M.I.T. professor Simon Johnson wrote (quite presciently) of "The Quiet Coup," and our resulting, "Two-Track Economy." This past Thursday, in the NY Times Economix blog, he sounded another warning that, in 2011, "Fresh Crises Loom in Europe and the U.S." Taken in context with the latest opinions from the editors over at the New York Times, Nobel Prize-winning economist Paul Krugman,  and an op-ed in Sunday's Times by Nicholas Kristof, the path to our success is quite clear. Unfortunately, the likelihood of our country following that path is not.

Johnson forecasts a serious crisis in Europe, early this year, "...tied to the rollover funding needs of its weaker governments." He states:  "The maelstrom will probably sweep aside Portugal and perhaps even Ireland; Spain and Italy will be threatened."  He also notes...

...This situation is not more preventable for being predictable, because its resolution will involve politically costly steps - which, given how Europe works, can be taken only under duress. Don't smile at the thought and think, "It can't happen here," because this same logic points directly to a deep and morally disturbing crisis in the United States...

There are plenty of places in Europe where you can find an easy political consensus to cut taxes and increase budget deficits. Sadly, this no longer pacifies markets. The American political elite - right and left - believes that we are different from the Europeans because we issue the dollar and therefore have some special privileges forever.

But this is not the 1950s. Asia has risen. Europe will sort itself out and become more fiscally Germanic. The Age of American Predominance is over.

Our leading bankers looted the state, plunged the world into deep recession and cost the United States eight million jobs. Now many of them stand by with sharpened knives and enhanced bonuses - willing to suggest how the salaries and jobs of others can be further cut. Consider the morality of that.

Will no one think hard about what this means for our budget and our political system until it is too late?

Bold type is diarist's emphasis.

As Paul Krugman reminded us, this past morning over at his New York Times blog, in, "The Long Road Ahead," if Johnson's spot-on (and he has been, IMHO), this will all play out against a backdrop of ongoing, unacceptably high levels of unemployment in the U.S., as well...

...the economy has to grow around 2 1/2 percent per year just to keep unemployment from rising. Second, growth above that level leads to a less than one-for-one fall in unemployment (because hours per worker rise, more people enter the work force, etc.). Roughly, it takes two point-years of extra growth to reduce the unemployment rate by one point.

So, suppose that US growth is accelerating. Even so, it will take years of high growth to get us back to anything resembling full employment. Put it this way: suppose that from here on out we average 4.5 percent growth, which is way above any forecast I've seen. Even at that rate, unemployment would be close to 8 percent at the end of 2012, and wouldn't get below 6 percent until midway through Sarah Palin's first term.

As Nicholas Kristof points out in his op-ed column in Sunday's Times, "Equality, a True Soul Food..."

John Steinbeck observed that "a sad soul can kill you quicker, far quicker, than a germ."

That insight, now confirmed by epidemiological studies, is worth bearing in mind at a time of such polarizing inequality that the wealthiest 1 percent of Americans possess a greater collective net worth than the bottom 90 percent.

There's growing evidence that the toll of our stunning inequality is not just economic but also is a melancholy of the soul. The upshot appears to be high rates of violent crime, high narcotics use, high teenage birthrates and even high rates of heart disease...

Kristof continues to expound upon the findings in a new book by two British epidemiologists, Richard Wilkinson and Kate Pickett, entitled:  "The Spirit Level: Why Greater Equality Makes Societies Stronger."

...They argue that gross inequality tears at the human psyche, creating anxiety, distrust and an array of mental and physical ailments -- and they cite mountains of data to support their argument.

"If you fail to avoid high inequality, you will need more prisons and more police," they assert. "You will have to deal with higher rates of mental illness, drug abuse and every other kind of problem..."

Kristof concludes (I strongly encourage you to read his entire column, it's more than just compelling): "So as we debate national policy in 2011 -- from the estate tax to unemployment insurance to early childhood education -- let's push to reduce the stunning levels of inequality in America today. These inequities seem profoundly unhealthy, for us and for our nation's soul. "

Last but not least, the editors over at the NY Times sum it all up in their Sunday editorial: "The Economy in 2011."

The Economy in 2011
NY Times
January 2, 2011

When people say that the recovery does not feel like a recovery, they are describing reality. The economy is growing, but for many Americans life is not getting better. Unemployment remains high. Home values are depressed. And state budgets are in deep trouble, presaging more layoffs, service cuts and tax increases.

The question for 2011 is whether growth will ever translate into broad prosperity.

For that to happen, the federal government must ensure that the recovery does not falter for lack of adequate stimulus, while fostering job-creating industries and committing itself to long-term deficit reduction...

Bold type is diarist's emphasis.

Happy New Year?

Originally posted to on Sat Jan 01, 2011 at 09:03 PM PST.

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