Paul Krugman was in Germany and continues beating the drum with That ’30s Feeling "Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic."
Mark Thoma follows that up with How 'Protectionist' Became An Insult, posting commentary by Douglas Irwin reminding people about the 1930 Smoot-Hawley tariff.
Krugman then did some mythbusting with Fiscal Fantasies "So every one of these stories says that you can have fiscal contraction without depressing the economy IF the depressing effects are offset by huge moves into trade surplus and/or sharp declines in interest rates. Since the world as a whole can’t move into surplus, and since major economies already have very low interest rates, none of this is relevant to our current situation. Yet these cases are being cited as reasons not to worry as austerity becomes the rule. You know what? I’m worried."
Krugman, still on a roll, wrote The Facts Have A Well-Known Keynesian Bias about Alan Greenspan's op-ed. "You know, some people might take the fact that what’s actually happening is exactly what people like me were saying would happen — namely, that deficits in the face of a liquidity trap don’t drive up interest rates and don’t cause inflation — lends credence to the Keynesian view. But no: Greenspan KNOWS that deficits do these terrible things, and finds it “regrettable” that they aren’t actually happening. The triumph of prejudices over the evidence is a wondrous thing to behold. Unfortunately, millions of workers will pay the price for that triumph."
I think if I had the opportunity to ask Obama a question, it would be: "Why do you think Paul Krugman is wrong?"
4 comments:
You ask an interesting question. Allow me to reply.
President Obama is a smart guy....
Columbia undergrad, Harvard Law, Lecturer of Constitutional Law, Black community activist to President of the United States.
He gets it.
Empirical evidence is on Krugman's side. So why would Obama be tempted to choose the deficit hawk path now?
Perhaps he feels that since the stimulus didn't create the hoped for jobs (there really should have been more direct federal infrastructure projects) there isn't enough time before the mid-terms for any additional stimulus to work, so there is no other option at this time but to play to the majority that is working and that wants to see budget deficits brought down (it's the old - you had to cut your family budget, so why shouldn't the federal government tighten its belt too?).
The alternative viewpoint is that he is caving to Wall Street, but I can't see what their motivation would be in reducing the budget deficit. Unless, they somehow get to keep their beloved 15% carry-interest tax treatment and Keep the Bush tax cuts as a stimulus effort, while government spending gets slashed to the bone.
So it goes.
I have to agree with Palin on one thing.....
That hopey changey thing still isn't really working for me yet.
TT
Somehow this cut the deficit meme has taken on a life of its own, and at exactly the wrong time. False comparisons to a family budget or to Greece not withstanding and the ability of governments with the ability to print their own currency (withing reason) to address some of the issues mentioned, it's not the deficit we should be worrying about.
Helping people who are out of work and getting the extra benefit of a boost to the economy is more important right now than the deficit. Do people think the government will spend this way forever (perhaps)? Adapt the solutions to the times. One approach would be to run surpluses in the good years and run even in the bad years, but we like to run small deficits in the good years and large in the bad.
It is not a bad idea to spend money to get the economy going now, the other choice is a long painful time of readjustment to (hopefully) high savings rates, a new higher equilibrium level of unemployment and a period of reduced government (federal, state and local) services and a tough time for all, but especially the poor.
Agree. Krugman also likes pointing out the that the stimulus money is small change in terms of the long term debt and by getting the economy moving will generate tax revenues to make up for the cost.
Also the real debt problem is the long term deficit for which we need to deal with the big three things, military spending, social security, and medicare. Health care reform was meant to address the third though a public option or something will really be needed to bring down costs, but at least it's a start.
Our military spending is just completely out of wack with the rest of the world, but cutting it now will affect the economy. To make the Soc Sec system work long term we'll probably need to do some means testing or raising the retirement age to tweak the numbers so they work with the future demographics.
Good luck getting the votes for any of this. Apparently Sec Def Gates wants to do much to reform the military but is getting tons of budget pressure from Congress to save work in their districts.
This is a purely observational comment. I just came back from East Germany, admittedly the weaker part of the United Germany. My husband and I spent about 10 days in Berlin, Dresden and Leipzig. We had a wonderful time and not even once I experienced this "30's feeling." Quite opposite, concert halls were full, together with restaurants, and Germans themselves were mostly focused on the World Cup taking place in South Africa. We rented a car and drove a bit to see the countryside. Our GPS proved worthless because there was so much construction and road-building going on.
BTW, the majority of the people in concert halls and restaurants were Germans, some local, some from West Germany. No soup kitchens anywhere either.
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