The Future for our Economy is Bleak–Deficit Cutting Will Make it Worse

This is first year economics, economics that seems beyond our politicians who are ready to drive us into another recession.

Local governments will have to continue a exercise of austerity, rather than inventing new projects and more borrowing (e.g. city of Coral Gables).

 

Paul Krugman: The Mistake of 2010

Will we continue to repeat the mistakes of the past?

The Mistake of 2010, by Paul Krugman, Commentary, NY Times: Earlier this week, the Federal Reserve Bank of New York published a blog post about the “mistake of 1937,” the premature fiscal and monetary pullback that … prolonged the Great Depression. As Gauti Eggertsson … points out, economic conditions today — with output growing, some prices rising, but unemployment still very high — bear a strong resemblance to those in 1936-37. So are modern policy makers going to make the same mistake?

Mr. Eggertsson says no, that economists now know better. But I disagree. In fact, in important ways we have already repeated the mistake of 1937. Call it the mistake of 2010: a “pivot” away from jobs to other concerns, whose wrongheadedness has been highlighted by recent economic data. …

Back when the original 2009 Obama stimulus was enacted, some of us warned that it was both too small and too short-lived. … By the beginning of 2010, it was already obvious that these concerns had been justified. Yet somehow … it became conventional wisdom that the deficit, not unemployment , was Public Enemy No. 1…

So, here we are, in the middle of 2011. How are things going?

Well, the bond vigilantes continue to exist only in the deficit hawks’ imagination. … And the news has, indeed, been bad. As the stimulus has faded out, so have hopes of strong economic recovery. … So, as I said, we have already repeated a version of the mistake of 1937, withdrawing fiscal support much too early and perpetuating high unemployment.

Yet worse things may soon happen.

On the fiscal side, Republicans are demanding immediate spending cuts as the price of raising the debt limit and avoiding a U.S. default. If this blackmail succeeds, it will put a further drag on an already weak economy.

Meanwhile, a loud chorus is demanding that the Fed … raise interest rates to head off an alleged inflationary threat. As the New York Fed article points out,… underlying inflation remains low. …

So the mistake of 2010 may yet be followed by an even bigger mistake. Even if that doesn’t happen, however, the fact is that the policy response to the crisis was and remains vastly inadequate.

Those who refuse to learn from history are condemned to repeat it; we did, and we are. What we’re experiencing may not be a full replay of the Great Depression, but that’s little consolation for the millions of American families suffering from a slump that just goes on and on.

via Economist’s View: Paul Krugman: The Mistake of 2010.

About Stephen E. McGaughey
International consultant in economic development programs and projects

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