Friday, March 25, 2011

Economics For Dummies

It is up to Paul Krugman, once again, to explain that "slashing spending in the face of high unemployment is a mistake."  (See, e.g., What Krugman Said; Must Read Krugman.)

There used to be a consensus that the twin problems caused by the financial crisis -- huge budget deficits and soaring unemployment -- "had to be tackled in sequence, with an immediate focus on creating jobs combined with a long-run strategy of deficit reduction."  But, as Krugman maintains, "these days you’re not considered serious in Washington unless you profess allegiance to the same [austerity] doctrine that’s failing so dismally in Europe."  Krugman explains that "cutting spending in a deeply depressed economy is largely self-defeating even in purely fiscal terms: any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks." 

While, "a serious fiscal plan for America would address the long-run drivers of spending, above all health care costs, and it would almost certainly include some kind of tax increase," these things are not even being discussed.  There is no serious discussion of "using Medicare funds effectively" and "the official G.O.P. position — barely challenged by Democrats — appears to be that nobody should ever pay higher taxes."  So what we are left with is "talk is about short-run spending cuts."  As Krugman concludes, "we have a political climate in which self-styled deficit hawks want to punish the unemployed even as they oppose any action that would address our long-run budget problems."

It is infuriating that with few exceptions (see Debate Shift), Obama and his fellow Democrats continue to buy into the Republican frame that requires tightening our belts and cutting domestic programs.  (See Why Can't Democrats Do The Right Thing.)  They fail to see that it is both economically and politically unsound to continue to focus on the deficit and spending cuts rather than job creation and investment.  As Krugman says, "jobs now, deficits later . . . is the right strategy."


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