Well, I take that back. He certainly gets the results of what would happen if we made massive spending cuts in the middle of terrible unemployment, but he doesn't understand the political reasons as to why it's being done. To whit:
But don’t we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.So far, so good. Spending cuts into a deflationary spiral is how Japan fell apart in the 90's, and they had one of the highest savings rates on the planet. If we tried that here, it would be an unmitigated disaster. Krugman is spot on here.
The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.
But what about Greece and all that? Look, right now sovereign debt problems are taking place in countries with a very specific problem: they’re part of the euro zone, AND they’re badly overvalued thanks to huge capital inflows in the good years; as a result they’re facing years of grinding deflation. Counties not in that situation are not facing any pressure from the markets for immediate cuts; as of this morning, 10-year bonds were yielding 3.51 in Britain, 3.21 in the US, 1.27 in Japan.
It's the "why" where he goes astray.
Yet the conventional wisdom now is that these countries must nonetheless cut — not because the markets are currently demanding it, not because it will make any noticeable difference to their long-run fiscal prospects, but because we think that the markets might demand it (even though they shouldn’t) sometime in the future.Umm, Big Kroog? Buddy? It's not the markets demanding this. It's the Teabaggers and their Republican allies, and the Village enablers. They are the ones saying "We'll turn into Greece overnight!" and are demanding we balance the budget through more tax cuts for the rich and trillions in spending cuts to eliminate as much government as possible.
Have you not noticed the campaign to demonize the federal government as the root of all evil by the Club For Growth gang? Have we not seen the crusade to de-fund health care reform's provisions and the number of Teapublican candidates out there pledging not a dime for the provisions should they take over the House?
Combined with the continuing efforts to make any recipients of government money as the bad guys (that includes government employees but strangely enough not members of Congress or Social Security or Medicare recipients...yet) the deficit hawks are out in force, and if they get their way there's going to be a whole hell of a lot of people suffering.
Just not the ones at the top. You think the GOP will limit de-funding to just "Obamacare" if they take over? You think the pressure on Obama to make huge spending cuts will end after the November elections? We're just getting started on this one.
Digby has more on this, but the bottom line is we're lining up to cut our own throats.
[UPDATE] Robert Cruickshank over at Calitics connects all this to the news that California's demographics are changing faster than anyone has anticipated.
Austerity is being mobilized to protect existing privilege. Whites with some assets, property, and political/cultural dominance see in stimulus for everything from mass transit to schools and health care a threat to their privilege through government aid to those who are the agents of the massive change they feel is coming upon them, change they do not want.He is absolutely on to the greater truth here.