Austerity for Posterity?

In Art. 35 we quoted economist Paul Krugman who stated, “Jobs do get mentioned every now and then … But no jobs bills have been introduced in Congress, no job-creation plans have been advanced by the White House, and all the policy focus seems to be on spending cuts.”

He’s right, and the pols are idiots. His latest column, “The Austerity Delusion”, reads like this:

“Portugal’s government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.

“What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.

“It’s too bad, then, that these days you’re not considered serious in Washington unless you profess allegiance to the same doctrine that’s failing so dismally in Europe.

“It was not always thus. Two years ago, faced with soaring unemployment and large budget deficits – both the consequences of a severe financial crisis – most advanced-country leaders seemingly understood that the problems had to be tackled in sequence, with an immediate focus on creating jobs combined with a long-run strategy of deficit reduction.

“Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies even further, worsening unemployment. And 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.

“So jobs now, deficits later was and is the right strategy. Unfortunately it’s a strategy that has been abandoned in the face of phantom risks and delusional hopes. On one side, we’re constantly told that if we don’t slash immediately we’ll end up just like Greece, unable to borrow except at exorbitant interest rates. On the other, we’re told not to worry about the impact of spending cuts on jobs because fiscal austerity will actually create jobs by raising confidence.

“How’s that story working out so far?

“Self-styled deficit hawks have been crying wolf over U.S. interest rates more or less continuously since the financial crisis began to ease, taking every uptick in rates as a sign that markets were turning in America. But the truth is that rates have fluctuated, not with debt fears, but with rising and falling hope for economic recovery. And with full recovery seeming very distant, rates are lower now than they were two years ago.

“But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long term problems, they will indeed stop buying our debt. But theat’s not a prospect that hinges, one way or another, on whether we punish ourselves with short-run spending cuts.

“Just ask the Irish, whose government – having taken on an unsustainable debt burden by trying to bail out runaway banks – tried to reassure markets by imposing savage austerity measures on ordinary citizens. The same people urging spending cuts on America cheered. ‘Ireland offers an admirable lesson in fiscal responsibility,’ declared Alan Reynolds of the Cato Institute, who said that the spending cuts had removed fears over Irish insolvency and predicted rapid economic recovery.

“That was June 2009. Since then, the interest on Irish debt has doubled; Ireland’s unemployment rate now stands at 13.5 percent.

“And then there’s the British experience. Like America, Britain is still perceived as solvent by financial markets, giving it room to pursue a strategy of jobs first, deficits later. But the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback. As I like to put it, the Cameron plan was based on the belief that the confidence fairy would make everything all right.

“But she hasn’t ; British growth has stalled, and the government has marked up its deficit projections as a result.

“Which brings me back to what passes for budget debate in Washington these days.

“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 … Instead, all the talk is about short-run spending cuts.

“In short, 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. And here’s what we know from our experience abroad: The confidence fairy won’t save us from the consequences of our folly.” –

Mr. Krugman and Bob Herbert are among the very, very few who know what’s going on down in D.C – and they’re certainly the only ones with the guts to clue US patsies in on the callousness of the elected elite in our newly-acknowledged “banana republic”.

Elite, my foot! Most of them are greedy, superficially educated, and tragically uninformed egoists. Rather than admit their utter ignorance with respect to solving the nation’s unemployment problems – the way FDR did in the 1930s – those fools are betting our wad on a sure loser. Spending cuts.

Can’t you just hear them whispering to one another? “Sshhh. They’re watching us. Look busy.”