Paul Krugman speaks to the most important economic issue we face whether to embrace the toxic austerity the Republican party has prescribed as the only possible cure for the sluggish recovery. He says in effect that if bleeding the patient makes the patient sicker we need to try a less drastic course of treatment.
The Big Fail
It’s tempting to argue that the economic failures of recent years prove that economists don’t have the answers. But the truth is actually worse: in reality, standard economics offered good answers, but political leaders — and all too many economists — chose to forget or ignore what they should have known.
For an economy is not like a household. A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall — and unemployment will soar.
Krugman goes on pointing out the conclusions from a recent IMF study showed that austerity during an economic downturn can be much more harmful than previously thought.
IMF: Austerity is much worse for the economy than we thought
by Brad Plumer on October 12, 2012
But if tax hikes and spending cuts hamper growth significantly, then austerity could be ill-advised. Indeed, if the fiscal multiplier is really, really high in certain situations—such as during a downturn—then austerity could prove counterproductive. Those higher taxes and severe spending cuts will cripple growth so much that the nation will end up with an even bigger deficit than it started out with.
Blanchard is now arguing that the fiscal multiplier appears to have been much higher over the past few years than policymakers, including the IMF, had assumed. It’s not 0.6. It’s somewhere between 0.9 or 1.7. If true, then countries in Europe and the United States should have been pursuing stimulus measures to boost growth—and not insisting on budget cuts. (Not surprisingly, Paul Krugman is claiming vindication, since this was his view all along.)
Krugman concludes with this:
And here in America, Republicans insist that they’ll use a confrontation over the debt ceiling — a deeply illegitimate action in itself — to demand spending cuts that would drive us back into recession.
The truth is that we’ve just experienced a colossal failure of economic policy — and far too many of those responsible for that failure both retain power and refuse to learn from experience.
The Big Fail
Our country shouldn't be dragged down by the counter stimulative effects of severe austerity. We need to increase spending on infrastructure to stimulate the economy. Our transportation and energy infrastructure are badly in need of modernization. That's where our national conversation needs to move toward.