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Friday, February 08, 2013

Paul Krugman: Kick That Can

Now is NOT the time for austerity:

Kick That Can, by Paul Krugman, Commentary, NY Times: John Boehner, the speaker of the House, claims to be exasperated. “At some point, Washington has to deal with its spending problem,” ... “I’ve watched them kick this can down the road for 22 years since I’ve been here. I’ve had enough of it. It’s time to act.” ...
While it’s true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we’re in, it would be irresponsible and destructive not to kick that can down the road.
Start with a basic point: Slashing government spending destroys jobs and causes the economy to shrink. This really isn’t a debatable proposition... Even Republicans admit, albeit selectively, that spending cuts hurt employment. Thus John McCain warned earlier this week that the defense cuts scheduled to happen under the budget sequester would cause the loss of a million jobs. ...
Still, won’t spending cuts (or tax increases) cost jobs whenever they take place, so we might as well bite the bullet now? The answer is no — given the state of our economy, this is a uniquely bad time for austerity.
One way to see this is to compare today’s economic situation with ... the big winding down of military spending in the late 1980s and early 1990s, following the end of the cold war. Those spending cuts destroyed jobs... At the national level, however, the effects were softened by monetary policy...
Today, by contrast, we’re still living in the aftermath of the worst financial crisis since the Great Depression, and the Fed, in its effort to fight the slump, has already cut interest rates as far as it can — basically to zero. So the Fed can’t blunt the job-destroying effects of spending cuts...
The point, again, is that now is very much not the time to act; fiscal austerity should wait until the economy has recovered...
But aren’t we facing a fiscal crisis? No,... medium-term forecasts, like the 10-year projections released Tuesday by the Congressional Budget Office, are distinctly not alarming. ...
Realistically, we’re not going to resolve our long-run fiscal issues any time soon, which is O.K. — not ideal, but nothing terrible will happen... Meanwhile, we face the imminent threat of severe economic damage from short-term spending cuts.
So we should avoid that damage by kicking the can down the road. It’s the responsible thing to do.

    Posted by on Friday, February 8, 2013 at 12:24 AM in Budget Deficit, Economics, Fiscal Policy, Unemployment | Permalink  Comments (37)

          


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