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Friday, August 09, 2013

Paul Krugman: Phony Fear Factor

You can be certain that uncertainty is not the problem:

Phony Fear Factor, by Paul Krugman, Commentary, NY Times: We live in a golden age of economic debunkery; fallacious doctrines have been dropping like flies. No, monetary expansion needn’t cause hyperinflation. No, budget deficits in a depressed economy don’t cause soaring interest rates. No, slashing spending doesn’t create jobs. No, economic growth doesn’t collapse when debt exceeds 90 percent of G.D.P.
And now the latest myth bites the dust: No, “economic policy uncertainty” ... isn’t holding back the recovery. ...
Actually, this happened in two stages. Soon after it became famous, the proposed measure of uncertainty was shown to be almost comically flawed; for example, it relied in part on press mentions of “economic policy uncertainty,” which meant that the index automatically surged once that phrase became a Republican talking point. Then the index itself plunged, back to levels not seen since 2008, but the economy didn’t take off. It turns out that uncertainty wasn’t the problem.
The truth is that we understand perfectly well why recovery has been slow, and confidence has nothing to do with it. What we’re looking at, instead, is the normal aftermath of a debt-fueled asset bubble; the sluggish U.S. recovery since 2009 is more or less in line with many historical examples, running all the way back to the Panic of 1893. Furthermore, the recovery has been hobbled by spending cuts — cuts that were motivated by what we now know was completely wrongheaded deficit panic.
And the policy moral is clear: We need to stop talking about spending cuts and start talking about job-creating spending increases instead. Yes, I know that the politics of doing the right thing will be very hard. But, as far as the economics goes, the only thing we have to fear is fear-mongering itself.

    Posted by on Friday, August 9, 2013 at 12:34 AM in Economics | Permalink  Comments (77)



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