Paul Krugman: The Bleeding Cure

Austerity is losing the future:

The Bleeding Cure, by Paul Krugman, Commentary, NY Times: Doctors used to believe that by draining a patient’s blood they could purge the evil “humors” that were thought to cause disease. In reality, of course, all their bloodletting did was make the patient weaker, and more likely to succumb.

Fortunately, physicians no longer believe that bleeding the sick will make them healthy. Unfortunately, many of the makers of economic policy still do. And economic bloodletting isn’t just inflicting vast pain; it’s starting to undermine our long-run growth prospects. ...

For the past year and a half, policy discourse in both Europe and the United States has been dominated by calls for fiscal austerity. By slashing spending and reducing deficits, we were told, nations could restore confidence and drive economic revival.

And the austerity has been real. ... Strange to say, however, confidence hasn’t surged. Somehow, businesses and consumers seem much more concerned about the lack of customers and jobs... In any case, evidence is starting to emerge that the economy’s “short run” troubles — now in their fourth year... — are taking a toll on its long-run prospects as well.

Consider, in particular, what is happening to America’s manufacturing base. In normal times manufacturing capacity rises 2 or 3 percent every year. But faced with a persistently weak economy,... manufacturing capacity is almost 5 percent lower than it was in December 2007.

What this means is that if and when a real recovery finally gets going, the economy will run into capacity constraints and production bottlenecks much sooner than it should. That is, the weak economy, which is partly the result of budget-cutting, is hurting the future as well as the present. ...

Similar cuts in capacity will probably take place in the service sector... Oh, and the brunt of those cuts in public spending is falling on education. Somehow, laying off hundreds of thousands of schoolteachers doesn’t seem like a good way to win the future.

In fact,... with the very low interest rates on U.S. government debt, it’s hard to avoid a startling conclusion: budget austerity may well be counterproductive even from a purely fiscal point of view, because lower future growth means lower tax receipts.

What should be happening? The answer is that we need a major push to get the economy moving, not at some future date, but right now. For the time being we need more, not less, government spending, supported by aggressively expansionary policies from the Federal Reserve and its counterparts abroad. ...

What we really need, however, is to convince a substantial number of people with political power or influence that they’ve spent the last year and a half going in exactly the wrong direction, and that they need to make a U-turn.

It’s not going to be easy. But until that U-turn happens, the bleeding — which is making our economy weaker now, and undermining its future at the same time — will continue.