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Thursday, February 14, 2013

Holtz-Eakin Tries to Scare You. Don't Let Him

Doglas Holtz-Eakin has learned nothing from his own failed predictions, nothing from the failed predictions of his cronies, and nothing from the experience in Europe (which makes the appearance of this op-ed in British rather than a US newspaper all the more odd):

We have to get US government spending under control, by Douglas Holtz-Eakin, Commentary, guardian.co.uk: ...Spend more, perhaps much more. Could this really be the best for America? As incredible as it may sound, this has become the new pundit orthodoxy. Confronted with over $16tn in federal debt, a half-decade of roughly $1tn annual deficits, and a Congressional Budget Office projection of $7tn in deficits over the next 10 years, their advice ranges from stand pat to (as Dean Baker argued for the Guardian last week) "double down".
The sad truth is that while the debt is as plain as day, there's still a long way to go in convincing some people of the problem. I'm happy to give it a shot.
The debt hurts the economy already. The canonical work of Carmen Reinhart and Kenneth Rogoff and its successors carry a clear message: countries that have gross government debt in excess of 90% of Gross Domestic Product (GDP) are in the debt danger zone. Entering the zone means slower economic growth...
Waiting to fix the debt is risky. ... The bad news scenario involves a financial crisis and severe recession. After the suffering, the US would face – you guessed it – an even worse debt problem than it had originally. ...
Debt reduction produces jobs and better economic growth.

Again, reading that last line, he has learned nothing from the failure of the confidence fairy to appear. Waiting ot fix the debt -- a problem driven mainly by health care cost escalation that won't become severe for many years -- is not risky, but his advice certainly is. Continuing:

The orthodoxists will trot out the usual fears of austerity and the need to spend to prop up the economy. Just remember that the intellectual foundation for this view is rooted firmly in an alternate universe. We listened to this advice in the 1960s and 1970s, and the political class translated it into chronically high unemployment and chronically high inflation. Economists learned nothing and continue to peddle the same backboard-based remedies.
Down with the orthodoxy. It is time to get the deficit under control.

The notion that we are responding in the same way as in the 60s and 70s, and that we faced the same type of shock (that require the same types of policies) -- an oil price shock and other large supply-side disturbances from demography that we faced then -- is wrong and he ought to know that (added note: plus, it was monetary, not fiscal policy that was the main problem back then).

The headline today for Europe -- where countries have followed the advice of the Holtz-Eakin types, is (remember his claim above about austerity and growth?):

Eurozone economy falls short of forecasts, FT: Europe’s brittle economies shrank at their fastest rate since the collapse of Lehman Brothers four years ago, official data for the fourth quarter of 2012 showed on Thursday, with both strong and weak countries falling short of expectations....

The "pundit orthodoxy" his disses is from Paul Krugman. Kind of funny, given how wrong Holtz-Eakin has been relative to Krugman (and Dean Baker too), but Krugman can speak for himself, and has, on how wrong the "we're about to become Greece!!!" crowd has been. There is, however, one thing he is correct about. Holtz-Eakin is right to say we shouldn't listen to some pundits, especially those like himself who have been so wrong about how events would unfold at every step along the way.

    Posted by on Thursday, February 14, 2013 at 11:14 AM in Budget Deficit, Economics, Politics | Permalink  Comments (41)


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