“The economic news is looking better lately. But after previous false starts — remember “green shoots”? — it would be foolish to assume that all is well. And in any case, it’s still a very slow economic recovery by historical standards.
There are several reasons for this slowness, with the most important being the overhang of household debt that is a legacy of the housing bubble. But one significant factor in our continuing economic weakness is the fact that government in America is doing exactly what both theory and history say it shouldn’t: slashing spending in the face of a depressed economy.
In fact, if it weren’t for this destructive fiscal austerity, our unemployment rate would almost certainly be lower now than it was at a comparable stage of the “Morning in America” recovery during the Reagan era.
Notice that I said “government in America,” not “the federal government.” The federal government has been pursuing what amount to contractionary policies as the last vestiges of the Obama stimulus fade out, but the big cuts have come at the state and local level. These state and local cuts have led to a sharp fall in both government employment and government spending on goods and services, exerting a powerful drag on the economy as a whole….”
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slashing spending? oh ok
Krugman has no place on a site meant for distinguished gentlemen.
There was a huge bubble in spending when the financial crisis hit. We should not stay at that level indefinitely. Returning to our mean spending levels should not be characterized as ‘slashing’ government spending.
none of you understand the context with which krugman is making his argument…
he doesn’t want spending cuts with a depressed economy. the results here and in europe speak for themself..and him. austerity DOES NOT bring growth.
Years of credit fueled bubbles apparently do not bring growth either, but which is the lesser of two evils?
The classical Keynesian approach:
1) Stimulate the economy (print money)
2) Check effects
3) Didn’t work = not enough stimulus (printing)
4) Go to 1)
You see the problem with advocating such theories, is that when they fail in practice it is very easy to claim that policy makers just didn’t do “enough” without defining “enough” beyond “the stimulus required to cause the economy to grow.” Can anyone spot the implicit assumption?
I can spot the erroneous explicit assumption about the Keynesian approach.
You made the claim that Keynesians don’t define “enough”. Not so. Read here for one example of how Keynesians would calculate “enough”: http://krugman.blogs.nytimes.com/2008/11/10/stimulus-math-wonkish/
To further improve your description of the Keynesian approach, you should not that fiscal stimulus is an approach that should be reserved primarily for times when we have zero-bound interest rates and the Fed cannot use further rate reductions to boost the economy.
An optional improvement would be to note that a too-big stimulus is preferable to a too-small stimulus, because it is easy to raise interest rates to correct an overstimulus.
Yes, unfortunately in the real world where time is correlated with interest, instantly raising rates doesn’t “remove” money from the economy, it simply reduces the velocity of money. Purely academic in any case, as it is all being pissed straight down the black holes that are banks balance sheets, commodity speculation and more leverage. Oh, and to buy worthless government paper which pays nothing.
Chivo, the govt is only slashing it’s “projected increases in spending”, they are not reducing their spending from 1 year or another, and in recent history I don’t recall they ever have. They still continue to spend, the idea that somehow the gov’t hasn’t been spending is ludicrous.
Europe has very high debt to GDP levels and there are TWO sides to that equation BOTH high debt AND low growth.
It is a global economy, how can we change where global capital flows? 40% of our capital is exported through interest payments on existing debt, how do we stimulate the domestic economy if capital flows overseas? What happens when no one wants to buy our treasuries at 2% or lower?
We have a 15 trillion dollar debt level WITH low interest rates…. Do you have any idea what is going to happen to the debt level if/when interest rates skyrocket?