Paul Krugman points to the absurdities of the belt-tighteners during the recession. Belt-tighteners -- or "austerians," as Krugman calls them have so much faith in their ideology that visible reality doesn't shake them.
Stimulist: Yes, long-run fiscal issues matter — but what we spend now is virtually irrelevant to those issues. A trillion dollars of spending will raise real interest costs by less than 0.1 % of GDP, and might even help the long-run position by avoiding a permanent loss of potential output.
Austerian: No, we must cut immediately to satisfy the bond market!
Stimulist: But the bond market isn’t demanding immediate cuts — it seems quite unworried by current deficits.
Austerian: But I know what the bond market will want, never mind what it’s saying now.
So the stimulists are saying that the fundamentals look OK, and there’s no obvious reason to disregard those fundamentals; the austerians are saying that we need to pursue economically irrational policies in order to satisfy demands that markets shouldn’t make and, in fact, aren’t making.
But they’re Very Serious People.
James Galbraith writes in Daily Beast about the "deficit crisis." In quotes.
...As this debate gets going, there are two traps. The first is the idea that we need another "stimulus package." How I hate that phrase! The message it conveys—of something fast, temporary, quickly withdrawn—is wrong. We're not in an ordinary postwar recession. We've suffered a major collapse of the financial system. Repairing this, and working off household debt loads and the housing glut, will take years. Yes, the economy can recover without strong private credit, but the recovery will be slow and unemployment will not be cured.
The second trap is the idea that we should undo it all later on. Even worse, many argue that we must make cuts today, effective at a later time, to offset the "stimulus." Since the major programs which are authorized today for later effect are Social Security and Medicare, this translates to "cutting entitlements" in order to bring "long-term budget deficits under control."
This is a pernicious idea, with two major foundations. One is the simple political appeal of a balanced argument—the same as Obama's decision to stay in Afghanistan while leaving Iraq. It's nice to have things both ways, to be for stimulus now and austerity later. The problems come, in war and economics, when you have to deal with the consequences, for real people, of actions taken largely for rhetorical effect.
The second foundation of the "long-term deficit crisis" argument is the work of the Congressional Budget Office. CBO creates its long-term deficit projections with a bizarre two-step operation. First, it wipes out the deficits caused by unemployment, simply by assuming that high unemployment will go away soon. And then CBO recreates the projected deficit by assuming (a) continued rapidly rising health care costs, and (b) much higher interest rates, while (c) overall inflation remains extremely low.
These assumptions are a mess. They are implausible and internally inconsistent. I know of no economist who defends them on their merits. They are accepted only because most people have never looked at them critically, and because they are politically convenient to some. But in the real world, you cannot make good policy on the basis of forecasts as bad as these.
