In times of progressive despair such as today, with news of the negotiations on the last bastions of the New Deal getting us up in arms, I try to listen to the economists who have been right the most.
Paul Krugman doesn't mention social security or medicare on his blog today nor at all since the Washington Post story broke. What he does talk about is the underlying fallacy of these negotiations. I want to talk about that as well. But I want to make clear from the outset: I think it's GOOD that we are getting so fired up over these particular cuts. It shows that there are some norms in the Democratic base that go right back to the New Deal, which is ultimately where Krugman and myself are coming from policy wise. Some people are more chill about the cuts to SS and medicare. I just want to point out that they are not wrong. They just don't have the same level of normative attachment to the two great safety nets, for better or worse. The BIG issue is that this austerity negotiation charade is a bunch of economic hogwash. Lest we forget.
What is the argument for austerity? The Republicans insist that it creates jobs. Is this the case? Krugman says that not only is that case dead, but the IMF (!!!) has just released a paper hammering another nail into the coffin. I fear it won't be the last.
What the paper shows is that the actual cases in history where there has been a clear, unambiguous policy of austerity, the economy reacted not by expanding but contracting. or as Krugman says: Contraction, still Contractionary.
To be fair, there is an argument that the President has been advancing on behalf of our Republican brethren for why austerity is appropriate: again, h/t to Krugman for finding the quote, according to Obama,
Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.
That blog post was pithy, titled "
Barack Herbert Hoover Obama" What it aimed to show is that even the President believes in what Krugman has dubbed the "confidence fairy" which is said to endow the Horatio Alger entrepreneur types with the confidence not to worry about the "bond vigilantes," another Krugman term for the imaginary market forces that are likely to come calling for the money we owe, a scenario that reduces, confidence... the two mythical creatures are not the source of the downturn, Krugman argues. What is? In a word, lack of effective
demand.
The fact that we've hit the zero lower bound on our interest rates, leading to a liquidity trap, and the only way to get money flowing is to use Fiscal Policy, i.e. to have the government spend money. This is Keynes section 1 of the General Theory and Krugman is right, it still holds today.
What doesn't hold is that decreasing government spending is likely to magically have the same effect as increasing it due to the existence of the mythical confidence fairy, who saves people from their fear of the bond vigilante. The fact that our president is negotiating as if these things exist is the real issue here.
I'm glad that we are all fired up finally. Even those who have argued for calm, themselves are demonstrating that they care about the New Deal legacy enough to write a diary. It's inspiring that we still have strong normative values for the least capable in our society. Please tip and rec Slinkerwink's awesome diary and make the calls as per Joanneleon's request, but don't forget to mention, when you call, just for the heck of it, that the idea of decreasing spending in a recession such as ours is economic suicide. Maybe they'll listen for once.