Prof. Krugman despairs:
But don’t we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.
The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.
...
Utter folly posing as wisdom. Incredible.
Representatives of G20 governments are willing to bring down powerful recessionary forces on the backs of their population.
Why?
To "reassure markets" -- markets that even now don't show any sign of needing reassuring.
But Krugman is wrong about a "lost decade."
I guess it all depends on how seriously various G20 governments -- virtually all the economies of any size in the world -- implement such an austerity plan. But a real global austerity program would unleash something far more crushing than Japan's ten years of low growth.
Could we really be so dumb?