Paul Krugman still plays Cassandra

I wish Krugman hadn't had such a good record on these things over the last few years. Today, he's thinking about Awesome Wrongness in economic policy.

And given his record, this is not good news:

OK, seriously: things are looking really terrible, And crucially, they’re looking terrible in the wrong way, at least if you wanted to believe that political and policy debate over the past year and a half made any sense at all. We’ve been utterly preoccupied with deficits, deficits, deficits; there was supposedly a crisis looming, but a crisis that would take the form of an attack by the bond vigilantes.

And here we are, with markets now deeply worried not by deficits but by stalling growth, fearing not fiscal profligacy but fiscal austerity, and with interest rates at historic lows.

Instead of turning into Greece, we've turned into Japan, except much worse. And policy is replaying 1937.

"Japan" in this case refers to Japan's "lost decade," which has actually been going on for more than a decade now, an extended period of depressed economic activity that involved what economists call a "liquidity trap," in which companies have money to invest, demand is too low to stimulate healthy investment levels, and interest rates are so near zero that manipulating the money supply via monetary policy can have little effect. By "1937," he means the new recession that resulted in 1937 when the Roosevelt Administration decided it was time to start balancing the budget. The resulting austerity policy pushed the still-weak economy into another recession.

Tags: paul krugman