Monday, February 11, 2013

The SOTU and the economy

Paul Krugman was on UP With Chris Hayes on Sunday morning (yesterday), and he said that his highest hope for President Obama's State of the Union (aks, SOTU) message Tuesday, the highest he thought was realistic anyway, was that he doesn't mention The Deficit very much. The more we hear about the deficit in the SOTU, the bigger indication that is that Obama intends to press forward with austerity economics in the middle of a depression, austerity that is very likely to scuttle the weak, high-unemployment recovery currently under way.

In his column of 02/07/2013, Kick That Can New York Times, he emphasizes what a bad idea austerity economics is for the American economy right now:

Slashing government spending destroys jobs and causes the economy to shrink.

This really isn’t a debatable proposition at this point. The contractionary effects of fiscal austerity have been demonstrated by study after study and overwhelmingly confirmed by recent experience — for example, by the severe and continuing slump in Ireland, which was for a while touted as a shining example of responsible policy, or by the way the Cameron government’s turn to austerity derailed recovery in Britain.

Even Republicans admit, albeit selectively, that spending cuts hurt employment. Thus John McCain warned earlier this week that the defense cuts scheduled to happen under the budget sequester would cause the loss of a million jobs. It’s true that Republicans often seem to believe in "weaponized Keynesianism," a doctrine under which military spending, and only military spending, creates jobs. But that is, of course, nonsense. By talking about job losses from defense cuts, the G.O.P. has already conceded the principle of the thing.
Krugman in that piece talks about the salutary effects of monetary policy in earlier decades, a reminder that he has more faith in the usefulness of monetary policy than the more heterodox Keynesians tend to have.

But that's not an immediate concern in the current situation, with rates still up against the zero lower bound and therefore monetary policy having little it can even theoretically do right now.

Meanwhile, Beltway conventional wisdom, and even some academic economists, are still operating on bonehead economic assumptions that were discredited decades ago, as Mr. K explains in Still Say’s Law After All These Years 02/10/2013. Say's Law as Krugman defines it is "the proposition that income must be spent and hence that there can never be an overall deficiency of demand." Supply-side economics, the crackpot economic theory that was the theoretical justification for St. Reagan's huge tax cuts for the wealthy, was a variation on Say's Law. Krugman writes:

What's depressing about all this is that Say’s Law is a primitive fallacy – so primitive that Keynes has been accused of attacking a straw man. Yet this primitive fallacy, decisively refuted three quarters of a century ago, continues to play a central role in distorting economic discussion and crippling our policy response to depression.
Bad ideas can have real effects, especially when wealthy interests find them convenient in reinforcing their power.

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