Krugman is Predicting a "Lost Decade"

In a posting on his NY Times blog, Paul Krugman sadly forsees a decade of grinding "Great Recession" because of foolish economic policies:

The deficit hawks have taken over the G20:

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.

These words were in marked contrast to the G20’s previous communiqué from late April, which called for fiscal support to “be maintained until the recovery is firmly driven by the private sector and becomes more entrenched”.
It’s basically incredible that this is happening with unemployment in the euro area still rising, and only slight labor market progress in the US.

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.

There's more. Go read the original posting.