Krugman on Craziness in High Places

Here is a bit from Paul Krugman's blog in the NY Times:

Rereading my post on the folly of the G20, it seems to me that I didn’t fully convey just how crazy the demand for fiscal austerity now now now really is.

The key thing you need to realize is that eliminating stimulus spending, while it would inflict severe economic harm, would do almost nothing to reduce future debt problems. Here’s the IMF’s estimate of sources of the growth in debt over the next few years:

And even this figure conveys a misleading impression of the importance of stimulus spending. First, since cutting stimulus would weaken the economy, it would reduce revenues — that is, a substantial part of the debt growth the IMF attributes to stimulus would have happened even without stimulus, through lower revenue. Second, for the US at least the core reason for long-run budget concern is rising health care costs — in fact, health cost control is the sine qua non of long-run solvency — which has nothing whatever to do with how much we spend on job creation now.

...

So wise policy, as defined by the G20 and like-minded others, consists of destroying economic recovery in order to satisfy hypothetical irrational demands from the markets — demands that economies suffer pointless pain to show their determination, demands that markets aren’t actually making, but which serious people, in their wisdom, believe that the markets will make one of these days.

This is the craziness of the Hoover era all over again. It is the same crazed raving as that of Andrew Mellon, Secretary of the Treasury, who cried out: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate . . . purge the rottenness out of the system." The result was the Great Depression. Leaders today are showing signs of letting loose their "inner Mellon" which will bring in tow the horrors of the 1930s. Who would have thought it possible? Sadly, we are probably going to live to see another lost decade like the 1930s or the 1990s to 2000s of Japan!