Portugal's government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.Pity poor Paul Krugman. He keeps citing chapter and verse, but nobody is listening. All the big shot political types are falling over themselves to line up for that dose of moral rectitude, the balanced budget, that caused the 1937 mini-recession in the midst of the Great Depression. They want to bring this folly back.
What do these events have in common? They're all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.
It's too bad, then, that these days you're not considered serious in Washington unless you profess allegiance to the same doctrine that's failing so dismally in Europe.
Meanwhile, poor Paul Krugman keeps standing in haircloth on the mountainside repeating his message:
Self-styled deficit hawks have been crying wolf over U.S. interest rates more or less continuously since the financial crisis began to ease, taking every uptick in rates as a sign that markets were turning on America. But the truth is that rates have fluctuated, not with debt fears, but with rising and falling hope for economic recovery. And with full recovery still seeming very distant, rates are lower now than they were two years ago.So the prophet Krugman is saying "woe unto both your houses... the wrath of the Lord will be great for you are a silly people unwilling to be serious about your own fate":
But couldn't America still end up like Greece? Yes, of course. If investors decide that we're a banana republic whose politicians can't or won't come to grips with long-term problems, they will indeed stop buying our debt. But that's not a prospect that hinges, one way or another, on whether we punish ourselves with short-run spending cuts.
Just ask the Irish, whose government -- having taken on an unsustainable debt burden by trying to bail out runaway banks -- tried to reassure markets by imposing savage austerity measures on ordinary citizens. The same people urging spending cuts on America cheered. ''Ireland offers an admirable lesson in fiscal responsibility,'' declared Alan Reynolds of the Cato Institute, who said that the spending cuts had removed fears over Irish solvency and predicted rapid economic recovery.
That was in June 2009. Since then, the interest rate on Irish debt has doubled; Ireland's unemployment rate now stands at 13.5 percent.
A serious fiscal plan for America would address the long-run drivers of spending, above all health care costs, and it would almost certainly include some kind of tax increase. But we're not serious: any talk of using Medicare funds effectively is met with shrieks of ''death panels,'' and the official G.O.P. position -- barely challenged by Democrats -- appears to be that nobody should ever pay higher taxes. Instead, all the talk is about short-run spending cuts.Go read his post to get more details.
In short, we have a political climate in which self-styled deficit hawks want to punish the unemployed even as they oppose any action that would address our long-run budget problems. And here's what we know from experience abroad: The confidence fairy won't save us from the consequences of our folly.