I'm frustrated because all these voices calling for spending cuts immediately are threatening a 1937-style recession within a depression. FDR succumbed to these howls about cutting deficits and worries about inflation and he produced a slump inside the Great Depression.
Since these were investors worried about the effects of inflation, I put my point as a "concern": if you go after deficits & debts before the recovery is soundly established, you can crash the stock market. The Dow Jones index dropped from a high of 185 in 1937 to a low of 113 in 1938. That's a fall of 40%. As investors, we have to be careful what we wish for. If you think the bogeyman is "deficits and debts" and push hard to cut them "now!" like the Republicans are doing, you can end up watching your investments evaporate as the market retreats by 40% in the face of a big downturn in the economy.
The speakers at the conference toned down their cry for cutting deficits and debts "now!" and rephrased this as "over time as the economy strengthens". More people need to call out the fanatics and to get them to tone down their cries for austerity "now!". If we don't push back, we may get the 1937 equivalent.
Here's a bit from a Paul Krugman post on his NY Times blog on the same subject:
The bad GDP number for the UK isn’t a surprise — in fact, judging from market response, investors seem to have expected something even worse. Still, if you step back and look at what has been happening, it’s doubleplusungood: zero growth over the past 6 months, with every reason to be worried on the downside looking forward, as Cameron’s austerity bites deeper.Go read the whole post to get the embedded links.
Jonathan Portes gets to the nub of it:On fiscal policy, the message is that we should listen to economists, not credit rating agencies. Most mainstream economists argued that the impact of the government’s fiscal consolidation on confidence and consumer demand would be negative; so it has proved.In short, there is no confidence fairy; and S&P can call invisible bond vigilantes from the vasty deep, but they won’t actually come when called.
Meanwhile, the argument that fiscal overkill was necessary to appease the credit rating agencies has again been disproved by market reaction – or the lack of it – to the Standard & Poor’s outlook warning last week in America, where US Treasury yields hardly budged.
Portes hits, in particular, on a point I’ve tried to make a number of times, here and more recently here: right now, we’re living in a world in which basic economics points to conclusions utterly at odds with what Very Serious People are supposed to believe, in which radical outsiders base their views on standard economics while orthodox types turn to heterodox, highly dubious speculations.