Paul Krugman, the Don Quijote of the 21st Century

Poor Paul Krugman, he keeps living to his ideals and jousting with those dreary old windmills that are stuck in place going round and round using false logic to sell pain and misery. Paul is the knight errant of today on a quest to bring a better life to millions. But just as Don Quijote is relegated to the must tomes of old, poor Paul is ignored by policy makers who are intent on ensure that we pay no attention to idealist knights, but instead satisfy stodgy old windmills with their eternally revolving logic that leads nowhere.

Here's a bit from Krugman's NY Times blog:

So, one more time: here’s an attempt to put together some key arguments about why the rush to fiscal austerity is deeply misguided.

Let me start with the budget arithmetic, borrowing an approach from Brad DeLong. Consider the long-run budget implications for the United States of spending $1 trillion on stimulus at a time when the economy is suffering from severe unemployment.

That sounds like a lot of money. But the US Treasury can currently issue long-term inflation-protected securities at an interest rate of 1.75%. So the long-term cost of servicing an extra trillion dollars of borrowing is $17.5 billion, or around 0.13 percent of GDP.

And bear in mind that additional stimulus would lead to at least a somewhat stronger economy, and hence higher revenues. Almost surely, the true budget cost of $1 trillion in stimulus would be less than one-tenth of one percent of GDP – not much cost to pay for generating jobs when they’re badly needed and avoiding disastrous cuts in government services.

But we can’t afford it, say the advocates of austerity. Why? Because we must impose pain to appease the markets.

There are three problems with this claim.

...

In short: the demand for immediate austerity is based on the assertion that markets will demand such austerity in the future, even though they shouldn’t, and show no sign of making any such demand now; and that if markets do lose faith in us, self-flagellation would restore that faith, even though that hasn’t actually worked anywhere else.

And this, ladies and gentlemen, is what passes for respectable policy analysis.

Go read the original post to get the full argument and the embedded links.