Thursday, April 28, 2011

Krugman on austerity economics

Paul Krugman has several particularly interesting posts near the top of his blog queue right now. In the New York Times' current how-hard-can-we-try-to-ignore-the-digital-realities effort, you're limited to how many times a month you can see NYT stories without a subscription. But they do allow an unlimited number of reads that come by clicking external links. So if you're following a NYT blog like Krugman's, you can navigate to his blog via his Twitter page, which has notices of each new blog entry. In UK, Not OK 04/27/2011, he states well what a strange time we're in on economics:

... 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.

Econ 101, buttressed if you like by fancier New Keynesian models, says that contractionary fiscal policy is, well, contractionary. Yet much of the world of movers and shakers bought into the exotic notion that expectational effects — the confidence fairy — would make contractionary policy expansionary. And they clung to this belief even as the supposed historical evidence in favor of expansionary austerity was thoroughly debunked.
In that post, he points to how Britain's current experience with austerity policies is driving their economy back toward a recession, which is where our Congress and the White House are heading us, as well.

In Bernanke At Bat 04/27/2011, he continues the thought quoted above:

I have to say, even I thought that we wouldn’t make the same mistakes we made in 1931; I thought we’d make different mistakes. But somehow conventional wisdom has gelled into the view that the course of wisdom is to forget everything we’ve learned over the past 80 years.
And in An Insurance Company With An Army, he offers a framing of the federal deficit issue that I don't recall seeing before, though he says he can't take credit for the basic idea:

A general reminder whenever budget issues are discussed: the U.S. government is — this isn’t original — best thought of as a giant insurance company with an army. When you talk about federal spending, you’re overwhelmingly talking about Social Security, Medicare, Medicaid, and defense. And the bulk of the insurance — all of Social Security and Medicare, about 2/3 of Medicaid — is for the elderly and disabled. ...

Put it this way: Whenever someone talks about making government smaller, he should be asked which of these big four he proposes cutting, and how. If he responds with generalities, he’s faking it.
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