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Deficit Mania Outpointing Common Sense in Washington

This Paul Krugman column got by me on Monday, but you should take a look:

What’s the greatest threat to our still-fragile economic recovery? Dangers abound, of course. But what I currently find most ominous is the spread of a destructive idea: the view that now, less than a year into a weak recovery from the worst slump since World War II, is the time for policy makers to stop helping the jobless and start inflicting pain.

When the financial crisis first struck, most of the world’s policy makers responded appropriately, cutting interest rates and allowing deficits to rise. And by doing the right thing, by applying the lessons learned from the 1930s, they managed to limit the damage: It was terrible, but it wasn’t a second Great Depression.

Now, however, demands that governments switch from supporting their economies to punishing them have been proliferating in op-eds, speeches and reports from international organizations. Indeed, the idea that what depressed economies really need is even more suffering seems to be the new conventional wisdom, which John Kenneth Galbraith famously defined as “the ideas which are esteemed at any time for their acceptability.”

This is an astoundingly wrongheaded notion, that we’ve passed the point of fixing a damaged economy and now must move directly to inflicting pain on the most vulnerable. We saw this just last week, when House Democrats slashed health care spending for the poor and the jobless – oddly enough, to make room for a maintenance of the salaries of American doctors, the richest in the world. The fact that doctors have a huge lobbying trade group behind them, while the jobless have two guys with a sign, contributes to the priority ordering.

It’s not just that austerity budgeting and withholding stimulative safety-net measures at a time of mass unemployment is unnecessarily cruel – it’s that it makes no logical sense. First of all, the jobs bill I just mentioned, with its short-term stimulative spending and long-term closures of tax loopholes for the rich and the powerful, will add nothing to the deficit in the out years and actually reduce it because of its permanent tax measures. Second, the best path to deficit reduction is job creation, and even the too-small stimulus package is on track to create about 3.4 million jobs by September. Stimulus spending, in a word, works. To quote David Leonhardt:

Luckily, the country’s two big economic problems — the budget deficit and the job market — are not on the same timeline. The unemployment rate is near a 27-year high right now. Deficit reduction can wait a bit, given that lenders continue to show confidence in Washington’s ability to repay the debt.

As a result, Congress does not have to choose between the problems. It can pass the jobs bill, putting people back to work, and even pass a separate bill to help struggling states. History has shown that state aid, which prevents layoffs of teachers, emergency medical technicians and other workers, is the single most effective form of stimulus.

Third, deficit hawks like Jason Altmire keep caterwauling about deficit reduction to head off the risk of inflation, but none exists practically anywhere in the developed world right now. And more to the point, while the same hawks claim that the deficit is bound to create a fiscal crisis, the bond markets don’t agree.

But apparently nobody told the people who lend the U.S. government money. On Friday, they were willing to hand over their cash to the Treasury for 10 years for 3.3 percent interest, a level so low it implies they consider the United States among the safest investments in the world. Collectively, those investors — think mutual funds, pension funds and foreign central banks — could lose hundreds of billions of dollars if they’re mistaken and the United States has a debt crisis.

It is the Beltway vs. the bond market, and they can’t both be right.

We have a long-term outlook that neglects a serious short-term problem. Almost half of the millions of Americans out of work have been that way for over six months – you’re talking about nearly five percent of the working age population just stagnating, with no hope, no prospects, and nothing to guide them. Yet the consensus in Washington chases phantoms and seeks anti-growth policies that will only make it tougher on those long-term jobless folks, as well as millions of others who will experience layoffs, insufficient retirement payments, or just total despair. And these policies will actually make it harder to close the budget deficit, as anti-growth austerity will lower tax receipts.

Somehow, our elites have this sense of national sacrifice – only for the masses, of course – that transcends common sense.

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David Dayen

David Dayen