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Unemployment Problem, Not a Deficit Problem, Cont’d

I touched on this yesterday, but with the release of the Federal Reserve’s economic projections, we can say just what a catastrophe the past several years of policymaking has been. Here’s Paul Krugman:

What struck me is that the Fed expects the unemployment rate to be well above its long-run level even in the fourth quarter of 2015, which is as far as its projections go.

This means that the Fed is projecting elevated unemployment nine full years after the Great Recession started. And, of course, the Fed has been consistently over-optimistic.

That just reflects a policy failure – an inability to rein in runaway unemployment on the way out, and a poverty of imagination to return the country to trend-level growth and employment on the way back in. Yes, you can opt for the Reinhart-Rogoff justification, that financial crises create hard, hard, hard situations for policymakers and traditionally take a long time from which to come back. But that’s really only true because policymakers consistently make too timid or just flat wrong decisions in the midst of a crisis.

We actually have a solution to this. There is no reason to be satisfied with the slow and gradual end of a lost decade. The solution is called filling the demand gap. It might be boring to say this over and over again, but that makes it no less true.

Consumers, whose spending comprises 70 per cent of economic activity in the US, aren’t buying nearly enough to boost the economy. Businesses won’t expand and hire unless consumers spend more. This means government has to spend more to make up for the shortfall […]

Policymakers need to understand that when unemployment is high and workplaces are idle, the way to generate jobs and growth is for the government to spend more, not less. And for taxes to stay low, or become even lower, on the middle class.

This is just textbook anti-austerity economics. And eventually reducing the deficit, which actually did occur the last time we had a high-growth environment in the late 1990s, is just a secondary benefit. For 20 years, the deficit scolds have railed against runaway deficits. They’ve been consistently wrong. Unfortunately, nobody of consequence will repudiate them.

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David Dayen

David Dayen

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