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Krugman: Don't Cut Spending Until We Get The Economy Under Control

The AFCSME, along with Americans United, has created the above ad targeting Olympia Snowe and Susan Collins' blocking of a vote on the Jobs Bill

The AFCSME, along with Americans United, has created the above ad targeting Olympia Snowe and Susan Collins' blocking of a vote on the Jobs Bill

"It's very simple - more jobs now mean less debt later. If Senators Snowe and Collins are truly concerned about the deficit, then they need to vote for this jobs bill - especially as unemployment hovers near ten percent, and 900,000 more workers face the threat of lay-offs," said AFSCME President Gerald McEntee.

To his credit, Krugman keeps trying to explain things clearly enough that people understand how really crazy it is to try to focus on cutting the deficit during this severe recession -- but the Republicans have done such a great job selling the idea of running the country on a household budget, I don't know how much it helps:

So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.

krugman_9592b.jpgBut if we need to raise taxes and cut spending eventually, shouldn’t we start now? No, we shouldn’t.

Right now, we have a severely depressed economy — and that depressed economy is inflicting long-run damage. Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force, and become a permanent underclass. Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives. And with each passing month we drift closer to a Japanese-style deflationary trap.

Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future. And it doesn’t even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope for rising revenues.

So now is not the time for fiscal austerity. How will we know when that time has come? The answer is that the budget deficit should become a priority when, and only when, the Federal Reserve has regained some traction over the economy, so that it can offset the negative effects of tax increases and spending cuts by reducing interest rates.

Currently, the Fed can’t do that, because the interest rates it can control are near zero, and can’t go any lower. Eventually, however, as unemployment falls — probably when it goes below 7 percent or less — the Fed will want to raise rates to head off possible inflation. At that point we can make a deal: the government starts cutting back, and the Fed holds off on rate hikes so that these cutbacks don’t tip the economy back into a slump.

But the time for such a deal is a long way off — probably two years or more. The responsible thing, then, is to spend now, while planning to save later.

As I said, many politicians seem determined to do the reverse. Many members of Congress, in particular, oppose aid to the long-term unemployed, let alone to hard-pressed state and local governments, on the grounds that we can’t afford it. In so doing, they are undermining spending at a time when we really need it, and endangering the recovery. Yet efforts to control health costs were met with cries of “death panels.”

And some of the most vocal deficit scolds in Congress are working hard to reduce taxes for the handful of lucky Americans who are heirs to multimillion-dollar estates. This would do nothing for the economy now, but it would reduce revenues by billions of dollars a year, permanently.

But some politicians must be sincere about being fiscally responsible. And to them I say, please get your timing right. Yes, we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.

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