Krugman points out the downside of fiscal austerity, which is something that we have also analyzed in class. In the last three months of 2012, the economy contracted by -.1% and this article suggests that Krugman would blame this slump on the policy of fiscal austerity. During this period, government spending decreased and according to Krugman "slashing government spending destroys jobs and causes the economy to shrink." Although reducing government spending seems like a great idea to most, in reality unless private investment is able to increase more than government spending decreases, the economy will continue to contract. Krugman goes on to explain that the economy is in a state right now that cannot support cuts to government spending because monetary policy cannot counter act these cuts with lower interest rates that promote private spending. Krugman states "The Fed... has already cut interest rates as far as it can — basically to zero" so essentially we are stuck and cannot promote private investment through the means of monetary policy. This article did a nice job explaining the current state of our economy and helped to highlight the consequences of fiscal austerity.
In my opinion, the most surprising statement by Krugman was, "But aren’t we facing a fiscal crisis? No, not at all. The federal government can borrow more cheaply than at almost any point in history....Yes, there’s a long-term fiscal problem, but it’s not urgent that we resolve that long-term problem right now. The alleged fiscal crisis exists only in the minds of Beltway insiders." The reason this statement is so intriguing is that we have been discussing the possibility of America defaulting on loans in class and how that could effect the abundance of loanable funds. Despite the fact that we have decided to raise the debt ceiling to avoid any problems right now, there is still plenty of time left in the "short-run" for the debt to become a problem as it almost was this quarter. I just think that it is hard to say whether risking "biting the bullet" now by cutting spending and possibly avoiding future problem or spending now to try to overcome this recession and hope that there is not too big of a future effect is the better choice since the future is so uncertain.
Timing is everything when it comes to economic policy. Krugman recognizes the fact that our country is running at a deficit, and has opinions on what we should or should not do to deal with it in the short run. The biggest point of the article is this: "Slashing government spending destroys jobs and causes the economy to shrink." Krugman makes the argument that attacking the deficit by cutting government spending is not the answer right now. He recognizes that at some point cutting government spending could prove to be beneficial to balancing the budget. However, the economy needs to improve before we can afford to lose anymore jobs. John McCain claims the defense budget cuts could result in the loss of 1,000,000 jobs. That means a million less people with a consistent income that will now spend less and provide less for our economy. A pro that would normally occur as a result of cut government spending would be lowered interest rates. However, our government has already set the interest rates around 0%, so the cost of lowering government spending today is even greater. Krugman recognizes the importance of balancing the budget in the long-run, but he claims that addressing employment and the well-being of our economy as a whole will have a better effect on our country than immediately cutting spending.
I think Krugman is right. Unemployment is probably the most significant problem with our economy, and the bottom line is that cutting federal spending eliminates jobs. Even if these cuts can help reduce federal debt in the long term, in the short term empoyment is more important for economic recovery. Like Krugman says, we should wait for the effects of the recession to die down before taking fiscal austerity measures, so that people are more ready to deal with the consequences.
While Krugman does a nice job laying out the key point in current fiscal policy, he makes a few off-hand statements that I find to be red flags.First, briefly, that using the surplus on tax cuts was "squandering" it. We've already discussed in class that this can be a tightrope, but in general if tax cuts increase consumer spending as much as they make up for the decrease in government spending, they don't necessarily hurt GDP.But most alarming, Krugman admits this is a long-term problem, but glosses over any concerns or ways to address this problem. Even though he states "we’re still living in the aftermath of the worst financial crisis since the Great Depression" he seems to treat the current measures as the best band aid. Perhaps a long-term fiscal crisis doesn't concern Mr. Krugman, but as students coming into the workforce and paying taxes during this crisis, his reassurances are exactly reassuring.
While Krugman's image of "kicking the can down the road" is not the most settling image, he makes a strong argument that cutting government spending right now would be a terrible decision, based on what we have learned in class. He is right to be critical of the attitude in Washington, especially his criticism of government spending on an unnecessary war (Iraq). After the economy recovers to the point of consistent growth at 3% or better we will have the flexibility to engage in a debate over role of government, or whatever else the Washington ideologues want to spend their time debating. For now however, it is time to put ideology aside and allow the economy to recover.
Krugman's article covers issues we have been focusing on class. Krugman alludes to the same models and data we have been talking about for weeks as evidence that the government should not cut spending. I would be more interested if the policy makers in Washington focused their efforts in developing a debt repayment plan that doesn't begin until consumer and investment spending reach economically healthy levels.
Krugman makes very vaild points in his article. He is right that cutting government spending will cause a lot of jobs lost. He is also right that the government can indeed create jobs. And lastly, he is right that our country is facing a long term fiscal crisis. But what he doesn't take into account is our growing reliability on the government. We have acknowledged in the past that it is nearly impossible to scale back the government once people begin to rely on its programs. Yes, the government does have the power to create and sustain new jobs, but it is also at the cost of new generations entering the workforce as well as current taxpayers. Serving the government is not exactly what most people hope to do with their career. In reality, we are facing a Catch-22. Past government policies have led us to a point of no return, so we must pick one side or the other. There are consequences to fiscal austerity, but there are also severe consequences to spending. The government must find the medium between.
While Krugman is correct that "Slashing government spending destroys jobs and causes the economy to shrink," he seems to be forgetting the other effects of decreased government spending. Cutting government spending puts more money back into the private-sector, which can then create more jobs and produce at a more efficient level. In class we focus on the benefits of large government spending, however governments do not always spend in the most effective and efficient ways. Although the intentions of their programs may be positive, the funds are misused. This article, http://www.nytimes.com/2013/02/12/technology/waste-is-seen-in-program-to-give-internet-access-to-rural-us.html, highlights some of the main problems that can result from government overspending. The article talks about the federal government's plan to give internet access to rural areas. While this is a goal that would increase human capital, the execution does not yield the appropriate results. Instead, the program has been adding internet in many places that already have it and at times been complicating the computer systems of the schools. In the process, they have also put local cable/internet providers out of business. This program has wasted $4 billion, put people out of work, and has not increased human capital. If this program had been cut, taxpayer's money could have been saved and these local businesses would still be around. The point is that increased government spending is not always the answer. While I agree that decreasing government spending can cut jobs, it can also create them in other ways. I think we do need to start cutting spending now, so we can avoid an even greater deficit in the future and end generational theft.