The Bleeding Cure
By PAUL KRUGMAN
Fortunately, physicians no longer believe that bleeding the sick will make them healthy. Unfortunately, many of the makers of economic policy still do. And economic bloodletting isn’t just inflicting vast pain; it’s starting to undermine our long-run growth prospects.
Some background: For the past year and a half, policy discourse in both Europe and the
And the austerity has been real. In Europe, troubled nations like
Strange to say, however, confidence hasn’t surged. Somehow, businesses and consumers seem much more concerned about the lack of customers and jobs, respectively, than they are reassured by the fiscal righteousness of their governments. And growth seems to be stalling, while unemployment remains disastrously high on both sides of the
But, say apologists for the bad results so far, shouldn’t we be focused on the long run rather than short-run pain? Actually, no: the economy needs real help now, not hypothetical payoffs a decade from now. In any case, evidence is starting to emerge that the economy’s “short run” troubles — now in their fourth year, and being made worse by the focus on austerity — are taking a toll on its long-run prospects as well.
Consider, in particular, what is happening to
What this means is that if and when a real recovery finally gets going, the economy will run into capacity constraints and production bottlenecks much sooner than it should. That is, the weak economy, which is partly the result of budget-cutting, is hurting the future as well as the present.
Furthermore, the decline in manufacturing capacity is probably only the beginning of the bad news. Similar cuts in capacity will probably take place in the service sector — indeed, they may already be taking place. And with long-term unemployment at its highest level since the Great Depression, there is a real risk that many of the unemployed will come to be seen as unemployable.
Oh, and the brunt of those cuts in public spending is falling on education. Somehow, laying off hundreds of thousands of schoolteachers doesn’t seem like a good way to win the future.
In fact, when you combine the growing evidence that fiscal austerity is reducing our future prospects with the very low interest rates on
What should be happening? The answer is that we need a major push to get the economy moving, not at some future date, but right now. For the time being we need more, not less, government spending, supported by aggressively expansionary policies from the Federal Reserve and its counterparts abroad. And it’s not just pointy-headed economists saying this; business leaders like Google’s Eric Schmidt are saying the same thing, and the bond market, by buying
And to be fair, some policy players seem to get it. President Obama’s new jobs plan is a step in the right direction, while some board members of the Federal Reserve and the Bank of England — though not, sad to say, the European Central Bank — have been calling for much more growth-oriented policies.
What we really need, however, is to convince a substantial number of people with political power or influence that they’ve spent the last year and a half going in exactly the wrong direction, and that they need to make a U-turn.
It’s not going to be easy. But until that U-turn happens, the bleeding — which is making our economy weaker now, and undermining its future at the same time — will continue.
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"The master class has always declared the wars; the subject class has always fought the battles. The master class has had all to gain and nothing to lose, while the subject class has had nothing to gain and everything to lose--especially their lives." Eugene Victor Debs