also in Foreign Affairs

[winterbadger]

This article on the move to cut government deficit spending

The authors make a good case that by reducing the stimulus of government spending (whether intended as such or simply as regular government programs like police, fire safety, roads, libraries, etc.) the G-20 nations will cut back employment, consumer spending, imports and exports, and thus kick the slow economic recovery in the stones, instead of in the arse where they intended to strike it.

They close by saying

There is no silver bullet to avoid the macroeconomic fallout associated with financial crises. The question, then, is where (and by whom) this pain will be felt. So far, it appears that although the financial sector was largely responsible for creating the $2 trillion in losses since the crisis began, it is determined to avoid paying for it. Instead, the taxpayers that paid to bail these firms out are now being doubly taxed as government services are cut in the name of “growth-friendly fiscal consolidation,” in the words of the G-20. What lies ahead, then, is a harmful populism that allies U.S. Tea Party activists with Greek public-sector unions.

In sum, both of the following statements are true: countercyclical spending worsens government finances, and austerity compounds an already miserable unemployment situation. But cutting spending in the middle of a recession is no solution -- especially when market participants conflate stimulus spending with bailouts of the financial system. Refilling a $2 trillion hole in the global financial architecture does not have the same effect on demand as, say, a $2 trillion stimulus package spent on brick-and-mortar projects. Such a conflation damns fiscal stimulus to ineffectiveness -- even though a large portion of the stimulus is yet to be spent in the United States and abroad and almost all of the debt accrued since the crisis comes from tax-revenue losses and bailout costs.

It is a shame that many of the most powerful ideas of dead economists are the most fallacious. The Great Depression proved that supply does not create its own demand. The mortgage debacle showed that good and bad money can co-exist quite happily. Although the idea of “austerity” may have the immediate ring of virtue, in the long term it is a vice. Keynes was indeed right, but with a twist. It is not the ideas of dead economists we have to worry about, but rather the dead ideas of very much alive ones.

Sometimes I find "the dismal science" opaque and boring. This, though, I can follow readily and find quite credible; I only wish more people could... and did.