Thursday, August 11, 2011

Austerity Doom Loop

The preoccupation with deficits and (nonexistent) inflation by policymakers on both sides of the Atlantic is short-circuiting the recovery, such as it was.

Even more troubling is the possibility that Very Serious People will interpret their policy failures as a sign that spending cuts have simply not gone far enough -- an austerity doom loop. It goes something like this:

1. Look at those deficits! We have to cut spending or the bond vigilantes will go Galt on us! (never mind that they are more than happy to lend to us at historically low rates).
2. Spending cuts lower growth expectations.
3. Investors pile into government debt in a flight to safety.
4. Austerians claim lower yields vindicate their agenda. Confidence has been restored!
5. Unemployment does not come down. Deficits worsen.
6. Repeat.

The market for ideas, like others, is not necessarily self-correcting. Which is why it would be helpful if President Obama -- who should know better -- would stop parroting GOP talking points about deficits and the confidence fairy.

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