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Keynesian economists howl as governments talk spending cuts

June 9, 2010 |  5:00 am

Europe has turned to fiscal austerity, voluntarily or otherwise.

Japan’s new prime minister is pledging to pare down the country's huge debt load.

And in Washington, the Senate on Tuesday began what’s expected to be a heated debate about extending benefits for the long-term unemployed versus cutting them off in favor of deficit reduction.

The world’s major governments suddenly seem to have gotten religion about reining-in spending. And that is bringing howls from one Keynesian camp of economists who believe policymakers are taking away stimulus well before the global economic recovery can sustain itself.

Krugman “Madmen in Authority” headlined a blog item Monday by economist and New York Times columnist Paul Krugman. He was taunting finance ministers of the Group of 20 nations, who in a communique last weekend stressed the need for "sustainable public finances" and hailed “recent announcements by some countries to reduce their deficits in 2010.”

“The G-20 Votes for Global Depression,” echoed a commentary by Marshall Auerback and Robert Parenteau on the New Deal 2.0 blog this week.

Krugman, Auerback and Parenteau assert that G-20 policymakers are pandering to bond markets and to bankers by shifting their focus to spending cuts at a time when sky-high unemployment threatens to destabilize societies.

“Wise policy, as defined by the G-20 and like-minded others, consists of destroying economic recovery in order to satisfy hypothetical irrational demands from the markets,” Krugman wrote.

He nods to Europe's government-debt crisis, but says it's no excuse for most countries to reduce spending. Although investors have driven up the interest rates that Greece, Spain and some other debt-laden European countries pay to borrow via bonds, Krugman says those are the exceptions, not the rule. “At the moment everyone except the overvalued euro-periphery nations is able to borrow at very low interest rates” to finance expenditures, he wrote.

Auerback and Parenteau say G-20 countries should be committing to more spending, not less, to spur job creation, and they make no apology for supporting expansion of public-sector employment that would put money into peoples' pockets.

The “crucial flaw” in stimulus packages to date has been the level of resources directed at bailing out bankers and other “well-connected political insiders,” Auerback and Parenteau say. “We are making bond holders and big bankers whole at the expense of impoverishing the entire society.”

It's worth noting here that stimulus can take many forms. Also, the government can borrow and spend money itself, or it can cut taxes and give the private sector more to spend.

Brad DeLong, an economics professor at UC Berkeley, on his blog calls it a “no-brainer that we ought to be doing more fiscal stimulus" despite many Americans' fear of adding to the federal debt load.

"Each dollar of missing production and each unemployed worker right now is much, much more painful to the country and a much greater loss to human welfare than a dollar of missed production and an unemployed worker in normal times," DeLong wrote.

“Right now, bad politics is undermining good policy, hurting the American economy and legions of unemployed workers. It is long past time for another stimulus package.”

-- Tom Petruno

Photo: Paul Krugman. Credit: Peter Schneider / EPA