Reich: The Austerity Death Trap

The only way out of this vicious cycle is for the government -- the spender of last resort -- to boost the economy. The regressives are all calling for the opposite.

But even without these hair-brained Republican plans, we're heading in their direction anyway. Unless Republicans agree to a budget deal before the end of the year (don't hold your breath), the temporary payroll tax cuts and extended unemployment benefits we have now will end.

The result will be the most stringent fiscal tightening of any large economy in the world.

Together with ongoing cuts at the state and local government level, the scale of this fiscal contraction would be almost unprecedented.

It will come at a time when 25 million are Americans looking for full-time work, median incomes are dropping, home foreclosures rising, and a record 37 percent of American families with young children are in poverty.

To call this economic lunacy is to understate the point.

And if you think 2011 is bad, you ain't seen nothin' yet.

Even if you're a deficit hawk this is nuts. Instead of reducing the ratio of debt to the size of the overall economy, this strategy increases the ratio because it causes the economy to shrink.

Call it the austerity death trap.

Under these circumstances, the harder a country works to cut its debt, the worse the ratio becomes -- because the economy shrinks even faster.

Greece is already in the trap. Spain and Italy are perilously close. Even Britain, France, and Germany are tip-toeing up to it. And now us.

Deficit hawks have to understand: The first step must be to revive growth and jobs. That way, revenues increase and the debt/GDP ratio drops. Only then -- when the economy is back on track -- do you start cutting.

http://www.huffingtonpost.com/robert-reich/gop-austerity_b_1020681.html

I'm not a fan of Reich, or the huffington post, however I am a fan of trying to gather facts to come to an informed opinion.

What strikes me about this is he is both "right" and simultaenously "wrong"./

Which means, in Keynsian Thinking, the answer is always monetization/debt/expand the credit supply, however after demonstrable failures to launch the prior 2 times, one simply must wonder exactly how much money and money supply he would propose to create?

By his theory, Zimbabwe should be booming, after all they had 1 billion "dollar" notes, and yet..uhm, no, it is not.

It strikes me that Keynsian Reply is ALWAYS "well, they did not spend enough", which is a convenient dodge imho, how about "your plan did not perform the way you put forward that it would"?