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Mon Dec 3, 2012, 11:35 AM

Why reducing the Deficit is WRONG (and when it will be Right)

Any method of reducing the deficit is contractionary. It has the effect of lessening economic growth. Some ways of reducing the deficit are more or less contractionary, but they are all contractionary.

Cutting the deficit is similar, in effect, to the Fed increasing interest rates.

Stimulus borrowing is similar, in effect, to the Fed cutting interest rates.

The Fed would like to stimulate the economy by cutting interest rates, but since we have been stuck at zero for years the rates cannot be cut further. (That is why we have had to rely so heavily on deficit spending for stimulus. And that need has not gone away.)

Cutting the deficit today is truly counterproductive because we would be trying to stimulate the economy with one hand while contracting it with the other hand. An incoherent policy.

The time to cut the deficit is when the Fed would normally be raising interest rates to cool off the economy.

In that case, the Fed says, "The economy is over-heating so we need to contract it with higher rates." And the federal government says, "We need to reduce the deficit anyway, so we can do some of the cooling off on the fiscal side."

Cutting the deficit while the Fed is trying to stimulate the economy is dumb. It's like stomping on the gas and the brake at the same time.

the time for austerity is when the economy is close enough to full employment that the Fed is starting to raise rates to head off an undesirably high rate of inflation; at this point, given the case for somewhat higher inflation, I’d say that we shouldn’t even think about this until unemployment is well below 7 and falling fast. At that point you can, in effect, make a deal — fiscal austerity in return for not hiking rates — that leaves the economy harmless.

http://krugman.blogs.nytimes.com/2012/12/01/against-willful-denseness-the-gods-themselves-contend-in-vain/

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Reply Why reducing the Deficit is WRONG (and when it will be Right) (Original post)
cthulu2016 Dec 2012 OP
Drale Dec 2012 #1
cthulu2016 Dec 2012 #2
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cthulu2016 Dec 2012 #3
tarheelsunc Dec 2012 #4

Response to cthulu2016 (Original post)

Mon Dec 3, 2012, 11:36 AM

1. We could very easily pay off the deficit while stimulating the economy

First we have to cut the defense spending by at least 50% more would be even better, and second we have to tax the rich.

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Response to Drale (Reply #1)

Mon Dec 3, 2012, 11:37 AM

2. Defense jobs are jobs

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Response to cthulu2016 (Original post)

Mon Dec 3, 2012, 03:09 PM

3. .

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Response to cthulu2016 (Original post)

Mon Dec 3, 2012, 03:14 PM

4. What would really be contractionary is if China decides they no longer want to loan us money

because we aren't paying back what we already owe them. The government has a responsibility to repay its debt just like its citizens do. The more we borrow, the more in interest we have to pay back later. We can't just keep borrowing and borrowing, that's just postponing our problems. We need to follow the Clinton model and get back to running a surplus, and that starts with having a somewhat reasonable tax code.

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