Krugman: The Hijacked Crisis

By PAUL KRUGMAN Published: August 11, 2011 @ The NYTimes

Has market turmoil left you feeling afraid? Well, it should. Clearly, the economic crisis that began in 2008 is by no means over.

But there’s another emotion you should feel: anger. For what we’re seeing now is what happens when influential people exploit a crisis rather than try to solve it.

For more than a year and a half — ever since President Obama chose to make deficits, not jobs, the central focus of the 2010 State of the Union address — we’ve had a public conversation that has been dominated by budget concerns, while almost ignoring unemployment. The supposedly urgent need to reduce deficits has so dominated the discourse that on Monday, in the midst of a market panic, Mr. Obama devoted most of his remarks to the deficit rather than to the clear and present danger of renewed recession.

What made this so bizarre was the fact that markets were signaling, as clearly as anyone could ask, that unemployment rather than deficits is our biggest problem. Bear in mind that deficit hawks have been warning for years that interest rates on U.S. government debt would soar any day now; the threat from the bond market was supposed to be the reason that we must slash the deficit now now now. But that threat keeps not materializing. And, this week, on the heels of a downgrade that was supposed to scare bond investors, those interest rates actually plunged to record lows.

Read the rest of the Krugman's OpEd @ The NYTimes

Consequences Of Republican Priorities

Jackie Calmes offers about the closest a newspaper reporter can come to telling the truth about the consequences of congressional Republican priorities in her NYTimes article:

The boasts of Congressional Republicans about their cost-cutting victories are ringing hollow to some well-known economists, financial analysts and corporate leaders, including some Republicans, who are expressing increasing alarm over Washington’s new austerity and anti-tax orthodoxy. Their critiques have grown sharper since, President Obama signed deficit reduction legislation, in which House Speaker John Boehner (R-Ohio) said he got "98 percent" of what he wanted in the final deal to raise the debt ceiling, and after Standard & Poor’s downgraded the credit rating of the United States.

But even before that, macroeconomists and private sector forecasters were warning that the direction in which the new House Republican majority had pushed the White House and Congress this year — for immediate spending cuts, no further stimulus measures and no tax increases, ever — was wrong for addressing the nation’s two main ills, a weak economy now and projections of unsustainably high federal debt in coming years.

Instead, these critics say, Washington should be focusing on stimulating the economy in the near term to induce people to spend money and create jobs, while settling on a long-term plan for spending cuts and tax increases to take effect only after the economy recovers.

But Republicans in Congress and on the presidential campaign trail refuse to back down.

Read the rest of Calmes article in the the NYTimes.

History's Lessons

Government spending accounts for about 20% of GDP in a given year, so curtailing government spending will detract from GDP growth, other things being equal. This is one reason why financial markets are nervous—much of the developed world is experiencing at best modest economic growth.

And yet, the U.S. and many European countries are launching into spending cuts and austerity programs aimed at reining in their debts. While this is desirable from the point of view of long-term economic health, austerity measures that curtail government spending will, by definition, detract from short-term GDP growth. Investors worry that this hit to growth is occurring at a time when the global economy is already weak and could tip us back into recession.

Indeed, University of California Berkeley economist Christina Romer, who was the Chair of the Council of Economic Advisors and a co-author of the Obama stimulus plan, once famously listed six lessons of the Great Depression for policymakers. One of these was “Beware cutting back stimulus too soon.” It is this dictum that the markets fear the government is violating with its newfound focus on austerity measures and fiscal discipline.

Federal Reserve Chairman Ben Bernanke, an expert on the Great Depression, once promised that the central bank would never repeat its 1937 mistake of rushing to tighten monetary policy too soon and prolonging an economic slump.

"Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again," Bernanke said back in 2002 at a conference honoring legendary economist Milton Friedman's 90th birthday.

He has been true to his word, keeping interest rates near zero since late 2008, but cuting government spending may end up having a 1937-type chilling effect on the economy, and there is little Bernanke can do to counter that.

Perry Announces Presidential Bid - Bachmann Wins Iowa Straw Poll

Introduced as the "jobs governor," Rick Perry threw his hat into the presidential ring with an economy-focused speech at the RedState convention in South Carolina.

"It is time to get America working again," he said. "That's why, with the support of my family, and an unwavering belief in the goodness of America, I declare to you today my candidacy for President of the United States."

Elsewhere, Michele Bachmann has prevailed in the Ames straw poll, an early though not necessarily determinative assessment of each campaign's organizational abilities. U.S. Rep. Ron Paul came in second place. Here's a breakdown of the results: