Metropolitik: When a penny saved is a penny wasted

Maybe Romney made a Freudian slip?

Mitt Romney finally said
something smart — though his campaign insists
it was unintentional. “As you cut spending, you’ll slow down the
economy; so you have to, at the same time, create pro-growth tax
policies,” Romney said on Tuesday.

By “pro-growth tax policies,” Romney probably means net tax cuts for
corporations and the rich, not tax increases. Nevertheless, Mitt Romney
does appear to be arguing that cutting government spending can hurt the
economy.

It seems Mitt Romney is trying to have his Krugman and eat it too.

Economist Paul Krugman has long argued
that our protracted economic mess is a liquidity trap caused by
insufficient aggregate demand.

To put it another way, families lost so much net worth after the
financial crisis that they can no longer afford to buy as much stuff.
Consequently, businesses refuse to grow because they might get stuck
making a bunch of stuff that no one can afford to buy. So they don’t
hire new people or give anyone a raise, which of course perpetuates
everyone’s inability to buy more stuff.

Cutting government spending worsens the problem, because what little
spending money families have left is preserved by government programs
like Medicare, Medicaid and federal college loans. Some people rely on
government jobs, such as police, firefighters and teachers. Every
spending cut to these and other programs further reduces total demand
for goods and services in the economy.

Or as Krugman put it, in response to Romney: “Yep, slashing spending
in a depressed economy depresses the economy even more. And if you
don’t have to … you should wait until the economy is stronger.”

Instead,
Krugman argues that the government must kick-start demand (and, in
doing so, private sector growth) by borrowing a bunch of money and
spending it on projects that not only put extra spending money in
people’s pockets, but get them to actually spend it instead of saving
it.

Tax cuts for the wealthy don’t accomplish the latter. Corporations
are already sitting on $2 trillion in unspent cash, and studies of the
Bush tax cuts indicate that the wealthy tend to save their tax cuts.
Sadly,
both parties find the concept of spending our way out of recession to
be so violative of common sense that few in Washington are courageous
enough to lend their full-throated support to Krugman’s proposals.

Even President Obama’s economic advisors — who privately agreed that
a return to full employment would likely necessitate a much larger
stimulus — were so wary of trying to sell Congress on the
counterintuitive wisdom of Krugman’s arguments that they removed the
strongest argument for a larger stimulus from their final recommendation
to the president.

So it was that Mitt Romney, momentarily and perhaps entirely by
accident, gave a false glimmer of hope to those who watch in dismay as
the president and the Republican candidates race to outdo the other’s
proposed spending cuts.?And Washington cheers while Rome burns.


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