Metropolitik: When a penny saved is a penny wasted

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.