Quote Originally Posted by Firn View Post
That standard economists using standard theory with standard models predicted that under certain circumstances there is a strong negative multiplier attached to austerity and that still policy makers acter later as if it was a total surprise?
There are more problems, incompetent politicians are just a standard problem that persists.

I myself was not an advocate of stimulus, but then again as a German that's a sensible position even as of now - for Germany. We export and import so much that our stimulus would largely be exported, too. We depend on foreign demand because our relatively huge manufacturing is not oriented at covering our demand, but at world-wide demand for certain goods (steel, chemicals, cars, machinery mostly - far in excess of our own demand for these).
Our own stimulus (~cash for clunkers, but earlier than the U.S. program by several months) was a mere gift to the industry, and again not even well-aimed (most cars disposed of this way were replaced by small cars, which play a minor role in German automotive production).


I did (in 2009) point at the possibility to get a long-term debt-neutral stimulus, though.
The idea had quite a career in the months thereafter (in variations), albeit no doubt totally independent of my text.

This '09 opinion of mine addresses one concern that applies to Keynesian counter-cyclical spending: Politicians cannot be trusted to pay down debt in good times (any more - this was realistic only until the 70's afaik). So Keynesianism cannot really work on the macro level. On top of that, people are dumb. A stimulus working wonders in a crisis would no doubt lead many to believe it's good economic policy in general and to demand one even during weak per capita growth.
Remember, people are dumb enough to buy into Laffer curve, trickle down economics, the "huge trade surplus = good" nonsense, for leaning more capital-based pension schemes in a country with an already large trade surplus etc etc. Human stupidity is reliable.

So even a multiplier like 2 does not prove in itself that a huge stimulus is a good idea.
Then again, the argument that government would hardly squander the money so hard that it wouldn't pay off despite the really small interest rate for inflation-indexed U.S. bonds holds water.


Krugman -the loud proponent of stimulus- is a short-term-only economist. He is a true Keynesian in that he doesn't care about the long term. What he wants is to set the U.S. economy back on track ASAP, sans the bubble.
Too bad that this track has still walls ahead, and picking up steam on this route will only lead to the next crash.

The U.S. needs to get back to its natural GDP per capita trajectory, but in a sustainable way. And I don't mean green stuff or energy.
I mean savings and investment. There is no way how the U.S. economy can justify and sustain the material standard of life in the U.S. without a vastly higher level of capital investment (both private and public) enabling a vastly higher manufacturing output per capita.
This in turn means a higher savings rate is a must, for this higher level of investment will not be possibly enabled by even much higher trade balance deficits (=net capital import).

Right now the U.S. is living off its fat, foreign generosity - and forgets to sustain itself. The financial market crisis was but a symptom of the inherently ####ed up allocation of resources in the U.S..
The financial sector was able to siphon a lot of resources for itself and proceeded to waste them with its inherent incompetence.

The real problem looming in the background was that the resource allocation was ####ed up. Income distribution sucks, capital investment sucks, savings rate is ridiculous.

Bad news; neither candidate has a clue, nor do their parties and most likely even their advisors have no real sensitivity for the issue.

Finally some more EU context; the UK did the same, ever since Reagan/Thatcher, but much more so since Blair.