Monday, March 4, 2013

Looking Forward To Recession? Thank A Deficit Hawk.

Budget cuts during a depression? Expect a recession. And for that recession, thank the obsession with deficits. Because apparently the recession of 1937-38 has been largely forgotten, at least among most Republicans and a few Democrats who join them in worrying about the deficit at what's clearly the wrong time. Trying to balance the budget during a depression is not just an error ... it's a classic error.
"The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently. If the government withdraws support too early, a return to economic decline or even panic could follow." 
- Christina Romer in "The lessons of 1937" writing for The Economist
This infatuation with deficits and debt steered us wrong before. It looks like we're doomed to repeat the lessons of history that deficit hawks have failed to learn.

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