Poor Krugman. He must be tired of trying to make people understand that austerity is the wrong prescription for the economy. But he soldiers on. Thank God. This week he takes on the situational Keynesians of the GOP who are now crying about the ill economic effects of ending taxpayer support for the nice white engineers in the defense industry:
Even Republicans admit, albeit selectively, that spending cuts hurt employment. Thus John McCain warned earlier this week that the defense cuts scheduled to happen under the budget sequester would cause the loss of a million jobs. It’s true that Republicans often seem to believe in “weaponized Keynesianism,” a doctrine under which military spending, and only military spending, creates jobs. But that is, of course, nonsense. By talking about job losses from defense cuts, the G.O.P. has already conceded the principle of the thing.
Still, won’t spending cuts (or tax increases) cost jobs whenever they take place, so we might as well bite the bullet now? The answer is no — given the state of our economy, this is a uniquely bad time for austerity.
One way to see this is to compare today’s economic situation with the environment prevailing during an earlier round of defense cuts: the big winding down of military spending in the late 1980s and early 1990s, following the end of the cold war. Those spending cuts destroyed jobs, too, with especially severe consequences in places like southern California that relied heavily on defense contracts. At the national level, however, the effects were softened by monetary policy: the Federal Reserve cut interest rates more or less in tandem with the spending cuts, helping to boost private spending and minimize the overall adverse effect.
Today, by contrast, we’re still living in the aftermath of the worst financial crisis since the Great Depression, and the Fed, in its effort to fight the slump, has already cut interest rates as far as it can — basically to zero. So the Fed can’t blunt the job-destroying effects of spending cuts, which would hit with full force.
The point, again, is that now is very much not the time to act; fiscal austerity should wait until the economy has recovered, and the Fed can once again cushion the impact.
But aren’t we facing a fiscal crisis? No, not at all. The federal government can borrow more cheaply than at almost any point in history, and medium-term forecasts, like the 10-year projections released Tuesday by the Congressional Budget Office, are distinctly not alarming. Yes, there’s a long-term fiscal problem, but it’s not urgent that we resolve that long-term problem right now. The alleged fiscal crisis exists only in the minds of Beltway insiders.
I know it seems obvious to people who read Paul Krugman. But the powers that be are still determined to take this opportunity to once again declare “the era of big government is over.” But according to Dave Weigel, they’re getting clever about how they plan to deal with these defense cuts:
[D]e-coupling the cuts from taxes put Republicans back where they were in December, when they passed a “sequestration replacement” bill that replaced all the defense savings with entitlement cuts. So you’re already hearing Republicans talk about ways to delay or alter the cuts, again. I’ve heard a number of current members make the point made here by the Ghost of Past Republican Failure.
Tom DeLay, the former House majority leader, who was meeting with a few of his former colleagues on Wednesday at the Capitol, says Boehner’s playbook is “sharp,” since defense spending “can always be replaced during the appropriations process, after the cuts are put into place.”
Yes. If the sequestration happens, it’s only a mere four weeks until Republicans have to pass a continuing resolution to fund the government. They can move the money around again. That takes another cannonball out of the cannon.
Another one is being whisked away right now by Sen. Kelly Ayotte and Rep. Buck McKeon, who are schlepping the Down Payment to Protect National Security Act of 2013. It would replace the first year of defense cuts with austerity hiring freezes.
Weigel says this has deficit hawks in the GOP seeing red — of course. They play their role in this drama very well.
So, we have the president representing his patented balanced approach of chump change in exchange for big spending cuts to everything but defense, the hawks demanding a complete dismantling of government and the GOP leadership pushing some kind of plan to preserve defense spending by either staging a theatrical showdown and then putting the defense spending back in the budget or delaying cuts for a year with another 10% reduction in the entire federal workforce. (Or something else.) I’m going to take a wild guess that none of those plans will be good for the economy although the president’s insistence on putting “entitlements” on the menu means his plan is more likely to cause more of the pain in the future.
Who knows what they’re really going to end up with. But if those sequester defense cuts stick I’ll be very, very surprised. I don’t know how much people remember of the last round of base closings but it didn’t just cause an economic upheaval — it was a political nightmare. And we were in a period of peace and prosperity at the time. It’s tempting to think that the Democrats are now the hawks and the right wing is so obsessed with spending that they’re willing to slash military spending, but I think that’s a pipe dream. The Democrats with contractors and bases in their districts have always been for military spending — and the chance that a majority of the GOP agrees to cut the military is nil. Whether they will agree to pretend to cut the military in the short run (as Tom Delay suggests) is another question.