World leaders have pledged to slash the government deficits of industrialized countries by half over the next three years. They would say that goal, set at the just-concluded G20 summit in Toronto is fiscal prudence. But prominent economist Paul Krugman has warned that it's the prelude to the next Great Depression.
Writing in the New York Times, Krugman says we're in for another Big One, following the Panic of 1873 and the Financial Crisis of 1929-1931.
Krugman says it's a failure of policy. Politicians around the world around the world are obsessed about fighting inflation and cost cutting when the real cause of the financial crisis is that demand has crashed. With the absence of jobs, no one is buying. And markets are hammering belt-tightening policies.
Krugman writes: "Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners' medicine. It's almost as if the financial markets understand what policy makers seemingly don't: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating."
Krugman is no voice in the wilderness. His broadside coincides with warnings from economists that governments should not pull back on stimulus spending. They say all the talk of inflation and deficits means nothing if consumers aren't spending.
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