Here is Krugman on what is wrong with the budget deal:
We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.
The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.
Slash government spending? A bit strong don’t you think? Let’s call it an exaggeration. There is no evidence that the deal slashes spending. There isn’t any evidence that it cuts it. It might cut the rate of growth. We’ll see.
But my favorite bit of polemicism is Krugman’s attack on the “confidence fairy”:
…that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.
Unfortunately, Krugman doesn’t provide a link to those “many studies” of the historical record. Maybe he was busy or simply didn’t have room to provide them. But I will just mention that in 1946, federal spending fell about 55% when the war ended. The Keynesians predicted a horrible depression. Yet despite the release of 10 million people into the labor market with demobilization private sector employment boomed and the economy thrived. That’s a great natural experiment. I am eager to read any of the alleged many studies of the historical record.
Alberto Alesina would also disagree. Here is a defense of his work and some other studies of the historical record that fail to find the effects Krugman claims.
