The Price of Austerity Gets Higher

The stakes of our leaders’ surreal obsession with deficits just got a lot higher. The economy could tip from stagnation into a real depression.

As it dawned on Wall Street that austerity would not in fact help the real economy, panic selling ensued. The swooning stock market, in turn, creates is one more source of belt-tightening that pushes us closer to an abyss.

As the value of savings and the earnings on investments plummet, consumers are even less likely to go out and by products.

Businesses are even less likely to expand or to take on new employees. And so the whole downward slide feeds on itself.

The imagined savings from deficit reduction will be more than wiped out by slower than projected growth, as this recent analysis from the John McDermott from the blog Alphaville shows.

If GDP growth is even half a percent lower less than the budget cutters assumed, nearly all of the projected budget savings vanish. And the belt-tightening in the budget deal is very likely to push the economy deeper into a downward spiral.

So austerity is a game of the economy chasing its own tail, as it spins downward.

Time is running out. If we were to shift to a program of massive public investment now, we might avert another depression. The spending could be financed part by surtaxes on the wealthy, and partly by deeper deficits for a year or two until a recovery kicks in.

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