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.This is part of the hypocrisy of current-day politics that I find so terribly offensive and counter-productive, or as Krugman said, "self-defeating." People are being manipulated to do things against their own best interests by political consultants that stir unnecessary flames and heighten righteousness. Furthermore, because of the increasing polarity, nothing is able to get accomplished and people end up dissolute and cynical which makes them even more passive and persuadable. Congressional party-line votes illustrate how the partisan acrimony gripping Congress is preventing cooperation, even for universally shared goals like healthcare, financial regulation and campaign finance.
So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.
In an in-depth piece in the International Herald Tribune entitled: "Betting That Cutting Spending Won't Derail Recovery," David Leonhardt wrote:
Policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.All the while stocks are tumbling and the daily economic and business news is abysmal. Repeating what Krugman wrote: "It's almost as if the financial markets understand what policy makers seemingly don't."
I agree with Krugman that it's too soon to stop stimulating the economy. Stimulation is necessary to get people working and also to enable new technologies to flourish over longer periods of time. By being short-sighted and focused on quarterly profits many American companies have pulled back their research and development budgets thereby thwarting new technologies. And by the government pulling back on it's economic stimulus, it's like a one-two punch backwards.