Herbert Hoover would be pleased by the New Austerity budget of the Federal government, thanks to the Sequester. But massive budget cuts are not just trouble for air traffic and poor seniors on Medicaid, they are terrible fiscal policy. Washington is taking the country down the wrong road.
Don’t be fooled by the stock market run-up, because profits may be good, but growth is mediocre — this is still the worst (slowest) recovery from a major recession on record. And stock gains don’t do anything for the working people, since only the top 20% own 95% of stocks.
In an economy still stuck in the mud and plagued by unemployent in the millions, the correct policy is for the federal government to stimulate spending by running deficits, as FDR proved in practice and economist John Maynard Keynes in theory during the Great Depression.
Yet the elite consensus today is that budget deficits and federal debt are a great danger to future economic health, so the US (and Europe) are busy pursuing exactly the wrong fiscal policy, just as Hoover did after 1929 — until the New Deal turned things around and revived the economy. First, everyone forgot the dangers of runaway finance that led to the blow-up of 2008; now, everyone is forgetting the lessons of the recovery of the 1930s.
Even worse, not only is the deficit NOT the real problem, it’s actually SHRINKING today. Thanks to massive budget cutting and an uptick in tax revenues, the federal budget deficit has gone down, as calculated by Goldman Sachs’ chief economist, Jan Hatzius.
So the bogeyman of the deficit is more like a will-o-the-wisp.