It's Too Bad Keynes Didn't Write in English

By DEAN BAKER

Keynes explained the dynamics of an economy in a prolonged period of high unemployment more than 70 years ago in The General Theory. Unfortunately, it seems that very few of the people in policymaking positions in the United States or Europe have heard of the book. Otherwise, they would be pushing economic policy in the exact opposite direction that it is currently headed.

Most of the wealthy countries have now made deficit reduction the primary focus of their economic policy. Even though the United States and many euro zone countries are projected to be flirting with double-digit unemployment for years to come, their governments will be focused on cutting deficits rather than boosting the economy and creating jobs.

The outcome of this story is not pretty. Cutting deficits means raising taxes and/or cutting spending. In either case, it means pulling money out of the economy at a time when it is already well below full employment. This can lower deficits, but it also means lower GDP and higher unemployment.

This might be okay if we could show some benefit from lower deficits, but this is a case of pain with no gain. Ostensibly, there will be a lower interest rate burden in future years, but even this is questionable. First, the contractionary policy being pursued by the deficit hawks will slow growth and lead to lower inflation or possibly even deflation. It is entirely possible that the debt to GDP ratio may actually end up higher by following their policies than by pursuing more expansionary policy.

http://www.counterpunch.org/baker05182010.html