Pigheaded Forecasts Of U.S. Fiscal Armageddon Result In Lousy Policy Decisions

Forecasts of U.S. fiscal Armageddon are wrong. "Conventional wisdom has it that the American national debt is out of control, and that cutting the federal deficit is an urgent task if the US is to avoid a budgetary crisis. The logic is beguiling. But it is wrong -- and the influence it exerts on policy makers may put a brake on future economic recovery....Such forecasts of a federal debt disaster depend on an assumption that is rarely mentioned: that interest rates will normalise even though economic growth will not. Combine decades of tepid expansion with traditional real interest rates, and an unsustainable debt burden quickly comes into view. But that combination would represent a dramatic break with history. It goes against everything we know about the mechanisms that determine real interest rates. It is, therefore, a slim reed on which to base a radical departure for economic policy." Robert Barbera in The Financial Times.

KRUGMAN: Oligarchs and money. "Econonerds eagerly await each new edition of the International Monetary Fund's World Economic Outlook. Never mind the forecasts, what we're waiting for are the analytical chapters, which are always interesting and even provocative. This latest report is no exception. In particular, Chapter 3 -- although billed as an analysis of trends in real (inflation-adjusted) interest rates -- in effect makes a compelling case for raising inflation targets above 2 percent, the current norm in advanced countries. This conclusion fits in with other I.M.F. research....But the I.M.F. evidently doesn't feel able to say outright what its analysis clearly implies. Instead, the report resorts to euphemisms that preserve deniability: the analysis 'could have implications for the appropriate monetary policy framework.' So what makes the obvious unsayable? In a direct sense, what we're seeing is the power of conventional wisdom. But conventional wisdom doesn't come from nowhere, and I'm increasingly convinced that our failure to deal with high unemployment has a lot to do with class interests." Paul Krugman in The New York Times