Forecast pain, heavy at times

Bundeskanzlerin. Reuters, via Sydney Morning Herald. 

What, NPR's Tom Gjelten asked Thursday morning, should the U.S. learn from Europe's woes? Specifically, about the

problem of excessive government debt [that] has swamped economies across Europe and forced countries to take severe measures to cut their deficits. The first lesson from their "fiscal consolidation" experiences: It will hurt.

Note the quiet assumptions that (1) the U.S. suffers from excessive government debt too and (2) that it was excessive debt that "forced" them into fiscal austerity. No. While the debt was in some cases excessive, the insuperable problem was the excessive interest rates they were being charged for new debt, and the excessive value of the currency they were being charged in.

So the first lesson is, don't let Bundeskanzlerin Merkel decide what your money is worth, which is not much of an issue here in America—it is not for nothing that we call it the "almighty dollar". And the second lesson is, don't get in a position where you have to borrow at unreasonable rates, which is also not our problem at the moment, given that they're lined up all around the block offering effectively to pay us to hold their money for them, like we're the Morgan Chase of national treasuries, with such beautifully designed ATM enclosures that they don't ask us to pay interest at all. Now's the time to refi the property!

And the third lesson is—Tom? Are you there, Tom?

But the lessons from Europe are still debatable. A country's experience, some economists argue, depends on whether the government balances its budget by spending less or by bringing in more tax revenue.

"The deficit debate is often misleading," argues Harvard economist Alberto Alesina, "because it tends to ignore a huge difference between the two kinds of deficit reduction." Alesina, writing in his blog, insists the evidence from Europe is clear. "When governments reduce deficits by raising taxes, they are indeed likely to witness deep, prolonged recessions," he says. "But when governments attack deficits by cutting spending, the results are very different."

No, no, no! Don't touch that Kool-Aid!

"What is the evidence?" [IMF's Olivier] Blanchard asks. "The evidence is more or less all over the place. It's very difficult to identify whether spending or taxes have more of an effect."

In contrast to Italy, the government of Latvia emphasized spending cuts over tax increases when it set out to balance its budget. And yet it suffered an even sharper economic downturn in the aftermath of that effort than did other European countries.

That's better; now, as I was saying—

But the story's already essentially over at this point, and the possibility that you could just leave that deficit alone until the growth rate picks up, tax collections follow, and interest rates begin to rise again just does not come up. At all. It's like Krugman is howling in the wilderness instead of the pages of the New York Times, very strange.