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Financial Markets Will Tell Us Via High Interest Rates When It Is Time to Pivot to Deficit Reduction

That's what they did in 1992. That's what they will do sometime in the future. That's what they are not doing now.

Paul Krugman:

Not Again With The Pivot: Steve Pearlstein is a good guy; that’s why the piece he posted on Ezra’s blog fills me with such despair. What Steve says is that there are a lot of indications that the economy is getting stronger…. So, he says, no more stimulus — in fact, let’s have more cuts in state and locals spending to get things in line with long-run revenues. Also, stimulus would get in the way of needed structural adjustment.

First of all, we’ve been here before — in early 2010. Maybe this time is different, and Lucy won’t snatch away the recovery football again — but why act before we’re sure? Second, even if recovery is solid this time, our economy is likely to stay depressed for quite a while…. Third, Steve’s rhetorical question — why postpone needed fiscal adjustments? — has a very good answer: because we’re in a liquidity trap, and the Fed can’t offset the economic downside. This is a very bad time for austerity.

Fourth, there have been many calculations about the extent to which this really is a structural slump, the result of workers in the wrong places or industries. None of them support the view that this is more than a minor factor. Why does it play such a central role in conventional wisdom about what has to be done?