Economist Paul Krugman sees a “clear and present danger to recovery” from the demands of House Republicans that the government “immediately slash spending on infant nutrition, disease control, clean water and more.”
“Quite aside from their negative long-run consequences, these cuts would lead, directly and indirectly, to the elimination of hundreds of thousands of jobs — and this could short-circuit the virtuous circle of rising incomes and improving finances,” Krugman writes in The New York Times.
“The bubble economy of the Bush years left many Americans with too much debt; once the bubble burst, consumers were forced to cut back, and it was inevitably going to take them time to repair their finances,” says Krugman.
“The only way we could have avoided a prolonged slump would have been for government spending to take up the slack.”
That, Krugman says, didn’t happen. Instead, “growth in total government spending actually slowed after the recession hit, as an underpowered federal stimulus was swamped by cuts at the state and local level.”
The process of families in the U.S. repairing their finances is proceeding but still fragile, Krugman argues.
And, “things will be much worse if the Federal Reserve and other central banks mistakenly respond to higher headline inflation by raising interest rates,” he says.
The Washington Post reports that European Central Bank President Jean-Claude Trichet gave what analysts called a clear sign that the bank is ready to part ways with the U.S. Federal Reserve and raise interest rates from the historic lows of the recent recession.
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