The Austerity Bomb, by Paul Krugman, in NY Times: Brian Beutler of Talking Points Memo seems to have been the first to use the phrase “austerity bomb” for what’s scheduled to happen at the end of the year. It’s a much better term than “fiscal cliff”. The cliff stuff makes people imagine that it’s a problem of excessive deficits when it’s actually about the risk that the deficit will be too small; also and relatedly, the fiscal cliff stuff enables a bait and switch in which people say “so, this means that we need to enact Bowles-Simpson and raise the retirement age!” which have nothing at all to do with it.
And it can’t be emphasized enough that everyone who shrieks about the dangers of the austerity bomb is in effect acknowledging that the Keynesians were right all along, that slashing spending and raising taxes on ordinary workers is destructive in a depressed economy, and that we should actually be doing the opposite.
Meanwhile, in Europe, which has had much more austerity in aggregate than we have, grim new industrial production numbers and a worsening unemployment crisis:
By the way, some readers have asked me what is happening to Ireland, which has seen an especially sharp fall in industrial production. The answer appears, in part, to be Lipitor. That is, expiring patents on some important drugs have created a cliff for Ireland’s pharma exports. You don’t want to overstate the real impact on Irish citizens: pharma looms large in Irish GDP but not so much in employment or GNP, because it’s highly capital-intensive and much of the value-added accrues to foreign multinationals. Still, not what Ireland needed.