Brad DeLong rightly defends "the confidence fairy" types from Paul Krugman's righteous indignation at the idea that there is symmetry between that view and the view the inflation expectations view. Paul and Brad are specifically discussing the "expansionary austerity" argument, but I'd expand it to other "regime uncertainty" arguments that say that the reason growth is slow is that people are afraid of regulations that are or will be imposed on them (as opposed to spending cuts).
These arguments, in theory, are fine. Excessive government spending and taxation will depress private economic activity practically by definition (otherwise it wouldn't be "excessive"). Regulation diminishes expected profits and therefore will also depress growth. Anything that lowers expected profit opportunities like that is going to threaten growth for the exact same reasons that we think reduced expectations of future demand are going to threaten growth.
Where expansionary contraction and regime uncertainty fail is when you compare them to the facts on the ground.
We aren't facing any unprecedented spending or tax levels (indeed, low tax revenue is what's driving the run-up in debt) that could explain the crisis. The problems with Medicare on the horizon were there long before the crisis, and hardly offer a convincing explanation for the Great Recession (nobody is even proposing that), so there's no reason to think that our spending or tax levels are "excessive", at least in a way that can pay macrocyclical dividends (perhaps you could argue some adjustment could nudge up our growth rate). The same goes with regulation. You might argue that the health reform law introduced regime uncertainty, but that case seems weak. Again, the problems started long before that was even on the radar, they weren't reduced after passage of the law added certainty, and they weren't reduced after the Supreme Court added even more certainty. Regime uncertainty in theory is fine. All you have to believe to admit that is that regulation can cut into profits. That's not a hard thing to accept.
What can't be provided is evidence that these stories matter for this crisis and recovery from this crisis.
What does seem to matter pretty obviously is a debt overhang that is strangling demand and a lagging public sector.
Krugman is right because his diagnosis is right. He's not right because the very idea of expansionary austerity or regulatory uncertainty as an explanation of economic crisis is nonsense.
The Lonely Unicorn
1 hour ago