Paul Krugman: Beware of Austerity's Vicious Circle

Thursday, 05 April 2012 11:49 

One of the key arguments made by the proponents of fiscal austerity, even in a deeply depressed economy, has involved a sort of macroeconomic version of Pascal's wager. Yes, the more open-minded admit, borrowing costs are very low in the United States and Britain. Yes, the arithmetic suggests that cutting spending now will do very little to improve long-run fiscal prospects. But you never know — maybe the last trillion dollars of spending will be what causes a sudden loss of market confidence, turning you into Greeeeeeece. (Cue scary noises.)

Leave on one side the enormous difference between countries that do and don't have their own currencies (and debt in their own currencies). Let me instead point out that there are other risks.