Paul Krugman writes:

June 6 2010
Lost Decade, Here We Come

The deficit hawks have taken over the G20:

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.

These words were in marked contrast to the G20’s previous communiqué from late April, which called for fiscal support to “be maintained until the recovery is firmly driven by the private sector and becomes more entrenched”.
It’s basically incredible that this is happening with unemployment in the euro area still rising, and only slight labor market progress in the US.

But don’t we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.


Our previous run-in with a relcalcitrant problem of this magnatitude was solved by World War II and its resolution with the USA being the only intact Industrial Democracy still standing. We really do not know how this would have come out if there had not been a war which had the exact type of ending WW II had: if WW II had ended in a protracted stalemate, and Europe had not been reduced to ashes, it would have been different.
Nobody really knows what's going to happen.