John Carney over at The Business Insider wrote an important critique of Obama's planned spending freeze yesterday. If we are in the middle of an extended deleveraging cycle as I have suggested recently then removing government spending is the last thing the economy needs right now. In fact, it may sow the seeds for another depression. Carney writes:

The Obama administration’s embrace of a spending freeze at a time when it is proposing tax hikes is frighteningly reminiscent of the disastrous policies that exacerbated the Great Depression.  He is doing nothing less than setting us on the path to economic suicide. The Great Depression was actually two economic downturns. According to the National Bureau of Economic Research, the first recession ran from August 1929 to March 1933 and the second from May 1937 to June 1938. Unemployment remained high until the Second World War.

The neo-Keynesians such as Paul Krugman and Christina Romer argue that what sparked the second downturn was an unfortunate inadvertent switch to contractionary fiscal and monetary policy. This is precisely what the Obama administration seems to be doing now: freezing spending and raising taxes even as the Federal Reserve retracts quantitative easing and considers rate hikes… From the Hayekian perspective, the second downturn was the inevitable product of the first stages of the New Deal.  The early New Deal stymied an economic recovery by creating a false dawn recovery. Employment returned and the economy grew but this was just another bubble…

Read the whole thing here.

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