The Colbert Report hones into this topic well:
http://www.colbertnation.com/the-colbert-report-videos/425748/april-23-2013/austerity-s-spreadsheet-error?xrs=share_copy

But don’t expect Rick Larsen or Susan Delbene to help turn back the austerity cuts advocated by President Obama.  They are “New Democrats” who wrote a letter urging Obama to cut programs and raise taxes just as soon as the election was over.

A couple of comments about the Krugman article.

First, the government has not “cut” anything.  The federal government will spend more this year than last year and will spend more next year than this year.  The term cut under government is not a cut as we normally think of.  If I am making $50,000 a year and my boss gives me a 10% raise to $55,000 and then comes back a month later and says things have changed and he can only give me a 5% raise instead then based on government terminology my spending just got cut by $2,500.  The reality my spending is increasing from $50,000 to $52,500 so I have more money next year even though I claim my salary got cut.  The definition of austerity is a little bizarre and the US, Spain, Italy, etc are not truly following austerity measures because government spending is not going down, it is just a lower increase then what they would like. 

Second, GDP = consumption + government spending + investment + net exports.  In isolation it is easy to look at that and say if we have more government spending then GDP will increase.  The problem is that ignores potential relationships between the variables and assumes they all operate in isolation.  What if the high government deficits causes people to consume less because of fear of the future and businesses to invest less because they are concerned about the deficits.  This could translate into more government spending having an adverse impact on consumption and investment and therefore lower GDP growth.  In turn, getting the deficit under control could bring confidence to households and business and they may consume and invest more and offset the lower government spending.  No one can really say what the interactions are, it is far to complicated, but to dismiss that as a possibility is naïve on Krugmans part.

Third, a lot of people claim that the government cannot be compared to individual households and Krugman as offered a variety of reasons including the government can print money and households cannot.  That spending and income are not related at the economic level but it is at the household level.  I personally think the comparison is much closer to reality then Krugman cares to acknowledge.  Government cannot borrow forever without ramifications.  We are “printing” almost $1 trillion a year to fund the government and economy, that has a negative impact on economy and will slow growth.  A household cannot run deficits forever with ultimately have to declare bankruptcy.  I see now scenario where the government can run deficits forever without having serious economic implications.  5 years ago on this blog I wrote and article comparing the economy to the Yellowstone fires of 1989.  5 years later I was proven correct and probably the most insightful article or comment I have ever made on this blog.

I do not think there are any simple answers to the current economic problems.  I think Krugman does have some good points that simply cutting government spending (if it were actually cut) would have short term negative impact, but continuing down the same path is going to stagnate income for years to come which means there is no way to grow our way out of it.  We are in deep trouble economically.  There is not going to be enough economic growth to whittle away at unemployment and continuing to print nearly a trillion dollars a year for the forseeable future is not a recipe for success either.

Paul Krugman is my celebrity crush.