What should be done about the economy? Republicans claim to have the answer: slash spending and cut taxes. What they hope voters won&rsquo;t notice is that that&rsquo;s precisely the policy we&rsquo;ve been following the past couple of years. Never mind the Democrat in the White House; for all practical purposes, this is already the economic policy of Republican dreams.

This Republican Economy

Business Standard

This was the month the confidence fairy died. For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should &mdash; by spending more to offset falling private demand &mdash; but with fiscal austerity, slashing spending in an effort to balance their budgets.

Death of a fairy tale

For years, allegedly serious people have been issuing dire warnings about the consequences of large budget deficits &mdash; deficits that are overwhelmingly the result of our ongoing economic crisis. In May 2009, Niall Ferguson of Harvard declared that the &ldquo;tidal wave of debt issuance&rdquo; would cause US interest rates to soar. In March 2011, Erskine Bowles, the co-chairman of President Obama&rsquo;s ill-fated deficit commission, warned that unless action was taken on the deficit soon, &ldquo;the markets will devastate us,&rdquo; probably within two years. And so on.

Paul Krugman: Money for nothing

Among economists who know their history, the mere mention of certain years evokes shivers. For example, three years ago Christina Romer, then the head of President Obama&rsquo;s Council of Economic Advisers, warned politicians not to re-enact 1937 &mdash; the year FDR shifted, far too soon, from fiscal stimulus to austerity, plunging the recovering economy back into recession. Unfortunately, this advice was ignored. But now I&rsquo;m hearing more and more about an even more fateful year. Suddenly normally calm economists are talking about 1931, the year everything fell apart.

The Great Abdication: Revisiting 1937 

The economic news is looking better lately. But after previous false starts &mdash; remember &ldquo;green shoots&rdquo;? &mdash; it would be foolish to assume that all is well. And in any case, it&rsquo;s still a very slow economic recovery by historical standards.

States of depression

So Greece has officially defaulted on its debt to private lenders. It was an &ldquo;orderly&rdquo; default, negotiated rather than simply announced, which I guess is a good thing. Still, the story is far from over. Even with this debt relief, Greece &mdash; like other European nations forced to impose austerity in a depressed economy &mdash; seems doomed to many more years of suffering.

What Greece means

Mitch Daniels, the former Bush budget director who is now Indiana&rsquo;s governor, made the Republicans&rsquo; reply to President Obama&rsquo;s State of the Union address. His performance was, well, boring. But he did say something thought-provoking &mdash; and I mean that in the worst way.

Paul Krugman