[A]usterity budgets, particularly spending cuts, are the worst and last thing California needs if we are to have economic recovery. We've had four summers of spending cuts, dating back to 2007, and what's happened to our economy? We now have the worst unemployment rate in the state in 60 years, no real growth, and gutted public services that make it difficult to see real recovery….
[Californians] are in… a "balance sheet recession" where the private sector is deleveraging -- purging debt. That is inherently deflationary and destroys economic growth. Unless government supports the economy with deficit spending and increased budgets, the deleveraging will become economically destructive…. [During] the unwind of great bubbles… companies go from maximizing profits, as they had done in normal times, to a post-bubble concern of reducing debt.
Regardless of how much priming of the pump monetary authorities do, the psychology of debt reduction will limit the effectiveness of monetary policy as a policy tool. In sum, the psychology after a major bubble is very different than the psychology before its collapse. The post-bubble emphasis becomes debt reduction and savings, making monetary policy ineffective, not because financial institutions are unwilling lenders but because companies and individuals are unwilling borrowers. These are forces to be reckoned with for some to come….
[I]n 1997 Japan went ahead with massive budget cuts, an austerity that produced a serious and deep recession, prolonging and worsening Japan's ongoing "lost decade." We're going to see the same thing in California if Arnold's reckless austerity budgets aren't rejected.
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