If anyone still believes that a nation’s journey to economic recovery requires a grim slog through fiscal austerity– and there may be such people even after the news that Britain has slipped back into recession despite (or because of) the Cameron government’s cutbacks– I recommend a reading of Paul Krugman’s latest column in The New York Times.
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 — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.
None of this should come as news, since the failure of austerity policies to deliver as promised has long been obvious. Yet European leaders spent years in denial, insisting that their policies would start working any day now, and celebrating supposed triumphs on the flimsiest of evidence. Notably, the long-suffering (literally) Irish have been hailed as a success story not once but twice, in early 2010 and again in the fall of 2011. Each time the supposed success turned out to be a mirage; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent.
And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better.
So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end.
While economic growth in the US is still fairly weak, at least there is growth.
The Times’s Richard W. Stevenson writes:
In the United States, the British experience is being held up, by Democrats and mainstream economists, as an object lesson in the risks inherent in aggressive short-term budget-cutting amid signs that the recovery could be losing traction again.
However flawed the stimulus plan Mr. Obama pushed through Congress more than three years ago, fiscal policy has helped the United States generate stronger growth rates coming out of the recession than Britain or the euro zone countries.
“The U.K. made a stupid mistake,” said Ian Shepherdson, an economist at High Frequency Economics. “Theoretically, the U.S. is in a less-bad situation than the U.K. to deal with fiscal tightening – but less-bad does not mean good.”
And as Stevenson notes, Republican Congressman Paul Ryan’s proposed budget– which Mitt Romney called “marvelous”– bears a striking resemblance to the Cameron budget. Of course conservatives claim the problem with Cameron’s austerity plan “is not that it was ill-timed or too aggressive, but that it relied too heavily on tax increases.”