The Triumph Of A Bad Idea - Austerity

Paul Krugman’s The Big Fail:

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For an economy is not like a household. A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall — and unemployment will soar.


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But it all went wrong in 2010. The crisis in Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away. Austerity became the order of the day, and supposed experts who should have known better cheered the process on, while the warnings of some (but not enough) economists that austerity would derail recovery were ignored. For example, the president of the European Central Bank confidently asserted that “the idea that austerity measures could trigger stagnation is incorrect.”

Well, someone was incorrect, all right.


… , but Mr. Blanchard, the I.M.F.’s chief economist, isn’t an ordinary researcher, and the paper has been widely taken as a sign that the fund has had a major rethinking of economic policy.

For what the paper concludes is not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake.

I’ve seen some reporting describing the paper as an admission from the I.M.F. that it doesn’t know what it’s doing. That misses the point; the fund was actually less enthusiastic about austerity than other major players. To the extent that it says it was wrong, it’s also saying that everyone else (except those skeptical economists) was even more wrong. And it deserves credit for being willing to rethink its position in the light of evidence.


The really bad news is how few other players are doing the same. European leaders, having created Depression-level suffering in debtor countries without restoring financial confidence, still insist that the answer is even more pain.

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The truth is that we’ve just experienced a colossal failure of economic policy — and far too many of those responsible for that failure both retain power and refuse to learn from experience.