The Austerity Disaster

HAMISH_MCTAVISH

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries.

It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression.

Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club.

Yes, there are some caveats and complications.

But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

O.K., about those caveats: On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed — mainly thanks to an ill-advised return to the gold standard — even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States.

Even so, surpassing the track record of the 1930s shouldn’t be a tough challenge. Haven’t we learned a lot about economic management over the last 80 years? Yes, we have — but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.

Britain, in particular, was supposed to be a showcase for “expansionary austerity,” the notion that instead of increasing government spending to fight recessions, you should slash spending instead — and that this would lead to faster economic growth. “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.”

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary.

Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea.

But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

http://www.nytimes.com/2012/01/30/opinion/krugman-the-austerity-debacle.html?_r=1&src=ISMR_AP_LO_MST_FB

Krugman hits the nail firmly on the head again.

Graham_Devon

Just one question...

What severe medicine?

What austerity?

That's two questions, but I'm being a devil.

homelessskilledworker

HAMISH_MCTAVISH wrote: »

http://www.nytimes.com/2012/01/30/opinion/krugman-the-austerity-debacle.html?_r=1&src=ISMR_AP_LO_MST_FB

Krugman hits the nail firmly on the head again.

I am starting to go that way as well after being very supportive of the coalition.
I am still angry at the mess the welfare state is in, and am happy to see certain departments hit, but I am starting to feel they are hitting the poor far to hard.

I would love to see a massive building project, the knock on effect would help out so many, and we would have something to show for it.

Mr_Mumble

Funny how you pick and choose the economist when it suits you Hamish.

You were quoting Scott Sumner recently and he neatly shows how Krugman, as usual, is talking nonsense:

What's Wrong With Britain?*

Of course Sumner isn't the only Economist with a PhD that calls Krugman out on ignoring the facts:

Krugman's Austere Science

and closer to home here's the the assistant editor of The Telegraph:

Krugman is wrong about the UK - again

* some very good comments footnoting the initial post and a few pithy ones too...

"Britain has too many human blobs and civil servants in the wagon… they have to get out and push."

Thrugelmir

Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Obviously not as the financial services sector will take years to recover to pre crash levels.

HAMISH_MCTAVISH

Graham_Devon wrote: »

What austerity?

In every economy Graham there is a line at which spending above this level creates growth, and spending below it creates recession.

The ConDems were warned that austerity was a bad idea.

They believed that you could have austerity and growth.

They were wrong.

And they will pay the price.

Jimmy_31

HAMISH_MCTAVISH wrote: »

In every economy Graham there is a line at which spending above this level creates growth, and spending below it creates recession.

The ConDems were warned that austerity was a bad idea.

They believed that you could have austerity and growth.

They were wrong.

And they will pay the price.

I think you find it will be us who pay the price.

shortchanged_2

Well I think this position we are now in and facing was pretty obvious really.

As I stated all along cut peoples incomes, they will spend less therefore growth becomes a nigh on impossibility and basically the situation becomes worse as less revenue comes into the treasury.

Whilst I was not totally against some cuts and reforms, I think a more gradual approach would probably have been a better option rather than the slash and burn approach, which if nothing else managed to crush any glimmer of consumer confidence.

Graham_Devon

HAMISH_MCTAVISH wrote: »

In every economy Graham there is a line at which spending above this level creates growth, and spending below it creates recession.

The ConDems were warned that austerity was a bad idea.

They believed that you could have austerity and growth.

They were wrong.

And they will pay the price.

Ok.

So what Austerity?

And no, I don't want a 3 post list of cuts to a toilet block expansion programme in Rhyl.

I want to know what medicine we have been swilling down?

HAMISH_MCTAVISH

Mr_Mumble wrote: »

You were quoting Scott Sumner recently

Just goes to show I have no blind allegiance to ideology, but can consider a good idea from wherever it comes from in the political or economic spectrum.

Although I do recall being surprised such a good idea would be discussed in the pages of Moneyweek.:)

he neatly shows how Krugman, as usual, is talking nonsense::)

Hmmmm, Nobel prize winning economist or Moneyweek journalist?

Let me think....

Wow, tough call....

Thrugelmir

HAMISH_MCTAVISH wrote: »

They believed that you could have austerity and growth.

Anybody with a degree of financial sense would know that that this isn't achievable.

The West has a debt problem. The East doesn't. The Emerging markets can trade amongst themselves. So there's no guarantee of growth. The world has changed permanently.