ECONOMICS:LAST WEEK the European Commission confirmed what everyone suspected: the economies it surveys are shrinking, not growing. It's not an official recession yet, but the only real question is how deep the downturn will be.
And this downturn is hitting nations that have never recovered from the last recession. For all America’s troubles, its gross domestic product has finally surpassed its pre-crisis peak; Europe’s has not.
And some nations are suffering Great Depression-level pain: Greece and Ireland have had double-digit declines in output, Spain has 23 per cent unemployment, Britain’s slump has now gone on longer than the one it faced in the 1930s.
Worse yet, European leaders – and quite a few influential players here – are still wedded to the economic doctrine responsible for this disaster. Things didn’t have to be this bad.
Matters were made far worse than necessary by the way Europe’s leaders, and more broadly its policy elite, substituted moralising for analysis, fantasies for the lessons of history. Specifically, in early 2010 austerity economics – the insistence that governments should slash spending even in the face of high unemployment – became all the rage in European capitals.
The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence”, that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates.
If this sounds to you like something Herbert Hoover might have said, you’re right: it does and he did.
Now the results are in – and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen.
The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge.
Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.
Furthermore, bond markets keep refusing to co-operate. Even austerity’s star pupils – Portugal and Ireland – who have done everything that was demanded of them, still face sky-high borrowing costs. Why?
Because spending cuts have deeply depressed their economies, undermining their tax bases to such an extent that the ratio of debt to GDP, the standard indicator of fiscal progress, is getting worse rather than better.
Now, not everything has gone wrong. Late last year Spanish and Italian borrowing costs shot up, threatening a general financial meltdown. Those costs have now subsided, to general sighs of relief. But this good news was actually a triumph of anti-austerity: Mario Draghi, the new president of the European Central Bank, brushed aside the inflation-worriers and engineered a large expansion of credit.
So what will it take to convince the “Pain Caucus”, the people on both sides of the Atlantic who insist that we can cut our way to prosperity, that they are wrong?
After all, the usual suspects were quick to pronounce the idea of fiscal stimulus dead for all time after President Barack Obama’s efforts failed to produce a quick fall in unemployment – even though many economists warned in advance that the stimulus was too small. Yet as far as I can tell austerity is still considered responsible and necessary despite its catastrophic failure.
The point is that we could actually do a lot to help our economies simply by reversing the destructive austerity of the last two years.
That’s true even in America, which has avoided full-fledged austerity at the federal level but has seen big spending and employment cuts at the state and local level.
All the federal government needs to do to give the economy a big boost is provide aid to lower-level governments, allowing these governments to rehire the hundreds of thousands of teachers they have laid off and restart the building and maintenance projects they have cancelled.
Look, I understand why influential people are reluctant to admit that policy ideas they thought reflected deep wisdom actually amounted to utter, destructive folly.
But it's time to put delusional beliefs about the virtues of austerity in a depressed economy behind us. – ( New York Timesservice)
