Paul Krugman: Austerity Is So Wrong!

The Daily Beast - May 6, 2012 

In a new book, End This Depression Now!, Nobel Prize–winning economist Paul Krugman says the current economic problems can be fixed both more easily and more quickly than anyone imagines. But politicians’ desire to slash spending is deeply destructive, and he details why austerity is so appealing even to Very Serious People—and why it’s such a bad idea.

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Everything that helps to increase the confidence of households, firms and investors in the sustainability of public finances is good for the consolidation of growth and job creation. I firmly believe that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.

—Jean-Claude Trichet, president of the European Central Bank, interviewed in the Italian newspaper La Repubblica, June 2010

In the scary months that followed the fall of Lehman Brothers, just about all major governments agreed that the sudden collapse of private spending had to be offset, and they turned to expansionary fiscal and monetary policy—spending more, taxing less, and printing lots of monetary base—in an effort to limit the damage. In so doing, they were following the advice of standard textbooks; more important, they were following the hard-earned lessons of the Great Depression.

But a funny thing happened in 2010: much of the world’s policy elite—the bankers and financial officials who define conventional wisdom—decided to throw out the textbooks and the lessons of history, and declare that down is up. That is, it quite suddenly became the fashion to call for spending cuts, tax hikes, and even higher interest rates even in the face of mass unemployment.

And I do mean suddenly: the dominance of believers in immediate austerity—“Austerians,” as the financial analyst Rob Parenteau felicitously dubbed them—was already well established by the spring of 2010, when the Organization for Economic Cooperation and Development released its latest report on the economic outlook. The OECD is a Paris-based think tank funded by a club of advanced-country governments, which is why people sometimes refer to the economically advanced world simply as “the OECD,” because membership in the club is more or less synonymous with advanced status. As such, it is of necessity a deeply conventional place, the kind of place where documents are negotiated paragraph by paragraph so as to avoid offending any of the major players.
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