Paul Krugman: Conservative Budget Hawks Have Done Damage Way Worse than Thought

Economy

Paul Krugman: Conservative Budget Hawks Have Done Damage Way Worse than Thought

 

The consequences of cruel budget cuts could be a permanently crippled economy.

 

 

By Janet Allon / AlterNet

Photo Credit: via YouTube/Moyers & Co.

Paul Krugman has some dismal news in Friday's column. The perverse mania for austerity while various economies were sputtering during the Great Recession may not just have been bad policy at the time. It may have done lasting damage and crippled longterm growth.

Initially, Krugman writes, policy makers here in the U.S. did more or less the right thing.

The Federal Reserve and other central banks realized that supporting the financial system took priority over conventional notions of monetary prudence. The Obama administration and its counterparts realized that in a slumping economy budget deficits were helpful, not harmful. And the money-printing and borrowing worked: A repeat of the Great Depression, which seemed all too possible at the time, was avoided.

But it didn't last. Around 2010, things took a fateful turn when "the policy elite on both sides of the Atlantic decided to stop worrying about unemployment and start worrying about budget deficits instead."

People espousing this approach were perceived as "Very Serious People.," despite any lack of analysis or evidence. Meanwhile, economists like Krugman, who pointed out the folly of "deficit fetishism" and the fact that it would deepen the recession were painted as irresponsible.

The so-called spendthrifts were vindicated by events. Krugman:

More than four and a half years have passed since Alan Simpson and Erskine Bowles warned of a fiscal crisis within two years; U.S. borrowing costs remain at historic lows. Meanwhile, the austerity policies that were put into place in 2010 and after had exactly the depressing effects textbook economics predicted; the confidence fairy never did put in an appearance.

But Krugman is hardly celebrating, because it now appears that austerity policies have wreaked more damage than even he predicted, the kind of damage that is harder to recover from, a crippling of long-term growth. Krugman again:

The idea that policies that depress the economy in the short run also inflict lasting damage is generally referred to as “hysteresis.” It’s an idea with an impressive pedigree: The case for hysteresis was made in a well-known 1986 paper by Olivier Blanchard, who later became the chief economist at the International Monetary Fund, and Lawrence Summers, who served as a top official in both the Clinton and the Obama administrations. But I think everyone was hesitant to apply the idea to the Great Recession, for fear of seeming excessively alarmist.

At this point, however, the evidence practically screams hysteresis. Even countries that seem to have largely recovered from the crisis, like the United States, are far poorer than precrisis projections suggested they would be at this point. And a new paper by Mr. Summers and Antonio Fatás, in addition to supporting other economists’ conclusion that the crisis seems to have done enormous long-run damage, shows that the downgrading of nations’ long-run prospects is strongly correlated with the amount of austerity they imposed.

Catastrophic austerity has pretty much eaten its own tail, undermining future tax receipts and possibly leading to bigger government debt. Oh, the dumb irony of it all.

Not that any of these lessons are likely to be learned, Krugman concludes ruefully.