Must-Read: Robert Skidelsky: Debating the Confidence Fairy

…To try to cure it by spending less is like trying to cure a sick person by bleeding. So it was natural to ask economist/advocates of bleeding like Harvard’s Alberto Alesina and Kenneth Rogoff how they expected their cure to work. Their answer was… the confidence fairy…. Alesina argued that… [the] beneficial impact on expectations would more than offset its debilitating effects. Buoyed by assurance of recovery, the half-dead patient would leap out of bed, start running, jumping, and eating normally, and would soon be restored to full vigor. The bleeding school produced some flaky evidence to show that this had happened in a few instances. Conservatives who wanted to cut public spending for ideological reasons found the bond vigilante/confidence fairy story to be ideally suited to their purpose. Talking up previous fiscal extravagance made a bond-market attack on heavily indebted governments seem more plausible (and more likely); the confidence fairy promised to reward fiscal frugality by making the economy more productive….

The cure… came about years behind schedule not through fiscal bleeding but by massive monetary stimulus…. The champions of fiscal bleeding triumphantly proclaimed that austerity had worked…. In his first budget in June 2010, Chancellor of the Exchequer George Osborne warned that ‘you can see in Greece an example of a country that didn’t face up to its problems, and that’s a fate I am determined to avoid.’ In presenting the United Kingdom’s 2015 budget in March, Osborne claimed that austerity had made Britain ‘walk tall’ again. On May 7, that claim will be put to the test in the UK’s parliamentary election. British voters, still wobbly from Osborne’s medicine, can be forgiven if they decide that they should have stayed in bed.