Must-Read: Paul Krugman: Austerity’s Grim Legacy
: Austerity’s Grim Legacy: “The consequences of the wrong turn we took look worse now…
…than the harshest critics of conventional wisdom ever imagined. For those who don’t remember (it’s hard to believe how long this has gone on): In 2010, more or less suddenly, the policy elite on both sides of the Atlantic decided to stop worrying about unemployment and start worrying about budget deficits instead. This shift wasn’t driven by evidence or careful analysis… was very much at odds with basic economics. Yet ominous talk about the dangers of deficits became something everyone said because everyone else was saying it… those parroting the orthodoxy of the moment [were the] Very Serious People. Some of us tried in vain to point out that deficit fetishism was both wrongheaded and destructive…. And we were vindicated by events. 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…. [And] there’s growing evidence that we critics actually underestimated just how destructive the turn to austerity would be. Specifically, it now looks as if austerity policies didn’t just impose short-term losses of jobs and output, but they also crippled long-run growth….
At this point… 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… shows that the downgrading of nations’ long-run prospects is strongly correlated with the amount of austerity they imposed…. The turn to austerity had truly catastrophic effects…. The long-run damage suggested by the Fatás-Summers estimates is easily big enough to make austerity a self-defeating policy even in purely fiscal terms: Governments that slashed spending in the face of depression hurt their economies, and hence their future tax receipts, so much that even their debt will end up higher than it would have been without the cuts. And the bitter irony of the story is that this catastrophic policy was undertaken in the name of long-run responsibility….
There are a few obvious lessons… groupthink is no substitute for clear analysis… calling for sacrifice (by other people, of course) doesn’t mean you’re tough-minded. But will these lessons sink in? Past economic troubles, like the stagflation of the 1970s, led to widespread reconsideration of economic orthodoxy. But one striking aspect of the past few years has been how few people are willing to admit having been wrong about anything…