[Vision2020] Death of a Fairy Tale

[Art Deco]

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April 26, 2012
Death of a Fairy Tale By PAUL
KRUGMAN<http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/index.html?inline=nyt-per>

This was the month the confidence fairy died.

For the past two years most policy makers in Europe and many politicians
and pundits in America have been in thrall to a destructive economic
doctrine. According to this doctrine, governments should respond to a
severely depressed economy not the way the textbooks say they should — by
spending more to offset falling private demand — but with fiscal austerity,
slashing spending in an effort to balance their budgets.

Critics warned from the beginning that austerity in the face of depression
would only make that depression worse. But the “austerians” insisted that
the reverse would happen. Why? Confidence! “Confidence-inspiring policies
will foster and not hamper economic recovery,” declared Jean-Claude
Trichet, the former president of the European Central Bank — a claim echoed
by Republicans in Congress here. Or as I put it way back when, the idea was
that the confidence fairy would come in and reward policy makers for their
fiscal virtue.

The good news is that many influential people are finally admitting that
the confidence fairy was a myth. The bad news is that despite this
admission there seems to be little prospect of a near-term course change
either in Europe or here in America, where we never fully embraced the
doctrine, but have, nonetheless, had de facto austerity in the form of huge
spending and employment cuts at the state and local level.

So, about that doctrine: appeals to the wonders of confidence are something
Herbert Hoover would have found completely familiar — and faith in the
confidence fairy has worked out about as well for modern Europe as it did
for Hoover’s America. All around Europe’s periphery, from Spain to Latvia,
austerity policies have produced Depression-level slumps and
Depression-level unemployment; the confidence fairy is nowhere to be seen,
not even in Britain, whose turn to austerity two years ago was greeted with
loud hosannas by policy elites on both sides of the Atlantic.

None of this should come as news, since the failure of austerity policies
to deliver as promised has long been obvious. Yet European leaders spent
years in denial, insisting that their policies would start working any day
now, and celebrating supposed triumphs on the flimsiest of evidence.
Notably, the long-suffering (literally) Irish have been hailed as a success
story not once but twice, in early 2010 and again in the fall of 2011. Each
time the supposed success turned out to be a mirage; three years into its
austerity program, Ireland has yet to show any sign of real recovery from a
slump that has driven the unemployment rate to almost 15 percent.

However, something has changed in the past few weeks. Several events — the
collapse of the Dutch government over proposed austerity measures, the
strong showing of the vaguely anti-austerity François Hollande in the first
round of France’s presidential election, and an economic report showing
that Britain is doing worse in the current slump than it did in the 1930s —
seem to have finally broken through the wall of denial. Suddenly, everyone
is admitting that austerity isn’t working.

The question now is what they’re going to do about it. And the answer, I
fear, is: not much.

For one thing, while the austerians seem to have given up on hope, they
haven’t given up on fear — that is, on the claim that if we don’t slash
spending, even in a depressed economy, we’ll turn into Greece, with
sky-high borrowing costs.

Now, claims that only austerity can pacify bond markets have proved every
bit as wrong as claims that the confidence fairy will bring prosperity.
Almost three years have passed since The Wall Street Journal breathlessly
warned that the attack of the bond vigilantes on U.S. debt had begun; not
only have borrowing costs remained low, they’ve actually fallen by half.
Japan has faced dire warnings about its debt for more than a decade; as of
this week, it could borrow long term at an interest rate of less than 1
percent.

And serious analysts now argue that fiscal austerity in a depressed economy
is probably self-defeating: by shrinking the economy and hurting long-term
revenue, austerity probably makes the debt outlook worse rather than
better.

But while the confidence fairy appears to be well and truly buried, deficit
scare stories remain popular. Indeed, defenders of British policies dismiss
any call for a rethinking of these policies, despite their evident failure
to deliver, on the grounds that any relaxation of austerity would cause
borrowing costs to soar.

So we’re now living in a world of zombie economic policies — policies that
should have been killed by the evidence that all of their premises are
wrong, but which keep shambling along nonetheless. And it’s anyone’s guess
when this reign of error will end.

-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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