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Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsKRUGMAN: demolishes austerity economics
How the Case for Austerity Has CrumbledJUNE 6, 2013
Paul Krugman
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Neil Irwins The Alchemists gives us a time and a place at which the major advanced countries abruptly pivoted from stimulus to austerity. The time was early February 2010;the place, somewhat bizarrely, was the remote Canadian Arctic settlement of Iqaluit, where the Group of Seven finance ministers held one of their regularly scheduled summits. Sometimes (often) such summits are little more than ceremonial occasions, and there was plenty of ceremony at this one too, including raw seal meat served at the last dinner (the foreign visitors all declined). But this time something substantive happened.
In the isolation of the Canadian wilderness, Irwin writes, the leaders of the world economy collectively agreed that their great challenge had shifted. The economy seemed to be healing; it was time for them to turn their attention away from boosting growth. No more stimulus.
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How decisive was the turn in policy? Figure 1, which is taken from the IMFs most recent World Economic Outlook, shows how real government spending behaved in this crisis compared with previous recessions; in the figure, year zero is the year before global recession (2007 in the current slump), and spending is compared with its level in that base year. What you see is that the widespread belief that we are experiencing runaway government spending is falseon the contrary, after a brief surge in 2009, government spending began falling in both Europe and the United States, and is now well below its normal trend. The turn to austerity was very real, and quite large.
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This raises the obvious question: Why did austerity economics get such a powerful grip on elite opinion in the first place?
So is the austerian impulse all a matter of psychology? No, theres also a fair bit of self-interest involved. As many observers have noted, the turn away from fiscal and monetary stimulus can be interpreted, if you like, as giving creditors priority over workers. Inflation and low interest rates are bad for creditors even if they promote job creation; slashing government deficits in the face of mass unemployment may deepen a depression, but it increases the certainty of bondholders that theyll be repaid in full. I dont think someone like Trichet was consciously, cynically serving class interests at the expense of overall welfare; but it certainly didnt hurt that his sense of economic morality dovetailed so perfectly with the priorities of creditors.
Its also worth noting that while economic policy since the financial crisis looks like a dismal failure by most measures, it hasnt been so bad for the wealthy. Profits have recovered strongly even as unprecedented long-term unemployment persists; stock indices on both sides of the Atlantic have rebounded to pre-crisis highs even as median income languishes. It might be too much to say that those in the top 1 percent actually benefit from a continuing depression, but they certainly arent feeling much pain, and that probably has something to do with policymakers willingness to stay the austerity course.
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(imho) This is a Krugman piece on the subject
(perhaps some of you can add some snippets...?)
From NYT Review of Books Section:
http://www.nybooks.com/articles/archives/2013/jun/06/how-case-austerity-has-crumbled/?page=1
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KRUGMAN: demolishes austerity economics (Original Post)
kpete
May 2013
OP
byeya
(2,842 posts)1. Krugman did a good job analyzing he 3 books and putting them in context. Still, I either
missed it or he didn't put in, the credit Dean Baker is due for pointing out within a day or two of the R/R "study" that Harvard duo had provided no data, a breech of ethics in the profession.
Leaving the above quibble aside, this essay is worth reading.