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Why Paul Krugman Needs to Run a Teach-in for Ignorant New York Times Business Reporters

International business reporters are helping the economic quacks who prescribe austerity snake oil.

To know the Washington Consensus as a regular citizen is to hate the Consensus.

The Washington Consensus, as the name implies, was an “inside the beltway” series of neo-liberal policies embraced by the IMF, the World Bank, and the U.S. government. It called for a minimal state and an all-powerful private sector. The private sector and de facto private central banks would discipline the State by insisting on balanced budgets – perpetual austerity. Democracy was unreliable, indeed dangerous, so the central banks had to be “independent” of the democratic process (and wholly dependent on the largest banks). Only the private sector had the proper incentives that could be relied upon to create vibrant growth and a self-correcting economy. The Consensus was developed in the context of the policies that should be imposed on Latin America -- and Latin Americans were the guinea pigs of Consensus. (This metaphor was particularly troubling for Latin Americans who knew that their ancestors raised guinea pigs as a reliable source of meat.)

The Consensus led to weak growth, high unemployment, and repeated privatization scandals. It enraged ordinary citizens in much of Latin America, which is why there has been a landslide of national leaders elected because of their promises to oppose the Consensus and their open disdain for Washington’s neo-colonial diktats. There is nothing unusual about the Latin American reaction to the Consensus. What is startling is that at the same time that Latin America was rising up to reject the Consensus, the dominant neo-liberal politicians and economists in Europe were passionately worshiping its failed dogma with the zeal of the convert. They created the Berlin Consensus, and it rested on austerity today, austerity tomorrow, austerity always.

Overall, European nations showed significant budgetary restraints in the decade leading up to the Great Recession. Most of the periphery did so – Greece is a special case. The Cato Institute, for example, praised Iceland and Ireland as models of restraint. Spain also received praise. The claim that the periphery was “profligate” through large budgetary deficits in the run up to the crisis reverses the facts.

Austerity during a serious recession is economically insane. It is a pro-cyclical policy that makes the recession more severe. A more severe recession is a mass destroyer of wealth and quality of life. It is pure waste. It is the primary cause of dramatic increases in public deficits and debt. Unemployment reduces tax payments and increases demands for public spending. One cannot decide to end a budgetary deficit during a recession by adopting austerity. Austerity (some combination of cutting government spending and increasing taxes) reduces private and public sector demand. This means that imposing austerity is likely to deepen the recession and can make the national deficit and debt larger. It is analogous to the medical insanity of bleeding patients to cure them of disease – and then bleeding them more because the prior bleeding make them sicker.

Europeans of the periphery are having austerity imposed on them by German demands – and they are subjected to repeated insults from German and Dutch leaders for failing to balance their budgets because the austerity imposed by Germany deepened their recession and slashed their tax revenues. Germany’s demands for austerity have thrown the euro zone back into recession – but it has forced the periphery into Great Depression levels of unemployment. German-imposed austerity, the Berlin Consensus, is even more draconian than the Washington Consensus in Latin America. Germany and the ECB are open that they are not simply demanding austerity and massive privatization – they are also demanding dramatic reductions in working class wages throughout the EU. The German’s and the ECB are not demanding any sacrifices from European elites. They explicitly target the working class and government workers’ wages and oppose any increased taxation of the wealthy. The Berlin Consensus is a road map to ever greater inequality.

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