Paul Krugman: How Austerity Killed Europe's Recovery - And America Somehow Squeaked Through
Paul Krugman has plenty of criticisms of economic policy in America, but at least we're not Europe, he points out. The fact that a recovery is finally, undeniably underway in the States, while Europe continues to stumble has everything to do with the ill-concieved austerity economics that has swept the continent, and that American conservatives would have loved to implement here. It's a good thing those conservatives did not entirely get their way, Krugman argues in Friday's column. "Spendthrift, loose-money America is experiencing a solid recovery — a reality reflected in President Obama’s feisty State of the Union address," Krugman writes. "Meanwhile, virtuous Europe is sinking ever deeper into deflationary quicksand; everyone hopes that the new monetary measures announced Thursday will break the downward spiral, but nobody I know really expects them to be enough.
It's a hard concept to wrap your head around, and Krugman keeps trying to explain it. Government spending, rather than government belt-tightening is the way out of recessions. Seems counterintuitive, even irresponsible, spending your way out of a slump, but there you have it. As Krugman writes:
No, it’s not morning in America, let alone the kind of prosperity we managed during the Clinton years. Recovery could and should have come much faster, and family incomes remain well below their pre-crisis level. Although you’d never know it from the public discussion, there’s overwhelming agreement among economists that the Obama stimulus of 2009-10 helped limit the damage from the financial crisis, but it was too small and faded away far too fast. Still, when you compare the performance of the American economy over the past two years with all those Republican predictions of doom, you can see why Mr. Obama is strutting a bit.
Europe, on the other hand — or more precisely the eurozone, the 18 countries sharing a common currency — did almost everything wrong. On the fiscal side, Europe never did much stimulus, and quickly turned to austerity — spending cuts and, to a lesser extent, tax increases — despite high unemployment. On the monetary side, officials fought the imaginary menace of inflation, and took years to acknowledge that the real threat is deflation.
As for the reasons Europe got it so wrong and America got it less wrong, the U.S. has strong institutions like Social Security, Medicare and food stamps that helped some of the worst-hit states. European countries were much more on their own. (And if Republicans get their way, so will we be, soon.)
But hard-hit European countries just kept slashing budgets and moralizing that belt-tightening and balanced budgets were the most important goals to attain. That would teach responsibility to all those profligate borrowers and spenders. Loosening of monetary policy shows some signs of helping, but Germany, in particular, is "adamantly opposed to anything that might make life easier for debtor nations."
The terrible thing is that Europe’s economy was wrecked in the name of responsibility. True, there have been times when being tough meant reducing deficits and resisting the temptation to print money. In a depressed economy, however, a balanced-budget fetish and a hard-money obsession are deeply irresponsible. Not only do they hurt the economy in the short run, they can — and in Europe, have — inflict long-run harm, damaging the economy’s potential and driving it into a deflationary trap that’s very hard to escape.
Nor was this an innocent mistake. The thing that strikes me about Europe’s archons of austerity, its doyens of deflation, is their self-indulgence. They felt comfortable, emotionally and politically, demanding sacrifice (from other people) at a time when the world needed more spending. They were all too eager to ignore the evidence that they were wrong.
And guess who gets to pay the price for decades to come.