Paul Krugman: Conservative Budget Hawks Have Done Damage Way Worse than Thought
Paul Krugman has some dismal news in Friday's column. The perverse mania for austerity while various economies were sputtering during the Great Recession may not just have been bad policy at the time. It may have done lasting damage and crippled longterm growth.
Initially, Krugman writes, policy makers here in the U.S. did more or less the right thing.
The Federal Reserve and other central banks realized that supporting the financial system took priority over conventional notions of monetary prudence. The Obama administration and its counterparts realized that in a slumping economy budget deficits were helpful, not harmful. And the money-printing and borrowing worked: A repeat of the Great Depression, which seemed all too possible at the time, was avoided.
But it didn't last. Around 2010, things took a fateful turn when "the policy elite on both sides of the Atlantic decided to stop worrying about unemployment and start worrying about budget deficits instead."
People espousing this approach were perceived as "Very Serious People.," despite any lack of analysis or evidence. Meanwhile, economists like Krugman, who pointed out the folly of "deficit fetishism" and the fact that it would deepen the recession were painted as irresponsible.
But Krugman is hardly celebrating, because it now appears that austerity policies have wreaked more damage than even he predicted, the kind of damage that is harder to recover from, a crippling of long-term growth. Krugman again:
The idea that policies that depress the economy in the short run also inflict lasting damage is generally referred to as “hysteresis.” It’s an idea with an impressive pedigree: The case for hysteresis was made in a well-known 1986 paper by Olivier Blanchard, who later became the chief economist at the International Monetary Fund, and Lawrence Summers, who served as a top official in both the Clinton and the Obama administrations. But I think everyone was hesitant to apply the idea to the Great Recession, for fear of seeming excessively alarmist.
Catastrophic austerity has pretty much eaten its own tail, undermining future tax receipts and possibly leading to bigger government debt. Oh, the dumb irony of it all.
Not that any of these lessons are likely to be learned, Krugman concludes ruefully.