Misguided belief in austerity diverts attention from need for jobs
Three years ago, a terrible thing happened to economic policy. Although the worst of the financial crisis was over, economies on both sides of the Atlantic remained deeply depressed, with very high unemployment. Yet the Western world's policy elite somehow decided en masse that unemployment was no longer a crucial concern, and that reducing budget deficits should be the overriding priority.
Worries about the deficit are greatly exaggerated - and I have documented the desperate efforts of the deficit scolds to keep fear alive. Today, however, I'd like to talk about a different kind of desperation: the frantic effort to find some example, somewhere, of austerity policies that succeeded. For the advocates of fiscal austerity - the austerians - made promises as well as threats: austerity, they claimed, would both avert crisis and lead to prosperity.
And let nobody accuse the austerians of lacking a sense of romance; in fact, they've spent years looking for Mr Goodpain.
The search began with a passionate fling between the austerians and Ireland, which turned to harsh spending cuts soon after its real estate bubble burst, and which for a while was held up as the ultimate exemplar of economic virtue. Ireland, said Jean-Claude Trichet of the European Central Bank, was the role model for Europe's debtor nations. American conservatives went further. Alan Reynolds, a senior fellow at the Cato Institute, declared that Ireland's policies showed the way forward for the United States, too.
Trichet's encomium was delivered in March 2010; at the time Ireland's unemployment rate was 13.3 per cent. Since then, every uptick in the Irish economy has been hailed as proof of recovery - but as of last month the unemployment rate was 14.6 per cent, only slightly down from the peak it reached early last year.
After Ireland came Britain, where the Tory-led government - to the sound of hosannas from many pundits - turned to austerity in mid-2010, influenced in part by its belief that Irish policies were a smashing success. Unlike Ireland, Britain had no particular need to adopt austerity: it is able to borrow at historically low interest rates. Nonetheless, the government insisted a harsh fiscal squeeze was needed to appease creditors and would boost the economy by inspiring confidence.
What actually happened was an economic stall. Before the move, Britain was recovering more or less in tandem with the US. Since then, the US economy has continued to grow, albeit slowly - but Britain's economy has been dead in the water.
At this point, you might have expected austerity advocates to consider something might be wrong with their analysis and policy prescriptions. But no. They went looking for new heroes and found them in a small Baltic nation, Latvia, which looms amazingly large in the austerian imagination.
This is kind of funny: austerity policies have been applied all across Europe, yet the best example of success the austerians can come up with is a nation with fewer inhabitants than, say, Brooklyn. Still, the International Monetary Fund recently issued two reports on the Latvian economy that help put this story into perspective.
To be fair to the Latvians, they do have something to be proud of. After experiencing a Great Depression-level slump, their economy has seen two years of solid growth and falling unemployment. However, they have regained only part of the lost ground in terms of output - and the unemployment rate is still 14 per cent. If this is the austerians' idea of an economic miracle, they truly are the children of a lesser god.
Oh, and if we're going to invoke the experience of small nations as evidence about what policies work, let's not forget the true economic miracle that is Iceland - a nation that was at ground zero of the financial crisis, but which, thanks to its embrace of unorthodox policies, has almost fully recovered.
So what do we learn from the rather pathetic search for austerity success stories? The doctrine that has dominated elite discourse for three years is wrong on all fronts. Not only have we been ruled by fear of non-existent threats, we've been promised rewards that will never arrive. It's time to deal with the real problem - unacceptably high unemployment.
The New York Times
Jake van der Kamp is on leave