Op-Ed Columnist
Published: January 29, 2012
Related
Times Topics: United States Economy | European Debt Crisis
Last week the National Institute of Economic and Social Research, a
British think tank, released a startling chart comparing the current
slump with past recessions and recoveries. It turns out that by one
important measure — changes in real G.D.P. since the recession began —
Britain is doing worse this time than it did during the Great
Depression. Four years into the Depression, British G.D.P. had regained
its previous peak; four years after the Great Recession began, Britain
is nowhere close to regaining its lost ground.
Nor is Britain unique. Italy is also doing worse
than it did in the 1930s — and with Spain clearly headed for a
double-dip recession, that makes three of Europe’s big five economies
members of the worse-than club. Yes, there are some caveats and
complications. But this nonetheless represents a stunning failure of
policy.
And it’s a failure, in particular, of the austerity doctrine that has
dominated elite policy discussion both in Europe and, to a large extent,
in the United States for the past two years.
O.K., about those caveats: On one side, British unemployment was much
higher in the 1930s than it is now, because the British economy was
depressed — mainly thanks to an ill-advised return to the gold standard —
even before the Depression struck. On the other side, Britain had a
notably mild Depression compared with the United States.
Even so, surpassing the track record of the 1930s shouldn’t be a tough
challenge. Haven’t we learned a lot about economic management over the
last 80 years? Yes, we have — but in Britain and elsewhere, the policy
elite decided to throw that hard-won knowledge out the window, and rely
on ideologically convenient wishful thinking instead.
Britain, in particular, was supposed to be a showcase for “expansionary
austerity,” the notion that instead of increasing government spending to
fight recessions, you should slash spending instead — and that this
would lead to faster economic growth. “Those who argue that dealing with
our deficit and promoting growth are somehow alternatives are wrong,”
declared David Cameron, Britain’s prime minister. “You cannot put off
the first in order to promote the second.”
How could the economy thrive when unemployment was already high, and
government policies were directly reducing employment even further?
Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the
time the president of the European Central Bank, and a strong advocate
of the doctrine of expansionary austerity — “that in the current
circumstances confidence-inspiring policies will foster and not hamper
economic recovery, because confidence is the key factor today.”
Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund
and elsewhere quickly debunked the supposed evidence that spending cuts
create jobs. Yet influential people on both sides of the Atlantic
heaped praise on the prophets of austerity, Mr. Cameron in particular,
because the doctrine of expansionary austerity dovetailed with their
ideological agendas.
Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron
for his boldness, and in particular for “brushing aside the warnings of
economists that the sudden, severe medicine could cut short Britain’s
economic recovery and throw the nation back into recession.” He then
called on President Obama to “do a Cameron” and pursue “a radical
rollback of the welfare state now.”
Strange to say, however, those warnings from economists proved all too
accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a
Cameron.
Which is not to say that all is well with U.S. policy. True, the federal
government has avoided all-out austerity. But state and local
governments, which must run more or less balanced budgets, have slashed
spending and employment as federal aid runs out — and this has been a
major drag on the overall economy. Without those spending cuts, we might
already have been on the road to self-sustaining growth; as it is,
recovery still hangs in the balance.
And we may get tipped in the wrong direction by Continental Europe,
where austerity policies are having the same effect as in Britain, with
many signs pointing to recession this year.
The infuriating thing about this tragedy is that it was completely
unnecessary. Half a century ago, any economist — or for that matter any
undergraduate who had read Paul Samuelson’s textbook “Economics” — could
have told you that austerity in the face of depression was a very bad
idea. But policy makers, pundits and, I’m sorry to say, many economists
decided, largely for political reasons, to forget what they used to
know. And millions of workers are paying the price for their willful
amnesia.
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