These days, ambulance-chaser economists like yours truly have an embarrassment of riches: So much is going wrong, in so many places, that one hardly knows where to start.
But let’s spare a moment for a disaster that’s being overshadowed by the euro crisis: Britain’s experiment in austerity.
In 2010, when Prime Minister David Cameron’s government came in, it was fully invested in the doctrine of expansionary austerity. Officials told everyone to read the paper by the economists Alberto Alesina and Silvia Ardagna (later succinctly criticized by Christy Romer, the former chairwoman of President Obama’s Council of Economic Advisers, during a recent speech at Hamilton College, which can be read at econ.berkeley.edu), which cited Ireland as a success story, and in general assured everyone that they could call the confidence fairy from the vasty deep.
Now it turns out that contractionary policy is contractionary after all. As a result, despite all the austerity, deficits remain high. So what is to be done?
More austerity!
Underlying the drive for even more austerity is the belief that the underlying economic potential of the British economy has fallen sharply, and will grow only slowly from now on. But why? There’s a discussion in a report released last month by Britain’s Office for Budget Responsibility that basically throws up its hands — hey, these things happen after financial crises, it says, and cites a report from the International Monetary Fund from 2009 on output dynamics after banking crises.
So I wonder: did officials read the abstract of that I.M.F. report? Because here’s what it says: “Short-run fiscal and monetary stimulus is associated with smaller medium-run deviations of output and growth from the precrisis trend.”
That is, history says that a financial crisis reduces long-run growth potential if policy makers don’t limit the short-run damage it does.
And yet what’s happening in Britain now is that depressed estimates of long-run potential are being used to justify more austerity, which will depress the economy even further in the short run, leading to further depression of long-run potential, leading to …
It really is just like a medieval doctor bleeding his patient, observing that the patient is getting sicker, not better, and deciding that this calls for even more bleeding.
And the truly awful thing is that Mr. Cameron and George Osborne, Britain’s chancellor of the Exchequer, are so deeply identified with the austerity doctrine that they can’t change course without effectively destroying themselves politically.
As the Brits would say, brilliant. Just brilliant.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007).
Copyright 2011 The New York Times.
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