The Confidence Fairy Is Dead. But ‘Reign of Error’ Continues.
Economist Paul Krugman, a professor at Princeton and popular columnist for the New York Times, has throughout the Great Recession provided analysis that correctly predicted what would happen with our current policies, both here and in Europe: Interest rates would not soar; Inflation would not soar; Unemployment would be stubborn without sufficient stimulus; And austerity policies would backfire and make recovery more difficult and slow.
Krugman has written a brilliant summary post in the New York Times. It’s a must read for anyone who has shared Krugman’s frustration over wrongheaded economic policies pushed both here and in Europe. Krugman thinks the leadership is coming close to admitting their errors, but he doesn’t hold out much hope for a reversal of policy prescriptions that have hurt recovery.
This was the month the confidence fairy died.
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.
The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.
So, about that doctrine: appeals to the wonders of confidence are something Herbert Hoover would have found completely familiar — and faith in the confidence fairy has worked out about as well for modern Europe as it did for Hoover’s America. All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment; the confidence fairy is nowhere to be seen, not even in Britain, whose turn to austerity two years ago was greeted with loud hosannas by policy elites on both sides of the Atlantic.
None of this should come as news, since the failure of austerity policies to deliver as promised has long been obvious. Yet European leaders spent years in denial, insisting that their policies would start working any day now, and celebrating supposed triumphs on the flimsiest of evidence. Notably, the long-suffering (literally) Irish have been hailed as a success story not once but twice, in early 2010 and again in the fall of 2011. Each time the supposed success turned out to be a mirage; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent.
However, something has changed in the past few weeks. Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working.
The question now is what they’re going to do about it. And the answer, I fear, is: not much.
For one thing, while the austerians seem to have given up on hope, they haven’t given up on fear — that is, on the claim that if we don’t slash spending, even in a depressed economy, we’ll turn into Greece, with sky-high borrowing costs.
Now, claims that only austerity can pacify bond markets have proved every bit as wrong as claims that the confidence fairy will bring prosperity. Almost three years have passed since The Wall Street Journal breathlessly warned that the attack of the bond vigilantes on U.S. debt had begun; not only have borrowing costs remained low, they’ve actually fallen by half. Japan has faced dire warnings about its debt for more than a decade; as of this week, it could borrow long term at an interest rate of less than 1 percent.
And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better.
But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar.
So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end.
Beezer here. Stubborness may be all that’s keeping this ‘reign of error’ afloat but eventually the public at large will begin to understand that their misery can be reversed and will demand action. These wrongheaded prescriptions of austerity have clearly failed by every metric and the situation keeps just getting worse, particularly in Europe. Only in the United States, where a Democrat President has called for stimulus now and long term fiscal prudence once recovery takes hold, is there any sign of recovery–and it’s been made unnecessarily weak by an austerity loving, Tea Party Republican controlled House of Representatives.
Tags: American Recovery, Confidence Fairy, Great Britain depression, New York Times, Paul Krugman, Reign of Error, Tea Party austerity policies
April 30th, 2012 at 11:04 am
While you propose pouring more fuel on the fire, I believe smothering works far better in puting the fire out.
April 30th, 2012 at 1:39 pm
Austerity is being tried everywhere, and its failing everywhere. Anyone who remembers their econ 101 knows procyclical austerity in a recession just makes matters worse. That’s why it’s called ‘procyclical.’
You need counter cyclical policies to get out of a recession. Direct government spending, like that for state fiscal support, or huge infrastructure RFPs, offers the most bang for the buck. It’s all about jobs, Capt.
April 30th, 2012 at 6:06 pm
I guess all the spending the govt has done has worked so well for us.
April 30th, 2012 at 11:42 pm
This administration has done everything to divide its citizens. Instead of passing the 30 jobs bills that were passed by the House and tabled by Reid in the Senate they scream out for more money taken from us to spend on BS. Look at “JOBSGOP.GOV” and see what this president has ignored
May 1st, 2012 at 7:00 am
The jobs bills were all tax cuts and special interest favors. That’s how the GOP defines a jobs bill–it’s a tax cut, or a release from some onerous regulation like polluting the environment. On the other hand anything that causes government spending, or elimination of a tax cut is a ‘job killing bill’
Ryan’s budget, with its draconian elimination of Medicare as we know it and Social Security benefits, is the major ‘jobs bill’ of the GOP. It’s all Orwellian speak.
May 1st, 2012 at 11:43 am
Yeh, the EPA has all the answers. I’ve dealt with the EPA. They allowed water run off to onto my land from rte3 in Hooksett by building a drain onto it without advising me and when I tried to sell the land they declared it wet land. It cost me 30 thousand dollars to fight it in court and when they realized they were losing withdrew. They were polluting my enviornment and never even apologized. Draconian, just because he wants to roll back the excessive spending to 2006 levels? No one is trying to eliminate medicare except Obama who stole 500 billion out of it for Obamacare. How did the 1 trillion dollar stimulus package work for you? Jobs are created by the private sector, not the govt., leave them alone and reduce regulations and taxes and you’ll see this economy grow.
May 2nd, 2012 at 7:18 am
First, the $500 billion was a projection of what the ACA would save over the next decade by bending the growth rate of health care spending. Your characterization of Obama stealing the money is a pure tell of your lack of serious thought. You could care less what the truth is.
As for the EPA, I’m certain they make mistakes. It’s a human condition, by the way, readily identifiable in private affairs too. I’m surprised you were not aware someone was building a conduit to your land. When the EPA withdrew, was the wetland disgnation lifted?
May 2nd, 2012 at 7:50 am
The property had been leased to NH college during that time. Neither NH college nor I was notified and yes the EPA withdrew but after a great cost to me which was unrecoverable. In addition the result from the water drain allowed wet land type plants to grow and we were restricted from building in that area, a costly result. As to the 500 billion,it doesn’t take serious thought to recognize blatent stealing by Obama from medicare.
May 2nd, 2012 at 11:08 pm
You can see what the EPA did to me and that’s small time. Just think what they do to the job creators in industry. They handcuff them by over regulation then kick them when they just try to survive and it’s the workers who get hurt. Like the recent official that controled the oil companies in the southwest, he intentionaly put unnecessary pressure on them for his own amusement. Thank God, he was forced to resign under public scrutiny. Obama’s administration has shown nothing but contempt for the private sector.
May 4th, 2012 at 11:26 am
No question there will be abuse. No question regulations must be effective and as reasonable as possible.
But you don’t toss the baby out with the bathwater. We have elected legislators who should help their constituencies succeed. I get that as much as anyone. But the public’s health and economic well being are dependent upon a lot of what governments are supposed to do, in my opinion. Don’t let great be the enemy of good. Demanding perfection of government is a non starter. Ain’t going to happen. And much of what government needs to do doesn’t fit a profit and loss profile (at least in terms of private corporate P&Ls).
May 4th, 2012 at 12:23 pm
Govt has never come in on budget because it cares less what it spends. Govt regulations are repressive and discourage buisness. You want 1984 to be a reality. Your love for “fairness”aka spcialism is sickening.Your lack of understanding of ones desire to improve themself is disheartening.
May 4th, 2012 at 2:52 pm
The problem with democrats, they are always looking for a hand out. Govt is the answer, those who pay taxes(mostly republicans) will take care of the inept and lazy. Why work? WE already see over 50% pay no federal taxes, why not increase that number and control the vote? This shows that all people are not created equal and the “fairness doctrine” that Obama screams out about is the beginning of our demise. Rome, all over again and Greece today. I guess history has no effect on the greedy. Who cares what we leave for our children, even if it’s a debt they won’t be able to pay?
May 4th, 2012 at 5:46 pm
The middle class and the poor are Greedy? If they’re greedy, the rich must be ravenous.
And of course the data shows they are ravenous. Be quiet serf!
May 4th, 2012 at 10:31 pm
Beez, you are for an entitled society, unforunately soon there will no one to pay for it and we will all be living under the bridge.
May 5th, 2012 at 6:33 am
Nah. Not happening Capt. Ironically, you underestimate our creativity and ambition. We have safety nets because we are compassionate people, as a rule.
There will always be people who game any system, whether it’s the financial system or the medicare system, or disability system–whatever. Never going to change.
My point of view is that having the most people gainfully employed is a fundamental goal. It’s actually one of two mandates for the Federal Reserve, the other one being price stability.
I’ve argued almost since the beginning of this blogsite that the government should be putting out infrastructure RFPs by the billions in order to address our infrastructure deficit and to put millions of people back to work being productive. If we’d done that from the get go, we’d already be well on our way in recovery.
But for reasons I still don’t understand, the GOP put up roadblocks on every path. Instead they obsess over deficits and recommend austerity–policies history shows only make matters worse. I’ve come to the conclusion this opposition is just that, opposition for the sake of opposition. If Obama wants infrastructure projects, we oppose infrastructure projects. If Obama wants everyone to have health care, we oppose everyone having health care. If Obama wants to clean up bank balance sheets and subdue speculation, we want banks to be less regulated and less transparent.
The single thing the GOP supports always is tax cuts, even though there’s no way we will balance our national books without sufficient revenue: IE, as a practical matter the GOP favors deficits and debt! Good Lord, what a mash.
May 5th, 2012 at 10:45 am
Amazing how you reverse the truth but I guess that comes with practice.
May 5th, 2012 at 5:13 pm
Saying tax cuts are equal to job creation is not a jobs bill. Name me one bill that guarantees jobs that’s been proposed by the GOP anywhere. I’m talking legislation here.
Name me one GOP bill that is paid for. You can’t. There aren’t any. Name me one GOP budget bill that details what tax reforms are being recommended, and what spending cuts are being recommended. You can’t because no such budget proposal has been made.
The only person who’s proposed a budget that includes the details on taxes and spending is the President’s. And the GOP in the House put his bill, stripped of all the recommendations, to a vote. No one would vote for such a thing. It was all theater.
May 6th, 2012 at 7:47 am
If you recall the senate voted Obama’s budget down unanimously.
May 6th, 2012 at 5:53 pm
Obama’s bill got to the Senate in 2011. It probably wasn’t going to pass anyway, but Obama made a speech after the budget hit the Senate floor where he outlined an ambitious plan to cut $4 trillion over 12 years. FUBAR. A terrible idea. Republicans weren’t going to vote for anything Obama proposed, but Democrats rebelled too after the speech.
Ain’t saying the guys perfect.
May 7th, 2012 at 4:15 pm
They finally agreed on his idiocy.
May 8th, 2012 at 5:54 am
Congress is not working. This Congress is the worst in history. They do nothing but play political posture games. Nothing can get passed, either in the House or the Senate.
They owe their allegiance to billionaires and ideologues like Grover Nyquist. They could care less about the public.
May 8th, 2012 at 10:11 am
The senate blocks every bill sent to them by the house, thanks to Reid.
May 10th, 2012 at 10:08 am
All the bills include a poison pill of one kind or another designed to insure they aren’t accepteable to the Senate. This is intentional and simply theater for pr grist. On the other hand the GOP will not accept anything that includes raising revenues.
So we’re stuck with a do nothing Congress.
The simple fact is the budget has zero chance of being balanced without raising revenues, which currently amount to 15% of GDP, far below the historical norms of 20% or more.