Tornado Alley (PROG)

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The case for cuts was a lie. Why does Britain still believe it? The austerity delusion

Paul Krugman

In May 2010, as Britain headed into its last general election, elites all across the western world were gripped by austerity fever, a strange malady that combined extravagant fear with blithe optimism. Every country running significant budget deficits – as nearly all were in the aftermath of the financial crisis – was deemed at imminent risk of becoming another Greece unless it immediately began cutting spending and raising taxes. Concerns that imposing such austerity in already depressed economies would deepen their depression and delay recovery were airily dismissed; fiscal probity, we were assured, would inspire business-boosting confidence, and all would be well.

People holding these beliefs came to be widely known in economic circles as “austerians” – a term coined by the economist Rob Parenteau – and for a while the austerian ideology swept all before it.

But that was five years ago, and the fever has long since broken. Greece is now seen as it should have been seen from the beginning – as a unique case, with few lessons for the rest of us. It is impossible for countries such as the US and the UK, which borrow in their own currencies, to experience Greek-style crises, because they cannot run out of money – they can always print more. Even within the eurozone, borrowing costs plunged once the European Central Bank began to do its job and protect its clients against self-fulfilling panics by standing ready to buy government bonds if necessary. As I write this, Italy and Spain have no trouble raising cash – they can borrow at the lowest rates in their history, indeed considerably below those in Britain – and even Portugal’s interest rates are within a whisker of those paid by HM Treasury.

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"All of the economic research that allegedly supported the austerity
push has been discredited"
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On the other side of the ledger, the benefits of improved confidence failed to make their promised appearance. Since the global turn to austerity in 2010,...

[...]

What we got instead, however, was a hard right turn in elite opinion, away from concerns about unemployment and toward a focus on slashing deficits, mainly with spending cuts. Why?

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"Conservatives like to use the alleged dangers of debt and deficits as clubs
with which to beat the welfare state and justify cuts in benefits
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Part of the answer is that politicians were catering to a public that doesn’t understand the rationale for deficit spending, that tends to think of the government budget via analogies with family finances. When John Boehner, the Republican leader, opposed US stimulus plans on the grounds that “American families are tightening their belt, but they don’t see government tightening its belt,” economists cringed at the stupidity. But within a few months the very same line was showing up in Barack Obama’s speeches, because his speechwriters found that it resonated with audiences. Similarly, the Labour party felt it necessary to dedicate the very first page of its 2015 general election manifesto to a “Budget Responsibility Lock”, promising to “cut the deficit every year”.

Let us not, however, be too harsh on the public. Many elite opinion-makers, including people who imagine themselves sophisticated on matters economic, demonstrated at best a higher level of incomprehension, not getting at all the logic of deficit spending in the face of excess desired saving. For example, in the spring of 2009 the Harvard historian and economic commentator Niall Ferguson .. http://www.nybooks.com/articles/archives/2009/jun/11/the-crisis-and-how-to-deal-with-it/?pagination=false , talking about the United States, was quite sure what would happen: “There is going to be, I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates.” The weeks and months turned into years – six years, at this point – and interest rates remain at historic lows.

The long read -- https://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion

See also:

Paul Krugman: 'I'm sick of being Cassandra. I'd like to win for once'
2012 - https://investorshub.advfn.com/boards/read_msg.aspx?message_id=78700145