Confronting the Austerity Agenda

Paul Krugman takes on the idea that after we bail out economically destructive banks, we all have to pay with downsized lives and a bad economy in his NYT column today. He continues to fight the idea that austerity–not prosperity–will bring back confidence and the economy.  He’s right that the austerity hawks push a ridiculous assertion that denies past history as well as logic.

The doctrine in question amounts to the assertion that, in the aftermath of a financial crisis, banks must be bailed out but the general public must pay the price. So a crisis brought on by deregulation becomes a reason to move even further to the right; a time of mass unemployment, instead of spurring public efforts to create jobs, becomes an era of austerity, in which government spending and social programs are slashed.

This doctrine was sold both with claims that there was no alternative — that both bailouts and spending cuts were necessary to satisfy financial markets — and with claims that fiscal austerity would actually create jobs. The idea was that spending cuts would make consumers and businesses more confident. And this confidence would supposedly stimulate private spending, more than offsetting the depressing effects of government cutbacks.

Some economists weren’t convinced. One caustic critic referred to claims about the expansionary effects of austerity as amounting to belief in the “confidence fairy.” O.K., that was me.

But the doctrine has, nonetheless, been extremely influential. Expansionary austerity, in particular, has been championed both by Republicans in Congress and by the European Central Bank, which last year urged all European governments — not just those in fiscal distress — to engage in “fiscal consolidation.”

And when David Cameron became Britain’s prime minster last year, he immediately embarked on a program of spending cuts in the belief that this would actually boost the economy — a decision that was greeted with fawning praise by many American pundits.

Now, however, the results are in, and the picture isn’t pretty

Example one:  The economy of Greece.  It has been pushed into an even bigger slump. Example two:  The economy of the UK.  Austerity has stalled its economy and the confidence fairy is no where to be seen.  Example three:  Iceland.  They did the exact opposite and they’re none the worse for wear.  So, which example are we following?  Well, it’s not Iceland.

Krugman, Icelanders, and the IMF are taking stock of the Iceland experience this week in a conference.  You can read many articles at the IMF on how Iceland is recovering from its 2008 economic catastrophe.  You can watch a video explaining what went on there with Dr. Joseph Stiglitz below.

Today, three years later, it is worth reflecting on how far Iceland―a country of just 320,000 people―has come since those dark days back in 2008. Growth has returned to the economy, and new jobs are being created: unemployment, although still unacceptably high for a country used to near-full employment, has dropped below 7 percent of the work force. In June this year, the government successfully issued a $1 billion sovereign bond, marking a return to international financial markets.

And while public debt, currently at around 100 percent of GDP, is much higher than before the crisis, an impressive consolidation program has put the country’s finances back on a sustainable path during the past couple of years. As for the banks, they have been shrunk to about 200 percent of GDP, and are now fully recapitalized.

So, how did they do it?  Did they embrace austerity for their citizens after rescuing and enriching their errant banking/financier class?

  • First, a team of lawyers was put to work to ensure that losses in the banks were not absorbed by the public sector. In the end, the public sector did of course have to step in and ensure the new banks had adequate capital, but it was insulated from vast private sector losses. This was a major achievement.
  • Second, the initial focus of the program was exclusively on stabilizing the exchange rate. Here, we reached for unconventional measures, notably capital controls.
  • Third, automatic stabilizers were allowed to operate in full during the first year of the program—effectively delaying fiscal adjustment. This helped support the economy at a time of severe strain.
  • Fourth, conditionality was streamlined and focused on the key issue at hand—rebuilding the financial sector. While there are some issues in the broader economy where reforms will eventually be needed, these were not a part of the program.
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13 Comments on “Confronting the Austerity Agenda”

  1. B Kilpatrick says:

    There is no austerity. It exists in the same way that Reagan’s slashing of government did – purely in the imagination.

    • dakinikat says:

      It depends on who you are talking about. There is no austerity for defense contractors or hedge fund managers.

      • B Kilpatrick says:

        There’s marginal austerity that hits social support services. It’s hard to see how spending would improve anything when that spending is horribly targeted. Building more roads and hiring cops will be as likely to benefit the average person as spending money to build an elevator to the moon.
        Hell, hiring more cops is likely to work out horribly for the average person since more cops = more traffic fines, arrests, court fees, etc = less money for everyone else. And yet cops, teachers, and roads are the only answers that anyone can seem to come up with on the left side of the aisle. On the right, the only thing they can think up are cutting taxes like 0.3% or something. Both solutions are useless, and what’s dooming us is the fact that nothing can change, or rather, that no-one is willing to change things no matter how obviously stupid and/or useless they may be.
        Want to fix the economy? Issue pardons for all drug offenses, and all non-violent crimes committed more than 10 years ago, seal any records, and make it a felony to release them or even mention them.
        Or make individually-purchased health insurance tax deductible, or remove the monopolies that a lot of power companies have, etc etc etc.
        There are sorts of things that could be done that make more sense than pretending like hiring 200 people for road work and a couple of cops and teachers is going to help the average person pay the light bill or buy decent food. The problems at this point are structural in nature and have a lot to do with the fact that people seem to be becoming much stupider at an alarming rate so that now, for instance, a lot of businesses will not hire anyone who has been unemployed for more than six months (and that’s a policy a lot of them had before the shirt hit the fan in 08.) How can sending someone a check get around the fact that he can’t even get a crappy McJob now because he hasn’t had one in awhile? etc

        As an aside, I’d assert that on the local level, anti-austerity is the problem. Less revenue for cities means that they can’t support the budgets that they’ve doubled over the last decade, so they turn to handing out traffic tickets and whatnot like candy so now the three people who do the work of one person can stay employed but everyone else gets to choose between paying the light bill and paying a ticket.

      • B Kilpatrick says:

        Yea, but an economy isn’t just a big “stuff machine” that does nothing but make undifferentiated “stuff”. It matters whether what is being produced is actually useful.

      • B Kilpatrick says:

        And Central City and the ninth ward have really high aggregate demand. The minute anyone gets a cent to their name it gets blown on tens and rims, lotto tickets and malt liquor. They sure as hell won’t ever suffer from a collapse in demand or a liquidity trap, but the wealth seems strangely absent.

      • foxyladi14 says:

        true dat. :(

  2. quixote says:

    I see we’re on the same austerity wavelength, Dak! I just scheduled a post for a bit later. Not being an economist, my focus is a bit different, but the message is really the same. Austerity? Schmausterity. Fuggedaboutit.

  3. bostonboomer says:

    Reading Krugman’s column is mind-blowing. He’s been saying this stuff over and over for years now. And the insanity continues.

  4. The thing about Iceland’s recovery, and places like Canada and Norway which have seen little (if any) downturn at all…. how many wars are they fighting? In how many locations around the world do they maintain a military presence? How much are they spending to terrorize and imprison their own citizens in a never ending Insane War On Drugs? How much are they spending to terrorize their own citizens in a war on (ironically) terrorism… which is not even a country, group, or person over which to claim victory?

    • dakinikat says:

      Here’s the best place to get that kind of data:

      http://www.sipri.org/databases/milex

      Most of those countries spend about 1 to 1 1/2 % of GDP on defense and we spend about 5% of GDP. But, government spending has about the same effects regardless of the target of spending as long as the targets are domestic. There are countries that spend a lot more of their GDP than we do and most of them are in the middle east like Saudi Arabia, Jordan, Israel, etc.

    • B Kilpatrick says:

      Iceland doesn’t have a massive underclass and a lower-middle class that’s barely hanging on. ANY policy will function better there than it will here.