As Others See Us

Paul Krugman writes:

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.

When the Cameron government came in, it was fully invested in the doctrine of expansionary austerity. Officials told everyone to read the Alesina/Ardagna paper (which is succinctly criticized by Christy Romer), 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 the Office for Budget Responsibility report, p. 54, that basically throws up its hands — hey, these things happen after financial crises, it says, and cites an IMF report.

So I wonder: did they read the abstract of that 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 policymakers 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 Cameron and Osborne 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.

Causing Charley James of Minneapolis to comment:

David Cameron, Chancellor Osborne and the entire British Orwellian newspeak experiment with austerity brings growth, hate brings love and banks aren't to blame for a banking crisis should be a lesson to those of us in a former colony. It does not work, no matter how much the circus parade of GOP presidential pretenders say it does.

In watching BBC news last night, it was amazing to see Osborne in Parliament tie himself in knots trying to justify a failed policy while insisting there is more to come because that will make everything better. This goes beyond believing in the confidence fairy; this is delusional behavior that would subject mere mortals (as opposed to ministers of the Crown or supposedly serious Republicans) to an intense intervention by friends and family members.