Death of the [Austerity]/Confidence Fairy Tale

Death of a Fairy Tale: This was the month the confidence fairy died.
By PAUL KRUGMAN

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.

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.

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.

https://www.nytimes.com/2012/04/27/opin ... .html?_r=1

Yeah, let's keep cutting... Let's keep chasing policies that we already KNOW don't work...

Eurozone Unemployment Hits 10.9 Percent, A Record High

LONDON — Record high unemployment for the 17 countries that use the euro is set to increase the pressure on Europe's leaders to switch from a focus on austerity to a pro-growth strategy to stop the region from moving deeper into recession.

Unemployment across the 17-member eurozone rose by 169,000 in March, official figures showed Wednesday, taking the rate up to 10.9 percent in March – its highest level since the euro was launched in 1999.

The rate was up from 10.8 percent in February and 9.9 percent a year ago, and reflects the downturn in the eurozone economy as governments pursue tough austerity measures to deal with their debts – nearly half the countries in the eurozone, including Spain and the Netherlands, are now officially in recession.

"The question is how long EU leaders will continue to pursue a deeply flawed strategy in the face of mounting evidence that this is leading us to social, economic and political disaster," said Sony Kapoor, managing director of Re-Define, an economic think-tank.

Austerity has so far been Europe's main policy response to the debt problems afflicting many countries. It's been pushed hard by Germany, Europe's biggest economy, as a way to convince markets and international investors that the region has a grip on the problem.

However, analysts have pointed out that Germany may change its stance as there are already indications that its economy may struggle this year.

http://www.huffingtonpost.com/2012/05/0 ... 70237.html

Yes, let's cut, cut, cut our way to a worse Depression than the Bush Recession.... :VeryScared:

Good point. When people are too scared to spend and invest in the economy, goverment needs to step in to prop it up. But when do you dial back the spending?
Consumers spent like crazy in the Clinton and Bush years adding debt and taking out home equity, so even if you want for consumers to eventually replace that goverment spending, they might not want to, or may not be able too.

There are so many reasons for people to be saving instead of spending right now.
Retirement savings? Experts will tell people they aren't saving enough and don't count on Social Security.
Home buying? So many less people are being approved for mortgages that even with declining home prices, rents are increasing in Denver at record rates.

Well time will tell which is better, a deep recession and stronger foundation, or a long slow recession with inflation and huge long term debts and massive interest costs.

The Euro's don't have much choice, they don't have a money printing press for multiple countries.

LadyJazzer wrote: Yeah, let's keep cutting... Let's keep chasing policies that we already KNOW don't work...

Oh, but they do work. Consider the 1920-21 Depression. In 1920 the federal government's spending was $6.4 Billion, which was dropped to $5 Billion in 1921 and had been nearly cut in half at $3.3 Billion by 1922. In 18 short months the union had recovered from a stock market crash where the value of the market had dropped by 47%, a 36% drop in wholesale prices, double digit unemployment (11.7%) and a decline in actual GNP of about 17% ($88.4 Billion to $73.4 Billion). In 18 short months the union recovered from a depression that, at its onset, was worse than even the Great Depression. What sets the two apart is how the federal government responded to them. The 1920/21 Depression saw the federal government significantly reduce its spending and the rate at which it taxed the populace. What the federal government did at the onset of the Great Depression was exactly the opposite, it increased spending and increased taxes which both magnified the problem and extended it. The 1920/21 Depression was over in 18 months, the Great Depression lasted 132 months. And history shows us that it wasn't until the federal government cut spending and lowered taxes in 1948 that recovery from the Great Depression truly gained a foothold. Truman vetoed two tax cuts in 1947 citing the same reason that Democrats oppose them now - they favored the wealthy. It wasn't until Congress overrode Truman's third veto of the tax cuts in 1948 that the economic engine of the union started humming once again. Here again federal government spending was cut along with the tax rates. In 1947 federal outlays were 17% of GDP at $41.4 Billion, in 1948 they were 13.25% of GDP and $35.6 Billion - a reduction of actual dollars spent by the federal government of 14% in one year.

Reducing the actual amount of money spent by the general government always yields positive results for the union's economy. Keynesian "stimulus" attempts my halt a decline, but they also inevitably lengthen the amount of time necessary to recover from the decline. The Great Depression lasted 7 times as long as the 1920/21 Depression did. As our current predicament shows, those that fail to learn the lessons of history are doomed to repeat it. Cut the tax rates, cut the actual amount of spending and we can get ourselves out of this mess which the general government created. It is the only solution which has shown itself to bring a quick end to economic downturns. Lowering tax rates alone will not solve the problem - actual dollars spent must also be significantly reduced instead of pretending that a smaller increase than previously proposed equates to less spending.

LadyJazzer wrote:
[snipped all the socialist crap]

Yes, let's cut, cut, cut our way to a worse Depression than the Bush Recession.... :VeryScared:

You mean like the current Obama Depression. How about the far left Paul Krugman, who announced on CNN that we are in a Depression. Go see the video.

http://hotair.com/archives/2012/05/01/k ... -you-know/

I knew Obama could do much better than Bush. You should be very proud of him.

LJ: "Was it over when the Germans bombed Pearl Harbor?"
Otter: Let her go.

The current economy is still Bush's fault.
Gasoline prices can not be affected by the President.
The Huffington Post told me it was so.

PrintSmith wrote: Oh, but they do work.

Oh, but they don't, and screw your ancient history...CURRENT history/affairs prove it doesn't.

Insert standard bullsh** Sovereign Citizen regurgitation here: ____________________________

Guess what LJ - there is no current history which has shown itself able to address the problem - every recent attempt has failed because, surprise surprise surprise (in best Jim Nabors voice), none of them included the portion of the solution that did work - reducing the actual amount of dollars that the federal government spends. We've tried raising the taxes and raising the spending, we've tried lowering the taxes and raising the spending - neither of these worked to recover from an economic downturn. What has worked - lowering tax rates and reducing the amount of dollars the federal government spends from one year to the next - hasn't been tried since the Depression of 1920/21 and the recovery which started in 1948. Why it hasn't been tried remains a mystery given that every time it has been tried it has been successful in limiting both the duration and the impact of the economic downturns that were occurring at the time.

Krugman's simpled minded solution to recessions is to have the Government pump money into the economy to create growth. It can work when you start from a low debt level and want to tolerate inflation after. Just like an individual can live off credit cards for months or even years.

Europe already has debts exceeding 100% of GDP and bond investors that demand 6-8% for 10 year bonds. They actually should demand more since Greece already defaulted and made investors take a 50% haircut on old bonds. At some point debt is too high and you can't grow fast enough to grow GDP faster than interest payments are rising.

They are basically stuck with no way out except for eventual default.

On another note- I think it would be a hoot if the Socialist dude wins the election in France. Lets see what happens to France's economy.

And they put themselves there with their quixotic austerity measures... And it's worked so well there that the Ryan/Ayn-Rand Kool-Aid drinkers want to do it here...