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Friday, October 28, 2011

Paul Krugman: The Path Not Taken

Austerity doesn't work:

The Path Not Taken, by Paul Krugman, Commentary NY Times: Financial markets are cheering the deal that emerged from Brussels early Thursday morning. Indeed,... the fact that European leaders agreed on something, however vague the details and however inadequate it may prove, is a positive development.
But it’s worth stepping back to look at the larger picture, namely the abject failure of an economic doctrine... 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 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. ...
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. ... 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...
Now, however, the results are in, and the picture isn’t pretty. Greece has been pushed by its austerity measures into an ever-deepening slump... Britain’s economy has stalled under the impact of austerity...
So bailing out the banks while punishing workers is not, in fact, a recipe for prosperity. But was there any alternative? ...
Iceland was supposed to be the ultimate economic disaster story: its runaway bankers saddled the country with huge debts and seemed to leave the nation in a hopeless position.
But a funny thing happened on the way to economic Armageddon: Iceland’s very desperation made conventional behavior impossible, freeing the nation to break the rules. Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net. Where everyone else was fixated on trying to placate international investors, Iceland imposed temporary controls on the movement of capital to give itself room to maneuver.
So how’s it going? Iceland hasn’t avoided major economic damage... But it has managed to limit both the rise in unemployment and the suffering of the most vulnerable... “Things could have been a lot worse” may not be the most stirring of slogans, but when everyone expected utter disaster, it amounts to a policy triumph.
And there’s a lesson here for the rest of us: The suffering that so many of our citizens are facing is unnecessary. If this is a time of incredible pain and a much harsher society, that was a choice. It didn’t and doesn’t have to be this way.

    Posted by on Friday, October 28, 2011 at 12:42 AM in Economics | Permalink  Comments (162)


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