Paul Krugman: The Big Fail

Who should be blamed for the slow recovery?:

The Big Fail by Paul Krugman, Commentary, NY Times: It’s that time again: the annual meeting of the American Economic Association and affiliates... And this year, as in past meetings, there is one theme dominating discussion: the ongoing economic crisis.

This isn’t how things were supposed to be. If you had polled the economists attending this meeting three years ago, most of them would surely have predicted that by now we’d be talking about how the great slump ended, not why it still continues.

So what went wrong? The answer, mainly, is the triumph of bad ideas.

It’s tempting to argue that the economic failures of recent years prove that economists don’t have the answers. But the truth is ... standard economics offered good answers, but political leaders — and all too many economists — chose to forget or ignore what they should have known. ...

A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn’t nearly enough.

At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen... Budget deficits rose, but this was actually a good thing, probably the most important reason we didn’t have a full replay of the Great Depression.

But it all went wrong in 2010. The crisis in Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away. Austerity became the order of the day...

Of the papers presented at this meeting, probably the biggest flash came from one by Olivier Blanchard and Daniel Leigh of the International Monetary Fund. ... For what the paper concludes is not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake. ...

The really bad news is ... European leaders ... still insist that the answer is even more pain. ... And here in America, Republicans insist that they’ll use a confrontation over the debt ceiling ... to demand spending cuts that would drive us back into recession.

The truth is that we’ve just experienced a colossal failure of economic policy — and far too many of those responsible for that failure both retain power and refuse to learn from experience.