In the United States, we have zero job growth, with unemployment still at nosebleed levels, according to a recent government report. Meanwhile, the interest rate on 10-year bonds is down to 2.04 percent, and it’s negative on inflation-protected securities.
Aren’t you glad we pivoted from jobs to deficits a year and a half ago?
Meanwhile, on the other side of the pond, “Is Austerity Killing Europe’s Recovery?” asks The Washington Post.
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Howard Schneider, a staff writer who covers international economics, wrote on Sept. 1: “After more than a year of aggressive budget cutting by European governments, an economic slowdown on the continent is confronting policymakers from Madrid to Frankfurt with an uncomfortable question: Have they been addressing the wrong problem?”
Too bad there weren’t any prominent economists warning that the obsession with short-term deficits was a terrible mistake; that austerity would undermine hopes of recovery. Oh, wait.
The awful thing is that those of us who warned about all this — based not on some unorthodox doctrine, but on basic textbook macroeconomics — weren’t so much argued down as just ignored. Somehow, those with actual power were convinced that fiscal austerity wasn’t just an option but the only option, and that anyone arguing with that — even people like me and fellow economist Joe Stiglitz, who have a few easy-to-understand credentials — were just not part of the serious discussion.
I haven’t fully organized my thoughts on exactly why this happened. But whatever the reasons, we are now reaping the consequences of the disastrous distraction of policy makers, who have been fighting phantoms while the real problems festered.
Iceland, the Exception
Iceland is no longer under an International Monetary Fund program. In a recent report, the I.M.F. pronounced the nation’s Fund-supported adjustment program successful: “The key program objectives were met: the exchange rate has been stabilized, Iceland’s public finances have been put on a sustainable path, and significant progress has been made in rebuilding the financial sector. Policy implementation has been impressive, earning the authorities significant credibility.”
Indeed. Iceland still has high unemployment and is a long way from a full recovery, but it’s no longer in crisis. It has regained access to international capital markets, and it has done all that with its society intact. And it has done all that with very heterodox policies — debt repudiation, capital controls and currency depreciation. It was as close as you can get to the polar opposite of the gold standard.
And it has worked.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007). Copyright 2011 The New York Times.