Op-Ed Columnist

The Austerity Delusion

Published: March 24, 2011

Fred R. Conrad/The New York Times

Paul Krugman

What do these events have in common? They’re all evidence that slashingspending in the face of high unemployment is a mistake. Austerityadvocates predicted that spending cuts would bring quick dividends inthe form of rising confidence, and that there would be few, if any,adverse effects on growth and jobs; but they were wrong.

It’s too bad, then, that these days you’re not considered serious inWashington unless you profess allegiance to the same doctrine that’sfailing so dismally in Europe.

It was not always thus. Two years ago, faced with soaring unemploymentand large budget deficits — both the consequences of a severe financialcrisis — most advanced-country leaders seemingly understood that theproblems had to be tackled in sequence, with an immediate focus oncreating jobs combined with a long-run strategy of deficit reduction.

Why not slash deficits immediately? Because tax increases and cuts ingovernment spending would depress economies further, worseningunemployment. And cutting spending in a deeply depressed economy islargely self-defeating even in purely fiscal terms: any savings achievedat the front end are partly offset by lower revenue, as the economyshrinks.

So jobs now, deficits later was and is the right strategy.Unfortunately, it’s a strategy that has been abandoned in the face ofphantom risks and delusional hopes. On one side, we’re constantly toldthat if we don’t slash spending immediately we’ll end up just likeGreece, unable to borrow except at exorbitant interest rates. On theother, we’re told not to worry about the impact of spending cuts on jobsbecause fiscal austerity will actually create jobs by raisingconfidence.

How’s that story working out so far?

Self-styled deficit hawks have been crying wolf over U.S. interest ratesmore or less continuously since the financial crisis began to ease,taking every uptick in rates as a sign that markets were turning onAmerica. But the truth is that rates have fluctuated, not with debtfears, but with rising and falling hope for economic recovery. And withfull recovery still seeming very distant, rates are lower now than theywere two years ago.

But couldn’t America still end up like Greece? Yes, of course. Ifinvestors decide that we’re a banana republic whose politicians can’t orwon’t come to grips with long-term problems, they will indeed stopbuying our debt. But that’s not a prospect that hinges, one way oranother, on whether we punish ourselves with short-run spending cuts.

Just ask the Irish, whose government — having taken on an unsustainabledebt burden by trying to bail out runaway banks — tried to reassuremarkets by imposing savage austerity measures on ordinary citizens. Thesame people urging spending cuts on America cheered. “Ireland offers anadmirable lesson in fiscal responsibility,” declared Alan Reynolds ofthe Cato Institute, who said that the spending cuts had removed fearsover Irish solvency and predicted rapid economic recovery.

That was in June 2009. Since then, the interest rate on Irish debt hasdoubled; Ireland’s unemployment rate now stands at 13.5 percent.

And then there’s the British experience. Like America, Britain is stillperceived as solvent by financial markets, giving it room to pursue astrategy of jobs first, deficits later. But the government of PrimeMinister David Cameron chose instead to move to immediate, unforcedausterity, in the belief that private spending would more than make upfor the government’s pullback. As I like to put it, the Cameron plan wasbased on belief that the confidence fairy would make everything allright.

But she hasn’t: British growth has stalled, and the government has marked up its deficit projections as a result.

Which brings me back to what passes for budget debate in Washington these days.

A serious fiscal plan for America would address the long-run drivers ofspending, above all health care costs, and it would almost certainlyinclude some kind of tax increase. But we’re not serious: any talk ofusing Medicare funds effectively is met with shrieks of “death panels,”and the official G.O.P. position — barely challenged by Democrats —appears to be that nobody should ever pay higher taxes. Instead, all thetalk is about short-run spending cuts.

In short, we have a political climate in which self-styled deficit hawkswant to punish the unemployed even as they oppose any action that wouldaddress our long-run budget problems. And here’s what we know fromexperience abroad: The confidence fairy won’t save us from theconsequences of our folly.

A version of this op-ed appeared in print on March 25, 2011, on page A27 of the New York edition.