Three years ago, a terrible thing happened to economic policy. Although the worst of the financial crisis was over, economies on both sides of the Atlantic remained deeply depressed, with very high unemployment. Yet the Western world’s policy elite somehow decided en masse that unemployment was no longer a crucial concern, and that reducing budget deficits should be the overriding priority.
Worries about the deficit are greatly exaggerated – and I have documented the desperate efforts of the deficit scolds to keep fear alive. Today, however, I’d like to talk about a different kind of desperation: the frantic effort to find some example, somewhere, of austerity policies that succeeded. For the advocates of fiscal austerity – the austerians – made promises as well as threats: austerity, they claimed, would both avert crisis and lead to prosperity.
And let nobody accuse the austerians of lacking a sense of romance; in fact, they’ve spent years looking for Mr Goodpain.
The search began with a passionate fling between the austerians and Ireland, which turned to harsh spending cuts soon after its real estate bubble burst, and which for a while was held up as the ultimate exemplar of economic virtue. Ireland, said Jean-Claude Trichet of the European Central Bank, was the role model for Europe’s debtor nations. American conservatives went further. Alan Reynolds, a senior fellow at the Cato Institute, declared that Ireland’s policies showed the way forward for the United States, too.
Choosen excerpts by Job Market Monitor from