Thursday, May 2, 2013

Paul Krugman and the Rest of Us Keynesians Have Won the War on Economic Policy and Austerity

But It Wasn’t a Fair Fight – The Other Side Had No Substance, Only Mindless Faith

The argument over whether or not fiscal austerity is the right economic policy to return the world to a high growth, low unemployment economy is over.  Austerity lost.

The Economic Argument Is Over — Paul Krugman Has Won

Henry Blodget | Apr. 24, 2013, 10:15 AM |
America 1935 or Europe 2013?  We Report, You Decide

Over the course of this debate, evidence has gradually piled up that, however well-intentioned they might be, the "Austerians" were wrong. Japan, for example, has continued to increase its debt-to-GDP ratio well beyond the supposed collapse threshold, and its interest rates have remained stubbornly low. More notably, in Europe, countries that embraced (or were forced to adopt) austerity, like the U.K. and Greece, have endured multiple recessions (and, in the case of Greece, a depression). Moreover, because smaller economies produced less tax revenue, the countries' deficits also remained strikingly high.
So the empirical evidence increasingly favored the Nobel-prize winning Paul Krugman and the other economists and politicians arguing that governments could continue to spend aggressively until economic health was restored.
And then, last week, a startling discovery obliterated one of the key premises upon which the whole austerity movement was based.
An academic paper that found that a ratio of 90%-debt-to-GDP was a threshold above which countries experienced slow or no economic growth was 
found to contain an arithmetic calculation error.
the error was corrected, the "90% debt-to-GDP threshold" instantly disappeared. Higher government debt levels still correlated with slower economic growth, but the relationship was not nearly as pronounced. And there was no dangerous point-of-no-return that countries had to avoid exceeding at all costs.
The discovery of this simple math error eliminated one of the key "facts" upon which the austerity movement was based.

Ok, Henry Blodgett is not a good source, even though his summary is right on.  He is a disgraced Wall Streeter who was caught flogging bad stock to his brokerage firm’s customers.  But here is another, more credible piece of evidence that the Austerians have lost.

Spanish Prime Minister Mariano Rajoy was one of the leading Austerians, and he took over the Spanish government after Socialists were blamed for the crash.  But he is changing his mind.

The Spanish prime minister, when he took over 16 months ago, attacked bloated budget deficits by cutting spending and raising taxes. The deficit has indeed shrunk under this treatment, yet on Friday, Mr. Rajoy's government is expected to lay out an agenda that tilts away from austerity—putting new priority on spurring growth.

Behind the move is a continued slide in Spain's fortunes. Its jobless rate leapt a full point Thursday, to a depression-like 27.2%, and the central bank sees the economy shrinking 1.5% this year.

Now no one should expect the really radical conservatives to admit they were wrong, and in Britain they will not change course until the next election gets closer.  But given the fact that no country, absolutely zero countries have prospered from the economic policy recommend by conservatives means that the intellectual battle is over. We won, they lost.

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