For the past five years, a fierce war of words and policies has been fought in America and other economically challenged countries around the world.
On one side were economists and politicians who wanted to increase government spending to offset weakness in the private sector. This “stimulus” spending, economists like Paul Krugman argued, would help reduce unemployment and prop up economic growth until the private sector healed itself and began to spend again.
On the other side were economists and politicians who wanted to cut spending to reduce deficits and “restore confidence.” Government stimulus, these folks argued, would only increase debt loads, which were already alarmingly high. If governments did not cut spending, countries would soon cross a deadly debt-to-GDP threshold, after which economic growth would be permanently impaired. The countries would also be beset by hyper-inflation, as bond investors suddenly freaked out and demanded higher interest rates. Once government spending was cut, this theory went, deficits would shrink and “confidence” would return…
Those in favor of economic stimulus won a brief victory in the depths of the financial crisis, with countries like the U.S. implementing stimulus packages. But the so-called “Austerians” fought back. And in the past several years, government policies in Europe and the U.S. have been shaped by the belief that governments had to cut spending or risk collapsing under the weight of staggering debts.
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)…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.
Once 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…
The argument is over. Paul Krugman has won. The only question now is whether the folks who have been arguing that we have no choice but to cut government spending while the economy is still weak will be big enough to admit that.
Between Congressional Republicans blind to the failure of their ideology and their candyass Blue Dog Democrat counterparts there still is a struggle to enforce austerity upon our limping economy. The so-called sequester is an example of their success at reducing the number of employed in our country.
Most Congress-critters are as ignorant as the average American and don’t know that something similar happened as Keynesian reforms were having a comparable success during the Great Depression. Politicians and pundits forced austere reversals to the reforms in place in the mid-1930′s and started the whole country on the way back down to the depths of economic despair. Only the dramatic need to prepare for the war against Fascism around the world reversed the start of a second depression.
But, stupidity seems to still be part of the job description for conservative politicians. We’ll get to see who prevails over the next few years. Not that any pundits will be joining folks at the unemployment office. There’s always a job for reactionary ideologues in corporate America.