There was, I'm pretty sure, an episode of “The Three Stooges” in which Curly kept banging his head against a wall. When Moe asked him why, he replied, “Because it feels so good when I stop.”
Well, I thought it was funny. But I never imagined that Curly's logic would one day become the main rationale that senior finance officials use to defend their disastrous policies.
Some background: In 2010, most of the nation's wealthy nations, although still deeply depressed in the wake of the financial crisis, turned to fiscal austerity, slashing spending and, in some cases, raising taxes in an effort to reduce budget deficits that had surged as their economies collapsed. Basic economics said that austerity in an already depressed economy would deepen the depression. But the “austerians,” as many of us began calling them, insisted that spending cuts would lead to economic expansion, because they would improve business confidence.
The result came as close to a controlled experiment as one ever gets in macroeconomics. Three years went by, and the confidence fairy never made an appearance. In Europe, where the austerian ideology took hold most firmly, the nascent economic recovery soon turned into a double-dip recession. In fact, at this point key measures of economic performance in both the euro area and Britain are lagging behind where they were at this stage of the Great Depression.
It's true that the human cost has been nothing like what happened in the 1930s. But that's thanks to government policies like employment protection and a strong social safety net — the very policies austerians insisted must be dismantled in the name of “structural reform.” Was it really austerity that did the damage?
Well, the correlation is very clear: The harsher the austerity, the worse the growth performance. Consider the case of Ireland, one of the first nations to impose extreme austerity and widely cited in early 2010 as a role model. Three years later, after repeated declarations that its economy had turned the corner, Ireland still has double-digit unemployment, even though hundreds of thousands of working-age Irish citizens have emigrated.