Monday, April 30, 2012

Austerity For Some, Bad Macroeconomic Theories For Others

Paul Krugman writes about that austerity business today (as he has done many times in the past).  How austerity could result in an economic recovery requires an extremely odd reading of economic theories. 

How that reading became the mainstream take would be worth a book or two.  How the lessons of the Great Depression could be so completely forgotten, how Maynard Keynes got dropped into the dustbins of history, all that deserves a proper explanation.   But we are not going to get one.

Instead, we will see the general trend of "failing upwards" or at least of "failing in place."  The costs of having been wrong are miniscule, both for the experts and for those popularizing the expert opinions.  It is only now that the costs of austerity are clearer that a few protesting voices are getting prominence.

Remember the "Irish miracle?"  I recall reading about it and trying to understand what might be driving such a miracle, given that Ireland had no unusual natural resources, no greater knowledge basis than other comparable countries and no lower labor costs than, say, Eastern European countries.

I concluded that the miracle was a bubble.  That bubble has now burst, but that's not the whole explanation for countries like Ireland, Greece and Spain.

The austerity politics have made things worse.  Much, much worse.  And countries belonging to the European Union no longer have access to many old macroeconomic tools, such as subsidies for export industries, tariffs on imports or the devaluation of currencies.  They are left with limited tools to cope with giant problems.