Friday, April 26, 2013

Austerity is Dead

We've written a fair amount about the absolute, mind-numbing stupidity of austerity on this blog.  From the questionable intellectual under-pinnings to the lack of any actual formal evidence in real world application, to the IMF issuing its own mea culpa, it's pretty clear there just wasn't much to the concept in the first place, save for a political philosophy looking for application.

The R&R data fiasco is the nail in the coffin.  Simply put, there just isn't anything there anymore.  The argument is over and the Keyneseans won.

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.


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.

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