How decisive was the turn in policy? Figure 1, which is taken from the IMF’s most recent World Economic Outlook, shows how real government spending behaved in this crisis compared with previous recessions; in the figure, year zero is the year before global recession (2007 in the current slump), and spending is compared with its level in that base year. What you see is that the widespread belief that we are experiencing runaway government spending is false—on the contrary, after a brief surge in 2009, government spending began falling in both Europe and the United States, and is now well below its normal trend. The turn to austerity was very real, and quite large.And:
Clear evidence on the effects of economic policy is usually hard to come by. Governments generally change policies reluctantly, and it’s hard to distinguish the effects of the half-measures they undertake from all the other things going on in the world. The Obama stimulus, for example, was both temporary and fairly small compared with the size of the US economy, never amounting to much more than 2 percent of GDP, and it took effect in an economy whipsawed by the biggest financial crisis in three generations. How much of what took place in 2009–2011, good or bad, can be attributed to the stimulus? Nobody really knows.And:
Three years after the turn to austerity, then, both the hopes and the fears of the austerians appear to have been misplaced. Austerity did not lead to a surge in confidence; deficits did not lead to crisis. But wasn’t the austerity movement grounded in serious economic research? Actually, it turned out that it wasn’t—the research the austerians cited was deeply flawed.(As RtO has observed more than once, business confidence is a bad thing. When is confidence highest? Right before a crash.) I recommend reading the whole thing. There is one part of it, however, that I cannot accept. Krugman says nobody saw the crash of 2008 coming or if they were nervous, knew it was going to be so bad. RtO did. I recognized the problem around December 2007; this blog did not open for business until a few weeks later. From the start, and over and over, RtO recommended getting out of securities and into cash. I think I was getting strident about it by May. The crash came in October. I do not pretend that I saw it in spreadsheets. I saw it in history; to be specific, I was persuaded that the insolvency of Bear Stearns must mean that all the big financial houses were insolvent, since the so-called rationalization of financial markets had required that all players operate purely as hot-money banks. That that was unsustainable was obvious to anyone who had studied the Great Depression or, for that matter, paid attention to the way the S&Ls worked in the Reagan crash. If you think I'm breaking an arm patting myself on the back, well, the early posts of RtO are still up. Read 'em and weep (but you'll have to go to The Maui News blog; this mirror site did not start until 2012). When it comes to austerians, as Krugman calls them, both RtO and Andy Mellon advised liquidating securities. The only difference was that RtO recommended doing it before they had lost two-thirds of their value.