At the end of 2011, Richard Eskow of the Huffington Post wrote a somewhat sardonic obituary on the death of austerity economics. In this article, he states that this economic model “died of natural causes brought on by prolonged exposure to reality.”
Fiscal austerity has definitely taken a beating in the past few years. Numerous pundits, practitioners, and press members have seriously questioned the logic behind this economic model, and a few real world examples provide some support to this critique. Ireland, argued to be the poster child for fiscal austerity, instituted budget cuts that may have killed a tepid recovery of early 2010 (as recently argued by Paul Krugman). Back in November, British PM David Cameron felt he had to defend his government’s policy from criticism that austerity measures were slowing the economy; last week, Landon Thomas warned that Portugal’s dutiful adoption of austerity measures may be driving it deeper into recession, giving a dire warning for what’s in store for Greece. Speaking of Greece, Anthony Faiola of the Washington Post recently wrote on the concerns that austerity may be killing the Greek economy. And finally, a few economists at the International Monetary Fund, a major proponent of fiscal responsibility, seem to have found a link between steep budget cuts and weaker economic growth.
So, with all these anecdotes, does this mean that Milton Friedman is out and John Maynard Keynes is back in? Hardly.
The most recent Greek bailout deal contains a continued policy of budget cuts, a move that has sparked considerable criticism. To overview a few of those critiques:
Reading these critiques, you do get the sense of deep polarization on both sides of the issue. So why the disconnect between fiscal hawks and austerity critics? In 2009, Particia Cohen of the New York Times offered one answer: academics remain strongly attached to old theoretical paradigms and are unwilling to change their thinking. However, I’m not sure this is really the full story. In many ways, the financial crisis has highlighted some pretty extensive divisions within the academic literature. So, our problem isn’t that one paradigm dominates academic thinking, but that too many paradigms are dividing the field. Keynes, Friedman, Hayek…all names that mean very little for the average individual but seem to take on almost mythological status among economists, and their theories do not always play nicely together (a trend we might see pretty quickly under the changing intellectual paradigms of Chinese development strategies). So, basically, economists have no consensus on whether austerity is a good or bad thing – it all depends on the branch of the economist family tree you fall into.
So, what does this intellectual disagreement mean for policy? We should probably see continued swings between fiscal stimuli and austerity economics and that has so far characterized Europe’s response to the current crisis (for an overview of Europe’s stimulus strategy from 2008-09, check out Steven Hill’s book Europe’s Promise, just remember that a lot of that behavior ends in 2010…).
So the final punchline? To paraphrase Mark Twain, when it comes to austerity (at least at the moment), the report of its death was greatly exaggerated.