Paul Krugman: Nations Which Embraced Austerity Are Worse Off

Wednesday, 22 Feb 2012 07:38 AM

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Countries who embraced austerity measures to right their economies like Portugal and Ireland aren't seeing the benefits they were expecting to come from taking the painful medicine, says Nobel economist Paul Krugman.

Troubled countries often embrace austerity measures like budget cuts and layoffs to streamline their economies.

The problem with such policy, Krugman argues, is that it cuts into growth because laying off people and cutting spending ultimately eliminates sources of both tax revenue and economic productivity.

"None of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending," Krugman writes in his New York Times column.

"Furthermore, bond markets keep refusing to cooperate. Even austerity’s star pupils, countries that, like Portugal and Ireland, have done everything that was demanded of them, still face sky-high borrowing costs. Why? Because spending cuts have deeply depressed their economies, undermining their tax bases to such an extent that the ratio of debt to G.D.P., the standard indicator of fiscal progress, is getting worse rather than better."

Furthermore, Krugman points out, countries that that didn't fully embrace austerity during the recent economic downturn like the United States and Japan are better off and enjoy low borrowing costs demanded of them by creditors.

The U.S. economy officially emerged from the Great Recession in 2009, although unemployment rates remain well above pre-downturn levels.

A Congressional Budget Office report shows that despite growth, the country is locked in the longest stretch of high unemployment rates since the Great Depression, with jobless rates above 8 percent since February of 2009, many of whom are out of work for the long term.

"The share of unemployed people who have been looking for work for more than six months — referred to as the long-term unemployed — topped 40 percent in December 2009 and has remained above that level ever since," CBO Director Douglas Elmendorf on the CBO Director’s Blog site.

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