Austerity economics and the Very Serious People

Paul Krugman explains how unserious and reckless the Very Serious People of the leading international economic organizations have been during the current depression (Uncertain at the OECD 09/12/2013):

What's been interesting about these recommendations is that they do not, as you might expect, come from a rigid application of conventional economic models. Conventional models, after all, say that contractionary fiscal policy is contractionary, and should not be undertaken at a time when those adverse effects can’t be offset with looser monetary policy. And for sure, conventional models don’t say that you should raise interest rates in the face of high unemployment and low inflation. Yet somehow people at these institutions decided that tightening both fiscal and monetary policy was the thing to do, making up stories on the fly — I wouldn’t call them models — to justify their demands.

I guess we should just call these people crats, since the techno got thrown out the window and replaced by intuition, or something.

Anyway, the OECD is either the worst or the second-worst offender — the BIS gives it a run for the (tight) money; back in 2010 it was among the most eager pushers of fiscal austerity, even as it also called for a sharp rise in policy interest rates. That didn't happen, but the austerity did. According to the OECD's own estimates, the "underlying primary balance" of the eurozone as a whole has gone from significant deficit to significant surplus since 2009, a swing of about 4 percent of GDP. Given what we now know about multipliers, this should have depressed eurozone GDP by at least 5 percent, and probably more, relative to what would have happened without austerity. [my emphasis]

Tags: austerity economics, eu, euro, european union