Krugman exposes the “Austerity Delusion”; Why can’t we learn from Ireland?

Posted on March 26, 2011


NYT op-ed columnist and economist Paul Krugman.

The Austerity Delusion

Similar to a previous post of mine about the right-wing overstating the issue of “uncertainty” in the economy, Paul Krugman explains in his latest NYT op-ed column why the “confidence fairy” will not save us.  He goes into more detail and argues with more economic handiness than I can exactly why austerity at a time of high unemployment is irresponsible.

His premise is simple:  If we want to know what effects the proposed budget cuts in Congress might have on the economy, all we have to do is turn our glance across the Atlantic.  In early 2009, Ireland imposed tax hikes and emergency cuts to federal spending in the face of high unemployment.  The Irish finance minister, Brian Lenihan, conceded that the cuts would “reduce living standards” in Ireland, but, according to economists, Ireland had no choice: the S&P had stripped it of its “AAA” rating and tightening the federal belt was the only way to regain lost confidence.  “Since then,” says Krugman, “the interest rate on Irish debt has doubled; Ireland’s unemployment rate now stands at 13.5 percent.”

Close by, David Cameron implemented measures of “unforced” austerity following the economic crisis believing that increased private spending would make up for the government cuts.  But, plain and simply, it hasn’t: growth in the private sector is stagnant and Britain’s deficit is growing.

On the other side of the pond, two of the main problems facing the United States are high unemployment and the massive, seemingly insurmountable deficit.  Because interest rates have not spiked and financial markets still perceive American debt to be solvent, Congress should be focusing on jobs first and the deficit second.  And, in fact, according to a recent CNN poll, the American people do place the economy and unemployment first and second respectively and the deficit fourth (behind health care) on a list of priorities for the country.  This makes sense, not only because it is economically prudent to tackle jobs first, but also because high unemployment has a very real and immediate impact on quality of life in this country whereas the deficit does not.  Currently, there are families failing to make ends-meet due to the lack of jobs, but no one will go to sleep hungry tonight due to the national debt.

So why do Republicans insist that we focus on trimming the deficit?  In my opinion, and per usual when we’re talking about Republicans, it all comes back to keeping taxes low for their corporate campaign donors.

Republicans realize they can’t technically be the “conservative” party if they only propose we cut taxes and don’t do anything about current levels of federal spending.  So, they argue for tax cuts for the richest Americans under the guise of calling for “smaller government” and then blame everyone but the richest Americans for the country’s woes (i.e. unions, poor people, the unemployed).  Remember the debate over extending the Bush tax cuts and unemployment benefits?  Republicans argued that the jobless were doing more damage to the economy than the richest 1%: unemployed people were sucking billions of dollars out of the government through unemployment benefits, apparently causing great “uncertainty” in the markets, thereby causing more people to be laid off to collect unemployment benefits.  Further, the argument went, by leaving the top tax rate at a record-low, private sector profits would soar and ultimately more tax dollars would roll into Washington than if the rate had been increased.

Of course, this theory has now lost most if not all of its credibility in light of Ireland’s whopping 13.5% unemployment rate and rising deficit.  Why can’t Americans take a hint about economic policy from the perils of a foreign nation?    Unfortunately, most Americans do not pay attention to what goes on outside of their own country’s borders.  This is attributable to three main factors:

1)  American minds are commonly plagued by an exaggerated notion of American Exceptionalism and the idea that we are somehow immune to the historical and economic forces that shape the fate of other countries and markets.

2)  Education in this country has been dismal in recent decades.  Over the last 30 years, the government (both state and federal) cut education funds drastically and gave the money to the rich through tax cuts and the repeal of the Glass-Steagal Act.

3)  Americans simply do not travel much outside of the United States.  According to CNN, only 30% of Americans have passports, and that number was in the teens just two years ago before a law went into effect forcing American and Canadian travelers to show identification when crossing the border.  In 2009, there were just over 60 million foreign trips by Americans and half of those were to either Canada or Mexico.

In effect, without humility, schooling, or global travel, most Americans are now left with no sense of history or knowledge of foreign places, meaning that freshmen congressmen can feed their constituents any theory, regardless of proof, and the unsuspecting masses will gladly drink the kool-aid (if proper demagoguery is practiced).  And this is especially true of matters concerning economics, a field which is not only very complicated but, even if studied in school, is twisted by so-called academics who are paid by investment banks to preach theories that favor obscene corporate profits.

At what point will we be able to say our government has officially transformed from a democracy into a corporate oligarchy?