Paul Krugman: Much Too Responsible

Europe’s self-indulgent “archons of austerity” and “doyens of deflation”:

Much Too Responsible, by Paul Krugman, Commentary, NY Times: The United States and Europe have a lot in common. Both are multicultural and democratic; both are immensely wealthy; both possess currencies with global reach. Both, unfortunately, experienced giant housing and credit bubbles between 2000 and 2007, and suffered painful slumps when the bubbles burst.

Since then, however, policy on the two sides of the Atlantic has diverged. In one great economy, officials have shown a stern commitment to fiscal and monetary virtue, making strenuous efforts to balance budgets while remaining vigilant against inflation. In the other, not so much.

And the difference in attitudes is the main reason the two economies are now on such different paths. … No, it’s not morning in America… Recovery could and should have come much faster, and family incomes remain well below their pre-crisis level. Although you’d never know it from the public discussion, there’s overwhelming agreement among economists that the Obama stimulus of 2009-10 helped limit the damage…, but it was too small and faded away far too fast. …

Europe, on the other hand … did almost everything wrong. On the fiscal side, Europe never did much stimulus, and quickly turned to austerity … despite high unemployment. On the monetary side, officials fought the imaginary menace of inflation, and took years to acknowledge that the real threat is deflation. …

Monetary policy got much better after Mario Draghi became president of the European Central Bank in late 2011. … But it’s not at all clear that he has the tools to fight off the broader deflationary forces set in motion by years of wrongheaded policy. …

The terrible thing is that Europe’s economy was wrecked in the name of responsibility. … In a depressed economy…, a balanced-budget fetish and a hard-money obsession are deeply irresponsible. Not only do they hurt the economy in the short run, they can — and in Europe, have — inflict long-run harm, damaging the economy’s potential and driving it into a deflationary trap that’s very hard to escape.

Nor was this an innocent mistake. The thing that strikes me about Europe’s archons of austerity, its doyens of deflation, is their self-indulgence. They felt comfortable, emotionally and politically, demanding sacrifice (from other people) at a time when the world needed more spending. They were all too eager to ignore the evidence that they were wrong.

And Europe will be paying the price for their self-indulgence for years, perhaps decades, to come.