The Evidence Is In, and Austerity Is Declared a Loser

In 2014, Portugal stood on the brink. Its economy had collapsed amid Europe’s debt crisis, and unemployment had doubled. As part of a bailout program with the International Monetary Fund, which had lent the country 78 billion euros ($90 billion) in 2011, its government imposed drastic cuts to wages, pensions and social security.

But then something remarkable happened. Rather than bow to the demands of its European debtors, the Portuguese government elected to reinvest in its public sector, restoring salaries and benefits to their pre-crisis levels. Four years later, the results speak for themselves.

“The government’s U-turn, and willingness to spend, had a powerful effect,” writes The New York Times’ Liz Alderman. “Creditors railed against the move, but the gloom that had gripped the nation through years of belt-tightening began to lift. Business confidence rebounded. Production and exports began to take off.”

Its recovery remains fragile, with unions lobbying for more public spending to reduce inequality. Still, Portugal’s reversal of fortune would appear to confirm what the 2008 financial crisis made abundantly clear: Austerity—the process of reducing government deficits through a combination of tax increases and spending cuts—is not just a failure on a human level but a policy level as well. As Ryan Cooper argues this week in The Week, “in the great economic battle of the past decade, the winner is the tried and true—in a rout.”

“The anti-Keynesian forces have been proved conclusively mistaken on every single argument,” he writes. “Their refusal to pick up what amounted to a multiple-trillion-dollar bill sitting on the sidewalk is the greatest mistake of economic policy analysis since 1929 at least.”

In the wake of the Great Recession, which saw U.S. unemployment balloon to 10 percent, Republican politicians and prominent neoliberals alike attacked the notion that the Obama stimulus package would revive the nation’s economy. Their objections ranged from concerns about hyperinflation to a belief that unemployment was “structural” to concern about a “skills gap” in the jobs market. Cooper’s latest column lines them up and knocks them down, one by one.

“Economists Alberto Alesina and Silvia Ardagna outlined a theory of ‘expansionary austerity,’ arguing that governments could increase taxes, cut spending, and grow strongly,” Cooper notes. “Meanwhile, economists Carmen Reinhart and Kenneth Rogoff demonstrated an apparent trigger point of a 90 percent debt-to-GDP level beyond which more borrowing would cause economic stagnation.”

These economists, to borrow a phrase from the neoconservative Irving Kristol, were soon mugged by reality. Whatever its failings, the stimulus package did grow the U.S. economy, while the European countries that abided draconian austerity measures saw their production and employment crater. (Greece is only now emerging from the wreckage of the debt crisis, and its progress is halting.)

“In late 2010, a bunch of conservative financial and economics luminaries, including Michael Boskin, John Cogan, Niall Ferguson, Kevin Hassett, Douglas Holtz-Eakin, Bill Kristol, and John Taylor, signed an open letter to then-Fed Chair Ben Bernanke warning that ‘[t]he planned asset purchases risk currency debasement and inflation,’” Cooper continues. “Yet it’s been six to eight years since their arguments and there’s hardly been a glimmer of the kind of inflation they warned about. … In fact, not only has there been no hyperinflation, inflation has consistently come in under the Fed’s supposed target value of 2 percent.”

Concerns about a “skills gap”—the notion that Americans were untrained or ill-equipped to take available jobs—have proved similarly overblown. One need look no further than the stagnant wage growth over the last decade. (If there really was a scarcity of skilled labor, that trend line would theoretically point upward as companies compete for their services.)

“As we have seen, the evidence for the Keynesian position is overwhelming,” Cooper concludes. “Through a combination of bad faith, motivated reasoning, and sheer incompetence, austerians have directly created the problem their entire program was supposed to avoid. Good riddance.”

Read Ryan Cooper’s column at The Week.