Death of a Fairy Tale
By PAUL KRUGMAN
This was the month the confidence fairy died.
For the past two years most policy makers in Europe and many politicians
and pundits in America have been in thrall to a destructive economic
doctrine. According to this doctrine, governments should respond to a
severely depressed economy not the way the textbooks say they should —
by spending more to offset falling private demand — but with fiscal
austerity, slashing spending in an effort to balance their budgets.
Critics warned from the beginning that austerity in the face of
depression would only make that depression worse. But the “austerians”
insisted that the reverse would happen. Why? Confidence!
“Confidence-inspiring policies will foster and not hamper economic
recovery,” declared Jean-Claude Trichet, the former president of the
European Central Bank — a claim echoed by Republicans in Congress here.
Or as I put it way back when, the idea was that the confidence fairy
would come in and reward policy makers for their fiscal virtue.
The good news is that many influential people are finally admitting that
the confidence fairy was a myth. The bad news is that despite this
admission there seems to be little prospect of a near-term course change
either in Europe or here in America, where we never fully embraced the
doctrine, but have, nonetheless, had de facto austerity in the form of
huge spending and employment cuts at the state and local level.
So, about that doctrine: appeals to the wonders of confidence are
something Herbert Hoover would have found completely familiar — and
faith in the confidence fairy has worked out about as well for modern
Europe as it did for Hoover’s America. All around Europe’s periphery,
from Spain to Latvia, austerity policies have produced Depression-level
slumps and Depression-level unemployment; the confidence fairy is
nowhere to be seen, not even in Britain, whose turn to austerity two
years ago was greeted with loud hosannas by policy elites on both sides
of the Atlantic.
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