Finally, the End of Austerity?

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Is the world’s infatuation with austerity as the answer to the Great Recession finally over? Neil Irwin thinks it might be. The obvious big event that got everyone’s attention recently was the dismantling of the influential Reinhart/Rogoff thesis that high debt produces low growth, but Irwin argues that this is just the visible tip of the iceberg. Three other things have been pushing policymakers in the same direction:

No blowback for Japan. ….The Bank of Japan has undertaken open-ended quantitative easing of its own in pursuit of 2 percent annual inflation in a country where deflation has been the norm for two decades….The international community isn’t coming down on Japan with anywhere near the ire that the Fed saw three years ago.

Growing awareness that U.S. deficits are already falling. ….There is deepening recognition that—through spending cuts in the debt ceiling deal in 2011 including sequestration, tax increases as part of the fiscal cliff, and a growing economy—U.S. deficits are falling quite quickly. That being the case, Congressional Democrats are increasingly looking to hold the line and say “No Mas” to further near-term deficit reduction.

The slow-moving disaster that is Europe. Europe has been the poster child for aggressive austerity….The result is depression in the European periphery and recession in the core….But the ECB appears set to hop on the easy money train in its meeting on Thursday. And it wouldn’t be shocking if, either this week or in a future month, the ECB seeks out some more innovative tool to funnel loans to the smaller businesses that are being frozen out from getting credit. The institution that most eagerly embraced austerity and tight money three years ago, in other words, is inching away from it as well.

In this telling, the paper that took apart the Reinhart/Rogoff thesis was the perfect story at the perfect time. The conventional wisdom was already changing, slowly but steadily, and the implosion of R&R provided just the right catalyst to draw everyone’s attention to it.

Of the three things on Irwin’s list (and you should probably add Britain’s performance in there somewhere), I’d guess that Europe is the most important by far. The political barriers to doing the right thing remain pretty strong, but it’s getting to the point that I suspect even Germans are starting to wonder if the game is worth the candle. There might be worse things than higher inflation or big flows of money heading south, and the specter of Europe spiraling apart may just qualify. The evidence on this score is still iffy (remember Cyprus?), and the 11th hour may not quite be upon us, but we’re getting there. The austerity experiment has pretty spectacularly failed, and before too much longer even the technocrats of the EU are going to have to face up to this.


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