<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN">
<HTML><HEAD>
<META content=text/html;charset=iso-8859-1 http-equiv=Content-Type>
<META name=GENERATOR content="MSHTML 8.00.6001.19170"></HEAD>
<BODY style="PADDING-LEFT: 10px; PADDING-RIGHT: 10px; PADDING-TOP: 15px"
id=MailContainerBody leftMargin=0 topMargin=0 CanvasTabStop="true"
name="Compose message area">
<DIV><FONT size=2 face=Verdana>
<DIV id=fb-root></DIV>
<DIV class=header>
<DIV class=left><A href="http://www.nytimes.com/"><IMG
title="http://www.nytimes.com/
CTRL + Click to follow link" border=0
hspace=0 alt="The New York Times" align=left
src="http://graphics8.nytimes.com/images/misc/nytlogo153x23.gif"></A>
<NYT_REPRINTS_FORM>
<LI class=reprints>
<FORM name=cccform
action=https://s100.copyright.com/CommonApp/LoadingApplication.jsp
target=_Icon></FORM></LI></DIV>
<DIV class=right> </DIV></DIV><BR clear=all>
<HR align=left SIZE=1>
<DIV class=timestamp>December 29, 2011</DIV>
<DIV class=kicker></DIV>
<H1><NYT_HEADLINE version="1.0" type=" ">Keynes Was
Right</NYT_HEADLINE></H1><NYT_BYLINE>
<H6 class=byline>By <A class=meta-per title="More Articles by Paul Krugman"
href="http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/index.html?inline=nyt-per"
rel=author>PAUL KRUGMAN</A></H6></NYT_BYLINE><NYT_TEXT>
<DIV id=articleBody><NYT_CORRECTION_TOP></NYT_CORRECTION_TOP>
<P>“The boom, not the slump, is the right time for austerity at the Treasury.”
So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him
right by trying to balance the budget too soon, sending the United States
economy — which had been steadily recovering up to that point — into a severe
recession. Slashing government spending in a depressed economy depresses the
economy further; austerity should wait until a strong recovery is well under
way. </P>
<P>Unfortunately, in late 2010 and early 2011, politicians and policy makers in
much of the Western world believed that they knew better, that we should focus
on deficits, not jobs, even though our economies had barely begun to recover
from the slump that followed the financial crisis. And by acting on that
anti-Keynesian belief, they ended up proving Keynes right all over again. </P>
<P>In declaring Keynesian economics vindicated I am, of course, at odds with
conventional wisdom. In Washington, in particular, the failure of the Obama
stimulus package to produce an employment boom is generally seen as having
proved that government spending can’t create jobs. But those of us who did the
math realized, right from the beginning, that the Recovery and Reinvestment Act
of 2009 (more than a third of which, by the way, took the relatively ineffective
form of tax cuts) was much too small given the depth of the slump. And we also
predicted the resulting political backlash. </P>
<P>So the real test of Keynesian economics hasn’t come from the half-hearted
efforts of the U.S. federal government to boost the economy, which were largely
offset by cuts at the state and local levels. It has, instead, come from
European nations like Greece and Ireland that had to impose savage fiscal
austerity as a condition for receiving emergency loans — and have suffered
Depression-level economic slumps, with real G.D.P. in both countries down by
double digits. </P>
<P>This wasn’t supposed to happen, according to the ideology that dominates much
of our political discourse. In March 2011, the Republican staff of Congress’s
Joint Economic Committee released a report titled “Spend Less, Owe Less, Grow
the Economy.” It ridiculed concerns that cutting spending in a slump would
worsen that slump, arguing that spending cuts would improve consumer and
business confidence, and that this might well lead to faster, not slower,
growth. </P>
<P>They should have known better even at the time: the alleged historical
examples of “expansionary austerity” they used to make their case had already
been thoroughly debunked. And there was also the embarrassing fact that many on
the right had prematurely declared Ireland a success story, demonstrating the
virtues of spending cuts, in mid-2010, only to see the Irish slump deepen and
whatever confidence investors might have felt evaporate. </P>
<P>Amazingly, by the way, it happened all over again this year. There were
widespread proclamations that Ireland had turned the corner, proving that
austerity works — and then the numbers came in, and they were as dismal as
before. </P>
<P>Yet the insistence on immediate spending cuts continued to dominate the
political landscape, with malign effects on the U.S. economy. True, there
weren’t major new austerity measures at the federal level, but there was a lot
of “passive” austerity as the Obama stimulus faded out and cash-strapped state
and local governments continued to cut. </P>
<P>Now, you could argue that Greece and Ireland had no choice about imposing
austerity, or, at any rate, no choices other than defaulting on their debts and
leaving the euro. But another lesson of 2011 was that America did and does have
a choice; Washington may be obsessed with the deficit, but financial markets
are, if anything, signaling that we should borrow more. </P>
<P>Again, this wasn’t supposed to happen. We entered 2011 amid dire warnings
about a Greek-style debt crisis that would happen as soon as the Federal Reserve
stopped buying bonds, or the rating agencies ended our triple-A status, or the
superdupercommittee failed to reach a deal, or something. But the Fed ended its
bond-purchase program in June; Standard & Poor’s downgraded America in
August; the supercommittee deadlocked in November; and U.S. borrowing costs just
kept falling. In fact, at this point, inflation-protected U.S. bonds pay
negative interest: investors are willing to pay America to hold their money.
</P>
<P>The bottom line is that 2011 was a year in which our political elite obsessed
over short-term deficits that aren’t actually a problem and, in the process,
made the real problem — a depressed economy and mass unemployment — worse. </P>
<P>The good news, such as it is, is that President Obama has finally gone back
to fighting against premature austerity — and he seems to be winning the
political battle. And one of these years we might actually end up taking
Keynes’s advice, which is every bit as valid now as it was 75 years ago.
</P><NYT_CORRECTION_BOTTOM>
<DIV
class=articleCorrection></DIV></NYT_CORRECTION_BOTTOM><NYT_UPDATE_BOTTOM></NYT_UPDATE_BOTTOM></DIV></NYT_TEXT></FONT></DIV>
<DIV><FONT size=2 face=Verdana></FONT> </DIV>
<DIV><FONT size=2 face=Verdana></FONT> </DIV>
<DIV><FONT size=2 face=Verdana>_____________________________</FONT></DIV>
<DIV><FONT size=2 face=Verdana>Wayne A. Fox<BR><A
href="mailto:wayne.a.fox@gmail.com">wayne.a.fox@gmail.com</A><BR></FONT></DIV></BODY></HTML>