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<div class="timestamp">April 26, 2012</div>
<h1>Death of a Fairy Tale</h1>
<span><h6 class="byline">By <a rel="author" href="http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/index.html?inline=nyt-per" title="More Articles by Paul Krugman" class="meta-per">PAUL KRUGMAN</a></h6>
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<p>
This was the month the confidence fairy died. </p>
<p>
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.
</p>
<p>
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. </p>
<p>
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. </p>
<p>
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. </p>
<p>
None of this should come as news, since the failure of austerity
policies to deliver as promised has long been obvious. Yet European
leaders spent years in denial, insisting that their policies would start
working any day now, and celebrating supposed triumphs on the flimsiest
of evidence. Notably, the long-suffering (literally) Irish have been
hailed as a success story not once but twice, in early 2010 and again in
the fall of 2011. Each time the supposed success turned out to be a
mirage; three years into its austerity program, Ireland has yet to show
any sign of real recovery from a slump that has driven the unemployment
rate to almost 15 percent. </p>
<p>
However, something has changed in the past few weeks. Several events —
the collapse of the Dutch government over proposed austerity measures,
the strong showing of the vaguely anti-austerity François Hollande in
the first round of France’s presidential election, and an economic
report showing that Britain is doing worse in the current slump than it
did in the 1930s — seem to have finally broken through the wall of
denial. Suddenly, everyone is admitting that austerity isn’t working.
</p>
<p>
The question now is what they’re going to do about it. And the answer, I fear, is: not much. </p>
<p>
For one thing, while the austerians seem to have given up on hope, they
haven’t given up on fear — that is, on the claim that if we don’t slash
spending, even in a depressed economy, we’ll turn into Greece, with
sky-high borrowing costs. </p>
<p>
Now, claims that only austerity can pacify bond markets have proved
every bit as wrong as claims that the confidence fairy will bring
prosperity. Almost three years have passed since The Wall Street Journal
breathlessly warned that the attack of the bond vigilantes on U.S. debt
had begun; not only have borrowing costs remained low, they’ve actually
fallen by half. Japan has faced dire warnings about its debt for more
than a decade; as of this week, it could borrow long term at an interest
rate of less than 1 percent. </p>
<p>
And serious analysts now argue that fiscal austerity in a depressed
economy is probably self-defeating: by shrinking the economy and hurting
long-term revenue, austerity probably makes the debt outlook worse
rather than better. </p>
<p>
But while the confidence fairy appears to be well and truly buried,
deficit scare stories remain popular. Indeed, defenders of British
policies dismiss any call for a rethinking of these policies, despite
their evident failure to deliver, on the grounds that any relaxation of
austerity would cause borrowing costs to soar. </p>
<p>
So we’re now living in a world of zombie economic policies — policies
that should have been killed by the evidence that all of their premises
are wrong, but which keep shambling along nonetheless. And it’s anyone’s
guess when this reign of error will end. </p>
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<br>-- <br>Art Deco (Wayne A. Fox)<br><a href="mailto:art.deco.studios@gmail.com" target="_blank">art.deco.studios@gmail.com</a><br>