Using Austerity To Cure Economies Is Like Using Leeches To Cure Disease


leechesEconomists have been underestimating the harm caused by pulling back on government spending, according to new work from economists Òscar Jordà and Alan Taylor.

The new work, published in September by the National Bureau of Economic Research, confirms what austerity opponents have long argued: “expansionary austerity” is a myth, and while cutting spending hurts weak economies far more than strong ones its effect on growth is negative in all circumstances.

The economists frame their work using medical history as an analogy. The medieval practice of bloodletting was believed to help cure ailments until 1809, when a group of doctors conducted the first medical trial, separating hundreds of wounded soldiers into two groups and only bleeding half of their patients. Instead of a battlefield of dying soldiers, Jordà and Taylor have decades of data on fiscal policy and economic growth from the Organization for Economic Cooperation and Development (OECD). Instead of bloodletting, economists have austerity.

While their data predates the present round of austerity in Europe and elsewhere, the authors apply their findings to recent years of economic data from the United Kingdom and find that a full 60 percent of that country’s under-performance compared to forecasts is due to austerity. Research that had supported the “cut-and-grow” arguments in favor of austerity supporters really showed only that an economy that was already growing when austerity began does not cease to grow.

Furthermore, the authors “find even stronger results” than in previous research that austerity has an inherently contractionary effect on economies. “Generally,” they conclude, “austerity prolongs the pain.” That finding comes roughly six months after another core argument for austerity – that there is a “tipping point” level of debt beyond which economic growth is nearly impossible – was shown to be error-riddled and incorrect.

The research provides support for what real life experience had already indicated. The International Monetary Fund has already admitted in the case of Greece that austerity has been more harmful than its supporters had promised it would be. Greece’s economy has shrunk by a full quarter since the country began enacting an austerity agenda as a condition of its bailout. When Europe as a whole finally emerged from a record-long recession last month, it was due in large part to easing austerity requirements in various bailed-out countries.

While Europe demonstrates how austerity exacerbates difficulties for struggling economies, the United States is currently demonstrating the other point from Jordà and Taylor. The American economy is growing, but “excessively rapid” austerity enacted since conservatives took over the House in 2010 is costing present and future economic growth and keeping unemployment a full percentage point higher than it would otherwise be.