Last week the European Commission confirmed what everyone suspected: the economies it surveys are shrinking, not growing. It\u2019s not an official recession yet, but the only real question is how deep the downturn will be.<\/p>\n
And this downturn is hitting nations that have never recovered from the last recession. For all America\u2019s troubles, its gross domestic product has finally surpassed its pre-crisis peak; Europe\u2019s has not. And some nations are suffering Great Depression-level pain: Greece and Ireland have had double-digit declines in output, Spain has 23 percent unemployment, Britain\u2019s slump has now gone on longer than its slump in the 1930s.<\/p>\n
Worse yet, European leaders \u2014 and quite a few influential players here \u2014 are still wedded to the economic doctrine responsible for this disaster.<\/p>\n
For things didn\u2019t have to be this bad. Greece would have been in deep trouble no matter what policy decisions were taken, and the same is true, to a lesser extent, of other nations around Europe\u2019s periphery. But matters were made far worse than necessary by the way Europe\u2019s leaders, and more broadly its policy elite, substituted moralizing for analysis, fantasies for the lessons of history.<\/p>\n
Specifically, in early 2010 austerity economics \u2014 the insistence that governments should slash spending even in the face of high unemployment \u2014 became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in \u201cconfidence,\u201d that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you\u2019re right: It does and he did.<\/p>\n
Now the results are in \u2014 and they\u2019re exactly what three generations\u2019 worth of economic analysis and all the lessons of history should have told you would happen. The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.<\/p>\n
Furthermore, bond markets keep refusing to cooperate. Even austerity\u2019s star pupils, countries that, like Portugal and Ireland, have done everything that was demanded of them, still face sky-high borrowing costs. Why? Because spending cuts have deeply depressed their economies, undermining their tax bases to such an extent that the ratio of debt to G.D.P., the standard indicator of fiscal progress, is getting worse rather than better.<\/p>\n
Meanwhile, countries that didn\u2019t jump on the austerity train \u2014 most notably, Japan and the United States \u2014 continue to have very low borrowing costs, defying the dire predictions of fiscal hawks.<\/p>\n
Now, not everything has gone wrong. Late last year Spanish and Italian borrowing costs shot up, threatening a general financial meltdown. Those costs have now subsided, amid general sighs of relief. But this good news was actually a triumph of anti-austerity: Mario Draghi, the new president of the European Central Bank, brushed aside the inflation-worriers and engineered a large expansion of credit, which was just what the doctor ordered.<\/p>\n
So what will it take to convince the Pain Caucus, the people on both sides of the Atlantic who insist that we can cut our way to prosperity, that they are wrong?<\/p>\n
After all, the usual suspects were quick to pronounce the idea of fiscal stimulus dead for all time after President Obama\u2019s efforts failed to produce a quick fall in unemployment \u2014 even though many economists warned in advance that the stimulus was too small. Yet as far as I can tell, austerity is still considered responsible and necessary despite its catastrophic failure in practice.<\/p>\n
The point is that we could actually do a lot to help our economies simply by reversing the destructive austerity of the last two years. That\u2019s true even in America, which has avoided full-fledged austerity at the federal level but has seen big spending and employment cuts at the state and local level. Remember all the fuss about whether there were enough \u201cshovel ready\u201d projects to make large-scale stimulus feasible? Well, never mind: all the federal government needs to do to give the economy a big boost is provide aid to lower-level governments<\/a>, allowing these governments to rehire the hundreds of thousands of schoolteachers they have laid off and restart the building and maintenance projects they have canceled.<\/p>\n Look, I understand why influential people are reluctant to admit that policy ideas they thought reflected deep wisdom actually amounted to utter, destructive folly. But it\u2019s time to put delusional beliefs about the virtues of austerity in a depressed economy behind us.<\/p>\n ________________________<\/p>\n Paul Krugman<\/em> joined The New York Times in 1999 and continues as professor of Economics and International Affairs at Princeton University. He received his Ph.D. from MIT in 1977 and has taught at Yale, MIT and Stanford. He is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes. On October 13, 2008, it was announced that Mr. Krugman would receive the Nobel Prize in Economics.<\/em><\/p>\n