Why Do the Media Provide Cover for Austerity Cranks, Like the Folks Running the EU?

23rd February 2019 Off By binary
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(This post first appeared on my Patreon page.)

It’s not uncommon to read new stories that quite explicitly identify economic mismanagement. For example, news reports on the hyperinflation in Zimbabwe routinely (and correctly) attribute the cause to the poor economic management by its leaders. We will see similar attributions of mismanagement to a wide range of developing countries.

One place we will never see the term mismanagement, or any equivalent term, applied is in reference to the austerity imposed on the euro zone countries by the European Commission, acting largely at the direction of the German government. In fact, major news outlets, like the New York Times, seem to go out of their way to deny the incredible harm done to euro zone economies and to the lives of tens of millions of people in these countries, as a result of needless austerity.

A decade ago it would at least have been an arguable point as to whether austerity, meaning budget cuts, in the wake of the Great Recession, was reasonable policy. There was some research suggesting that the boost to confidence from lower budget deficits could spur enough investment and consumption to offset the impact on demand of reductions in government spending.

However, since then we have far more evidence on the impact of deficit reduction in the context of an economy coming out of recession. There have been numerous studies, most importantly several from the International Monetary Fund’s research department, which show that lower deficits in this context slow growth and raise unemployment.

Furthermore, they show that periods of high unemployment have a lasting impact as a result of workers losing skills and companies and governments foregoing investment in a downturn that they would have undertaken if the economy were closer to its potential level of output. This means that insistence on deficit reduction not only led to one-time drops in output and employment, but could reduce potential output by trillions of dollars over subsequent years.

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