The austerity fallacy

Austerity policies are founded on a fallacy of composition: the mistaken notion that if something is true of the part (in this case, households), it must be true of the whole (in this case, the nation’s economy). Paul Krugman, writing in the Times, explains the difference:

An economy is not like a household. A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall — and unemployment will soar….

The crisis in Greece [from 2010] was taken, wrongly, as a sign that all governments had better slash spending and deficits right away. Austerity became the order of the day, and supposed experts who should have known better cheered the process on, while the warnings of some (but not enough) economists that austerity would derail recovery were ignored. For example, the president of the European Central Bank confidently asserted that “the idea that austerity measures could trigger stagnation is incorrect.”

Well, someone was incorrect, all right.

Read his piece here.