Is This Worse than the 1930s?

For England and Italy, at least, Paul Krugman argues that it is:

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

The interesting part of the response to the financial crisis has been the act of equating austerity with confidence. It might be reasonable to say that confidence is what is needed in times of economic downturn — whether or not that yields a particular policy preference — but it is bizarre to say, “confidence is what we need, so austerity is what we will enact.” Yet that was precisely the response of several European governments:

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Politicians and economic experts should generally refrain from giving policy rationales that verge on the overtly psychological, but if one is going to venture into those murky waters, at least get the logic right! The word “austerity,” no matter how you utter it, really doesn’t encourage confidence, and the systematic tightening of government services — often the inevitable result of austerity — is a self-esteem killer for a struggling economy.