The era of austerity is over (for now)

April 29, 2013

The era of austerity began on February 5, 2010. That was when the finance ministers and central bankers of the seven major industrialized powers flew to the remote Arctic village of Iqaluit, Canada. That meeting of the Group of Seven came at a time when the extraordinary financial rescues and fiscal and monetary stimulus of the crisis seemed to have done their job and the world economy was on the mend.

Sovereign debt crises had emerged in Greece and Dubai, and to the men and women in that summit in the Arctic, held amid weather that was a balmy zero degrees Fahrenheit, there was growing conviction that it was time to look toward the exits, to begin bringing deficits down and think seriously about how to unwind the expansive monetary interventions that had been taken. Also, there was dogsledding.


The leading world finance ministers and central bankers met this month in Washington. Is the pivot away from austerity underway? (IMF Photo)

Three years later, it is clear that they were wildly premature. But something remarkable has happened in the last few weeks. It looks like world financial leaders are coming to that conclusion themselves, and reversing course. In my new book, I describe Iqaluit 2010 as the moment of the pivot toward austerity; some future book may well pinpoint Washington, 2013—that is, the IMF and World Bank spring meetings that ended a week ago—as a similar turning point in global economics

The first substantive sentence in the communique following the meeting of the Group of 20 leading nations of the world on April 19 puts it succinctly: “We reaffirmed our determination to raise growth and create jobs.” No caveats, and surprisingly un-mealymouthed. That tone—of focusing on too few jobs instead of the risks from government debt and inflation—has been increasingly common in recent weeks. Consider what has happened:

L’Affaire Reinhart-Rogoff. There’s not much else left to say about a subject that has enthralled the economic commentariat for the last two weeks (here is my earlier take, and a few others worth reading). There is room to debate how much their research contributed to the push toward fiscal austerity to begin with. But there is no question that new methodological questions about the work of Carmen Reinhart and Kenneth Rogoff, and a less substantively significant but more splashy Excel coding error, has taken a great deal of wind out of the sails from those who argue that high government debt is, anywhere and everywhere, a bad thing.

No blowback for Japan. Remember when the Federal Reserve began its “QE2” policy of buying $600 billion in bonds in November 2010? At a Group of 20 Summit a few days later, leaders from three continents bashed the Fed for what they argued were irresponsible and destructive policies (China, Germany, and Brazil were the loudest). Fast forward almost three years, and the Bank of Japan has undertaken open-ended quantitative easing of its own in pursuit of 2 percent annual inflation in a country where deflation has been the norm for two decades. That is pulling down the value of the yen on currency markets, advantaging Japanese exporters. But while the steps have discomfited plenty of companies that have Japanese competitors, particularly in South Korea, the international community isn’t coming down on Japan with anywhere near the ire that the Fed saw three years ago. The Group of 20 statement said that “Japan’s recent policy actions are intended to stop deflation and support domestic demand,” raising no sense that they are treating Japan’s monetary easing as a volley in a currency war, but rather a worthwhile attempt to get a long-suffering economy on track.

Growing awareness that U.S. deficits are already falling. The United States has not embraced austerity as full-throatedly as our friends across the Atlantic, but there is deepening recognition that—through spending cuts in the debt ceiling deal in 2011 including sequestration, tax increases as part of the fiscal cliff, and a growing economy—U.S. deficits are falling quite quickly. That being the case, Congressional Democrats are increasingly looking to hold the line and say “No Mas” to further near-term deficit reduction. “Trying to just land on the debt too quickly would really harm the economy; I’m convinced of that,” Sen. Tim Kaine (D-Va.) told Politico.  “Jobs and growth should be No. 1. Economic growth is the best anti-deficit strategy.” In years past, centrist Democrats were among those most eager to reduce deficits, but now the winds are shifting and much of the president’s own party would object to anything that puts the economy at risk in the name of further deficit-slashing.

The slow-moving disaster that is Europe. Europe has been the poster child for aggressive austerity. The bailed-out countries of Greece, Portugal, and Ireland have slashed spending under direct orders from international creditors who offered bailouts. Spain and Italy have done the same through a less explicit process of coercion from Germany and the European Central Bank in exchange for measures to keep their borrowing costs under control. And Germany and other stronger European countries have focused on deficit reduction because, well, that’s how they do things in Germany. The result is depression in the European periphery and recession in the core. The ECB has been reluctant to cut interest rates to try to offset the impact, lest inflation rear its head in the stronger Eurozone economies. But the ECB appears set to hop on the easy money train in its meeting on Thursday. And it wouldn’t be shocking if, either this week or in a future month, the ECB seeks out some more innovative tool to funnel loans to the smaller businesses that are being frozen out from getting credit. The institution that most eagerly embraced austerity and tight money three years ago, in other words, is inching away from it as well.

It is worth a reminder that the change in tone from global economic policymakers does not always translate into substantive change in policy, and certainly not immediately. Eurozone nations are continuing on their budget-slashing path for now, as is Britain, and the sequestration policy in the United States appears destined to remain in place with only modest changes. In other words, for some time to come, residents of the major industrialized nations will still be living with policy choices made during the austerity era.

We don't know yet what practical results will come from the new tone from global policymakers. But we do know that what global policymakers were trying for the last few years didn’t work terribly well. And the best hope is that the Washington 2013 consensus leads to a better world economy than Iqaluit 2010 did.

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April 29, 2013

The era of austerity began on February 5, 2010. That was when the finance ministers and central bankers of the seven major industrialized powers flew to the remote Arctic village of Iqaluit, Canada. That meeting of the Group of Seven came at a time when the extraordinary financial rescues and fiscal and monetary stimulus of the crisis seemed to have done their job and the world economy was on the mend.

Sovereign debt crises had emerged in Greece and Dubai, and to the men and women in that summit in the Arctic, held amid weather that was a balmy zero degrees Fahrenheit, there was growing conviction that it was time to look toward the exits, to begin bringing deficits down and think seriously about how to unwind the expansive monetary interventions that had been taken. Also, there was dogsledding.


The leading world finance ministers and central bankers met this month in Washington. Is the pivot away from austerity underway? (IMF Photo)

Three years later, it is clear that they were wildly premature. But something remarkable has happened in the last few weeks. It looks like world financial leaders are coming to that conclusion themselves, and reversing course. In my new book, I describe Iqaluit 2010 as the moment of the pivot toward austerity; some future book may well pinpoint Washington, 2013—that is, the IMF and World Bank spring meetings that ended a week ago—as a similar turning point in global economics

The first substantive sentence in the communique following the meeting of the Group of 20 leading nations of the world on April 19 puts it succinctly: “We reaffirmed our determination to raise growth and create jobs.” No caveats, and surprisingly un-mealymouthed. That tone—of focusing on too few jobs instead of the risks from government debt and inflation—has been increasingly common in recent weeks. Consider what has happened:

L’Affaire Reinhart-Rogoff. There’s not much else left to say about a subject that has enthralled the economic commentariat for the last two weeks (here is my earlier take, and a few others worth reading). There is room to debate how much their research contributed to the push toward fiscal austerity to begin with. But there is no question that new methodological questions about the work of Carmen Reinhart and Kenneth Rogoff, and a less substantively significant but more splashy Excel coding error, has taken a great deal of wind out of the sails from those who argue that high government debt is, anywhere and everywhere, a bad thing.

No blowback for Japan. Remember when the Federal Reserve began its “QE2” policy of buying $600 billion in bonds in November 2010? At a Group of 20 Summit a few days later, leaders from three continents bashed the Fed for what they argued were irresponsible and destructive policies (China, Germany, and Brazil were the loudest). Fast forward almost three years, and the Bank of Japan has undertaken open-ended quantitative easing of its own in pursuit of 2 percent annual inflation in a country where deflation has been the norm for two decades. That is pulling down the value of the yen on currency markets, advantaging Japanese exporters. But while the steps have discomfited plenty of companies that have Japanese competitors, particularly in South Korea, the international community isn’t coming down on Japan with anywhere near the ire that the Fed saw three years ago. The Group of 20 statement said that “Japan’s recent policy actions are intended to stop deflation and support domestic demand,” raising no sense that they are treating Japan’s monetary easing as a volley in a currency war, but rather a worthwhile attempt to get a long-suffering economy on track.

Growing awareness that U.S. deficits are already falling. The United States has not embraced austerity as full-throatedly as our friends across the Atlantic, but there is deepening recognition that—through spending cuts in the debt ceiling deal in 2011 including sequestration, tax increases as part of the fiscal cliff, and a growing economy—U.S. deficits are falling quite quickly. That being the case, Congressional Democrats are increasingly looking to hold the line and say “No Mas” to further near-term deficit reduction. “Trying to just land on the debt too quickly would really harm the economy; I’m convinced of that,” Sen. Tim Kaine (D-Va.) told Politico.  “Jobs and growth should be No. 1. Economic growth is the best anti-deficit strategy.” In years past, centrist Democrats were among those most eager to reduce deficits, but now the winds are shifting and much of the president’s own party would object to anything that puts the economy at risk in the name of further deficit-slashing.

The slow-moving disaster that is Europe. Europe has been the poster child for aggressive austerity. The bailed-out countries of Greece, Portugal, and Ireland have slashed spending under direct orders from international creditors who offered bailouts. Spain and Italy have done the same through a less explicit process of coercion from Germany and the European Central Bank in exchange for measures to keep their borrowing costs under control. And Germany and other stronger European countries have focused on deficit reduction because, well, that’s how they do things in Germany. The result is depression in the European periphery and recession in the core. The ECB has been reluctant to cut interest rates to try to offset the impact, lest inflation rear its head in the stronger Eurozone economies. But the ECB appears set to hop on the easy money train in its meeting on Thursday. And it wouldn’t be shocking if, either this week or in a future month, the ECB seeks out some more innovative tool to funnel loans to the smaller businesses that are being frozen out from getting credit. The institution that most eagerly embraced austerity and tight money three years ago, in other words, is inching away from it as well.

It is worth a reminder that the change in tone from global economic policymakers does not always translate into substantive change in policy, and certainly not immediately. Eurozone nations are continuing on their budget-slashing path for now, as is Britain, and the sequestration policy in the United States appears destined to remain in place with only modest changes. In other words, for some time to come, residents of the major industrialized nations will still be living with policy choices made during the austerity era.

We don't know yet what practical results will come from the new tone from global policymakers. But we do know that what global policymakers were trying for the last few years didn’t work terribly well. And the best hope is that the Washington 2013 consensus leads to a better world economy than Iqaluit 2010 did.

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Ezra Klein | April 29, 2013