Modern Economics as Bloodletting

Here is an excellent post by Paul Krugman on his NY Times blog. He points out that the kind of "reasoning" being used by those demanding that deficits be cut and austerity be put in place is the same kind of reasoning that "physicians" used throughout the Middle Ages in doing bloodletting to cure their patients:

Liz Alderman offers an excellent, if depressing, portrait of Ireland in austerity. To fully appreciate its significance, you want to juxtapose it with what the apostles of austerity are saying. Jean-Claude Trichet:

“As regards the economy, the idea that austerity measures could trigger stagnation is incorrect,” Trichet said, according to an English-language transcript published on the ECB’s Internet site.

“I firmly believe that in the current circumstances, confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”
Uh-huh.

The key thing to bear in mind about calls for harsh austerity in the face of a a depressed economy is that such calls depend on two propositions, not one. Not only do you have to believe that the invisible bond vigilantes are about to strike — that you must move to appease markets, even though right now bond buyers are willing to lend money to the United States at very low rates; you must also believe that short-term fiscal cutbacks will in fact appease the markets if they do, in fact, lose confidence.

That’s why the Irish debacle is so important. All that savage austerity was supposed to bring rewards; the conventional wisdom that this would happen is so strong that one often reads news reports claiming that it has, in fact, happened, that Ireland’s resolve has impressed and reassured the financial markets. But the reality is that nothing of the sort has taken place: virtuous, suffering Ireland is gaining nothing.

Of course, I know what will happen next: we’ll hear that the Irish just aren’t doing enough, and must do more. If we’ve been bleeding the patient, and he has nonetheless gotten sicker, well, we clearly need to bleed him some more.

The politicians have gone insane. Right now the stock markets around the world are signaling a "double dip" recession. At the very best, growth may slow to zero and not actually go negative, but the latter half of 2010 and early 2011 are going to be either negative of no-growth months. That means more unemployed. That means more suffering. Why? Because Republicans believe in voodoo economics, an economics of "bloodletting". I never thought I would live to see the day, but sadly I have. The world has gone mad.