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No, Austerity Is Not Contractionary

Anthony Faiola:

In Greece, fears that austerity is killing the economy: ATHENS — Deeply indebted and nearly bankrupt, this Mediterranean nation was forced to adopt tough austerity measures to slash its deficit and secure an international bailout. But as the Greek economy slides into free fall, critics are scanning the devastated landscape here and asking a probing question: Does austerity really work?

Unemployment has surged to 18.8 percent from 13.3 percent only a year ago. Overburdened public hospitals are facing acute shortages of everything from syringes to bandages because of budget cuts, with hiring freezes forcing the mothballing of operating rooms even as more unemployed are relying on the public health system. Rates of homelessness, suicide, crime and HIV cases from intravenous drug use are jumping.

Greece has been forced to cut spending and raise taxes in the middle of a severe downturn, slashing pensions as well as state salaries, jobs and services. As public confidence has evaporated, consumer spending — the biggest driver of the economy — has plunged, generating cascading losses at private firms. The result is a dizzying economic plummet and social crisis that is bringing the cradle of Western civilization to its knees…. On Monday, German Chancellor Angela Merkel and French President Nicolas Sarkozy turned up the heat on Greece, suggesting that its bailout deal is in danger of unraveling if Athens does not press ahead quicker with pledged budget reforms and seal a deal with bondholders to voluntarily restructure its massive debt. But they also acknowledged that new steps are needed to combat slowing growth in the euro zone….

Leon Hannen, 64, a fluent English speaker and a maker of sacred icons for the Greek Orthodox faithful. When Greece’s economy went from bad to worse in 2011, squeezing wallets here, religious shops rapidly stopped purchasing his wares. He said he went from a monthly income of roughly $2,600 as recently as 2009, to just about $260 a month by last summer. “Before I knew it, rent was six months overdue and I was asked to leave,” he said. “I had nowhere to go. I slept under the stars, on park benches, at first. I chose the ones by street lamps to be careful. Frankly, I feel as if I’ve had an easy life up until now. But none of us do anymore”…

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