Austerity Budgets & the Confidence Fairy

Paul Krugman's op-ed today is a good read.  Among other points:

Just ask the Irish, whose government — having taken on an unsustainable debt burden by trying to bail out runaway banks — tried to reassure markets by imposing savage austerity measures on ordinary citizens. The same people urging spending cuts on America cheered. “Ireland offers an admirable lesson in fiscal responsibility,” declared Alan Reynolds of the Cato Institute, who said that the spending cuts had removed fears over Irish solvency and predicted rapid economic recovery.

That was in June 2009. Since then, the interest rate on Irish debt has doubled; Ireland’s unemployment rate now stands at 13.5 percent.
And then there’s the British experience. Like America, Britain is still perceived as solvent by financial markets, giving it room to pursue a strategy of jobs first, deficits later. But the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback. As I like to put it, the Cameron plan was based on belief that the confidence fairy would make everything all right.
But she hasn’t: British growth has stalled, and the government has marked up its deficit projections as a result.

A quite conservative friend asked me a couple of years ago "what would it take for you to give up your belief in Keynesian economics?".  I responded that we were getting a little test case at that time: the US was doing signficant (though still not enough according to economists) stimulus spending, while much of Europe was pulling back and trying to balance their budgets.  Now of course everything is multi-factorial, and this doesn't constitute ironclad proof, but it's a data point anyway, and one I identified years ago. 

Current trends are pretty clear.  Ireland is a disaster, the UK isn't doing very well, and Germany hasn't recovered as much as we have.  It's not going great in the US, but it's going better than in places where there was less stimulus.

So until I see some pretty good evidence, I'm still a Keynesian.