Confidence, Austerity, and the Great Leap Forward

Policies that critically rely on belief in the policy’s effectiveness can lead to disaster.

Those who questioned the Great Leap were attacked not only for attacking the party line but indeed for undermining its success. The energy and spirit involved in moving China forward was supposed to move China forward. Questioning whether it was working cut against everything that the Leap was about.

Paul Krugman writes today about austerity in Italy. What made me make the connection with the Great Leap is an amazing letter that claims that research showing that austerity is failing is undermining the confidence that austerity is supposed to be building.

From Not the Treasury View:

Mr Rehn [European Commission Vice President], in a letter to European Finance Ministers, copied to other international financial luminaries like Christine Lagarde, says: 

“I would like to make a few points about a debate which has not been helpful and which has risked to erode the confidence we have painstakingly built up over the last years in late night meetings. I refer to the debate about fiscal multipliers, ie the marginal impact that a change in fiscal policy has on economic growth.  The debate in general has not brought us much new insight.”

The economic disaster in Europe is not leading to famine, but it is a disaster caused by an unyielding belief in the efficacy of policies that have demonstrably failed.

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