This is what Paul Krugman called the austerity blunder in his latest New York Times column. He also had some praise for the latest paper by IMF Chief Economist Olivier Blanchard, in which he admitted that austerity had a profoundly negative effect, even though they should have known from the start that this was going to happen.
But Krugman also argued that the austerity problem remains:
I’ve seen some reporting describing the paper as an admission from the I.M.F. that it doesn’t know what it’s doing. That misses the point; the fund was actually less enthusiastic about austerity than other major players. To the extent that it says it was wrong, it’s also saying that everyone else (except those skeptical economists) was even more wrong. And it deserves credit for being willing to rethink its position in the light of evidence.
The really bad news is how few other players are doing the same. European leaders, having created Depression-level suffering in debtor countries without restoring financial confidence, still insist that the answer is even more pain. The current British government, which killed a promising recovery by turning to austerity, completely refuses to consider the possibility that it made a mistake.(…)
The truth is that we’ve just experienced a colossal failure of economic policy — and far too many of those responsible for that failure both retain power and refuse to learn from experience.
In a nutshell, the evidence that austerity has been a disastrous policy is mounting but the politics has not changed. This is the fight ahead.