Paul Krugman: Today's Austerity Policies Based On 'A Mythical 70s That Never Was'

They say hindsight is 20/20, but according to Paul Krugman it may actually be much worse than that when it comes to economic policy-making.

The Nobel-Prize winning economist and New York Times columnist wrote in a blog post Sunday that current policymakers are basing their decisions to cut spending, leading in many cases to high unemployment, on the false notion that the recession of the late 1970s and early 1980s was caused by too much government debt and too many government handouts.

During the period leading up to that recession government debt was low and stable or falling as a share of the economy. What actually caused the recession of the late 1970s, Krugman writes, was an unfortunate vicious cycle of workers demanding more money because they expected prices to rise, companies raising prices to pay for their increased costs as well as big oil price shocks.

“It would be bad enough if we were basing policy today on lessons from the 70s,” Krugman wrote in the blog post Sunday. “It’s even worse that we’re basing policy today on a mythical 70s that never was.”

Though Krugman has been criticizing some policymakers’ obsession with austerity for years, the strategy has recently come under fire after a widely-cited paper by Harvard economists Carmen Reinhart and Ken Rogoff thought to prove that high levels of government debt correlated with economic downturns, turned out to be riddled with errors. For their part, Reinhart and Rogoff have tried to disown the austerity movement -- which included Rep. Paul Ryan (R-Wis.), the U.K.’s George Osborne and other prominent politicians -- which cited their research as a way to justify their policies.

Earlier this month former President Bill Clinton backed Krugman’s argument that a laser-sharp focus on cutting the deficit can lead to high unemployment and other economic problems, saying “It's obvious that if you overdo austerity, you get Europe.”

The average unemployment rate in the Eurozone is at a record 12.1 percent and the region is currently mired in the longest recession in its history. Some experts blame the region’s policymakers’ obsessive focus on slashing government debt for the eurozone’s economic woes.

At least in the U.S., it turns out runaway debt may not be as much of a concern as originally thought, despite politicians’ panic. The nonpartisan Congressional Budget Office found earlier this month that the deficit is likely to shrink rapidly through 2015.