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March 07, 2013 1:00 PM Why Is the Poisoned Austerity Chalice So Tempting?

By Ryan Cooper

Paul Krugman has been understandably frustrated at the state of the economic debate among the DC elite. With a brief respite during the Occupy Wall Street upheaval, Washington has been utterly gripped by how best to cut deficits now now now, and is again measurably damaging the recovery. Macroeconomic Advisers estimates that we’ll shave 0.6 percentage points off GDP growth this year from the sequester alone. And as Felix Salmon argues, America’s long-term fiscal problems are entirely about how to solve the problems of health care costs and an aging population, which austerity can only make worse by strangling economic output. Right now, austerity solves no problems and makes almost everything worse.

So why are our political elites so obsessed with it? (And it’s not just the right—tax increases are austerity too, Mr. President.) Krugman’s usual explanation for this, in brief, is that elite policymakers are stupid. But there must be something deeper here—after all, consider other advanced countries. In the Netherlands, for instance, it’s not just the conservative parties arguing for austerity, it’s the center-left Labour as well:

During the electoral campaign, Labour nodded imperceptibly towards a Keynesian take on the euro-zone crisis, protesting the EU-mandated deficit limit of 3% of GDP as a senselessly rigid measure that would “cut the economy to pieces”. But they then signed on to a governing accord that immediately slashes the deficit by nearly 2% of GDP through tax hikes and budget cuts. Since the new cabinet took office last month, Labour ministers and MPs have been referring constantly to the party’s tradition of sober fiscal rectitude going back to the 1940s, to allay any suspicion that they might be softies or pinkos; they ridicule calls for stimulus, and hammer on the moral-hazard dangers of official writedowns or haircuts on Greek debt, lest the Greeks abandon promised reforms and other European debtor nations clamour for the same deal. Labour’s acquiescence to austerity policies has held even as the Dutch economy shrank a startling 1.1% in the third quarter. The party confines its leftist impulses mainly to spreading the domestic pain of austerity in a more egalitarian fashion, through progressive taxation and redistribution measures; on euro-zone policies, they’ve eliminated any daylight between themselves and the centre-right Liberals.

Consider further a nice historical look at the austerity-induced recession of 1937, the debates around which tracked our current ones almost exactly.

Our new issue has a Henry Farrell review of Mark Blyth’s Austerity, which asks exactly this question:

Blyth argues that austerity had its beginnings in the inability of classical liberal theorists like David Hume, Adam Smith, and John Locke to think straight about the state’s role in the economy. While their intellectual heirs recognized that economic crises happened, they thought of them as an inevitable hangover from previous economic exuberance. All that the state could do was balance the budget, and perhaps even raise taxes, to restore economic confidence. Under this theory, austerity was something like the apocryphal vomitorium at Roman feasts, allowing the economy to purge itself between successive bouts of overindulgence.
These arguments acquired ever fancier mathematical trappings. Economists came up with toy models under which austerity could actually expand the economy by restoring business confidence. And this general wisdom seeped down into politics. In 2009, Alberto Alesina and Silvia Ardagna wrote a paper arguing that austerity was a signal that politicians sent to entrepreneurs, guaranteeing that tax increases would not happen in the future so that they would have the confidence to invest in the present. When the crisis hit, they were invited to deliver a version of this paper to the gathered economics and finance ministers of Europe. Likely, many of these ministers now regret having listened to its recommendations, but the hurt is done.

Krugman is fond of saying “economics is not a morality play,” which is true. But I suspect that the intuitive appeal of having to “take one’s medicine” after a financial bender is strong indeed, and all the technocratic explanations about why this will be self-defeating will simply not penetrate. Instead, the anti-austerians must recapture moral explanations from the self-flagellation caucus. As Farrell writes:

Nonetheless, it’s essential reading. John Maynard Keynes famously argued that politicians are the unwitting slaves of the ideas of defunct economists. Blyth’s book is a practical application of Keynes’s dictum, asking what those ideas are, why they are so important, and where they came from in the first place. If Blyth is right, we are only going to get out of the mess we’re in by developing new ideas that work better than austerity and can shape a new economic order, at least for a while. He doesn’t know any better than I do where those ideas will come from, but at least he has some understanding of why and how they are important. The economy is much too important to leave to economists.
Ryan Cooper is a National Correspondent at The Week, and a former web editor of the Washington Monthly. Find him on Twitter: @ryanlcooper

Comments

  • golack on March 07, 2013 1:29 PM:

    Almost like asking why bubbles keep happening...but wait..it's different this time...

    Theories are cheap, especially if they are used as excuses to do something you want to do. Ok, they really aren't theories or even a decent hypothesis since many are grounded in illusions rather than reality. Hence the Bush "tax cuts", and unpaid wars, prescription drug benefit, etc.

    Simple. Gov't's pay down debt/build nest egg in good times, build up debt/pay out nest egg in bad. Charlatans raid nest eggs (see what happens to pension plans) and rationalize blowing up the deficit--and long as they get their cut--and leave the mess for someone else to clean up.

    Why is it soo easy to get away with this nonsense? Simple, selling people on austerity in flush times is difficult--don't change what "works", they may not make as much money...don't burst the bubble. In tough times, well, austerity is always for "them"...don't blame "me" for the bubble..."I" earned what I have. It's just fighting over a smaller pie instead of working together to grow a larger pie, especially since the latter requires helping "them". Tribalism at it's finest.

  • c u n d gulag on March 07, 2013 1:37 PM:

    Why "Austerity?"

    Perhaps this 171 year-old book can help to exlain what's going on - "Extraordinary Popular Delusions and the Madness of Crowds:"

    http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds

    Sometimes, some really stupid things, that make no sense whatsoever, like tulips, bring on some economic craze. All it takes, is belief that it'll work, and prayer that you're not the one holding the bag, when that bubble bursts.

    And of course, "Austerity" for the poor, young, old, sick, and handicapped, is the option that's quickly preferred by the rich and powerful.

    The powers-that-be, economically and politically, don't want to be taxed more and have their skin in the game, so naturally they'd prefer the "lesser classes" pay for the damage the powers-that-be have done, with their own pounds of flesh.

    And the rich and powerful have access to lobbyists, politicians, and the media.

    Who do the poor, the young, the old, the sick, or the handicapped, have to fight for them?

    And, that's why, "Austerity."

  • David on March 07, 2013 2:05 PM:

    Ryan,

    I think you're right that austerity is the perceived "correction" for years of excess. This may be as close as the baby boomers get to remorse for their self-obsessions. And Cund gulag, it's also fitting that they are making "other" people pay for the hangover. All too true to form.

  • square1 on March 07, 2013 2:20 PM:

    Or maybe the political leaders of ostensibly left-leaning political parties are corrupt.

  • Mimikatz on March 07, 2013 2:26 PM:

    I think it is much simpler than that, especially for today's elites. The key here is austerity for whom? It isn't some Puritan desire to purge the excess, but rather a desire to shift the pain downward. By definition, when things get excessive, someone has to take away the punch bowl, as Greenspan or whoever famously said. But then the question is whose drinks will be curtailed. As the bowl (or the pie) begins to shrink as a result of the bubble bursting, the elites scramble to put the pain on the people below them. Austerity is a signal to the wealthy that they won't have to pay for their excesses, that the workers and peasants will be squeezed instead. Of course it is self-defeating, since mass demand is needs to keep a consumer-based economy going, but at least it consoles the wealthy. That is the theory behind the confidence fairy, at least.

    In short, I just think that when times get tight, there is a great tendency to rationalize what's beat for oes class as what's best for the country as a whole. Which it is only if you are in the middle.

  • Mimikatz on March 07, 2013 2:29 PM:

    I think it is much simpler than that, especially for today's elites. The key here is austerity for whom? It isn't some Puritan desire to purge the excess, but rather a desire to shift the pain downward. By definition, when things get excessive, someone has to take away the punch bowl, as Greenspan or whoever famously said. But then the question is whose drinks will be curtailed. As the bowl (or the pie) begins to shrink as a result of the bubble bursting, the elites scramble to put the pain on the people below them. Austerity is a signal to the wealthy that they won't have to pay for their excesses, that the workers and peasants will be squeezed instead. Of course it is self-defeating, since mass demand is needs to keep a consumer-based economy going, but at least it consoles the wealthy. That is the theory behind the confidence fairy, at least.

    In short, I just think that when times get tight, there is a great tendency to rationalize what's beat for oes class as what's best for the country as a whole. Which it is only if you are in the middle.

  • mb on March 07, 2013 2:33 PM:

    Austerians generally view themselves, rightly or wrongly, as the "payers." In their not-so-humble opinion, everybody else has gotten a free ride at their expense and it's past time for it to stop. Any stimulus or other government "largesse" will, inevitably, they believe, come out of their pocket and they will not benefit. Because they are the payers. And they are not happy about it. Ergo, austerity.

  • FlipYrWhig on March 07, 2013 2:40 PM:

    Why do you keep saying that tax increases are "austerity"? That's totally wrong. Would raising the cap on Social Security contributions constitute austerity? That's a higher tax, isn't it? Whatever point you're trying to make, it's not about "austerity." I think what you mean is that higher taxes don't stimulate the economy. That may be true, of itself, but most people who make that argument are, you know, dirty filthy rich Republicans.

  • Peter C on March 07, 2013 2:44 PM:

    The problem is that 'austerity' *seems* 'responsible'. So, even though I can trace the 'blame' for the budgetary situation to Republicans, I can't stop them from pointing our fiscal situation and attacking the 'irresponsibility' of those who are trying to clean up the mess. So, while equating 'spending' with 'irresponsiblity' is wrong-headed, simplistic, and counter-productive; it is a credible attack. And being 'credible' is the only consideration.

    And, of course, the Republicans dodge and weave to avoid any in-depth analysis of the drivers of the national debt (simply yelling 'SPENDING' instead) because the more you study the problem, the more you see that the drivers of the debt were their fault.

    Now, the fact that when THEY were in power and controlled everything, THEY were anything but responsible - this doesn't stop them.

    It all comes down to what the problem is and who the enemy is. For Republicans, the number one enemy has never been the size of the national debt, or radical Islam, or the Chinese, or the Soviet Union; since Joseph McCarthy, their chief enemy has been LIBERALS. We're not the loyal opposition. We're not well-meaning but idealistic dreamers. We're not wayward children. We're the enemy. And ANY national event is a potential opening to attack us. If the World Trade Center falls, they attack US for being 'soft on terror' or 'coddling terrorist'. If the country insists on a Transportation Safety Agency, they refuse to consider it unless the agency may not have union representation by law. The financial sectors goes into free-fall, but they insist on killing off Medicare and Social Security.

    They are not partners. They do not negotiate in good faith. They are not to be trusted. They will not be constrained by their consciences if they regain power. They don't like to share; they are playing for all the marbles.

  • iyoumeweus on March 07, 2013 3:31 PM:

    ECONOMIC OBSERVATIONS
    FIRST OBSERVATION: Money, wealth, capital, assets, etc. can be created and destroyed
    SECOND OBSERVATION: Money, wealth, capital, assets, etc. are only useful when it is creating something useful to or for society, the nation or a culture.
    THIRD OBSERVATION: As wealth is taken out of a society and made unavailable through gambling, speculation or other means social disorder increases.
    FORTH OBSERVATION: Money, wealth, capital, assets, etc flows upward and if not stirred becomes stagnant.
    FIFTH OBSERVATION: When consumption increases, employment increases, and visa- versa.
    SIXTH OBSERVATION: No correlation exists between a low income rate for high income citizens and an increase performance in the national economy.
    SEVENTH OBSERVATION: The invisible hand has a thumb on the scale causing free enterprise and markets to favor the most powerful within any society.
    EIGHTH OBSERVATION: Only government can remove the thumb by using laws, rules and regulations and the strong, sure, even and fair enforcement thereof.
    NINTH OBSERVATION: Investment and consumption are not in competition but enjoy a symbiotic relationship. Without investment there would be nothing to consume, and without consumption there would be no reason to invest.
    TENTH OBSERVATION: Full employment leads to fuller production and fuller services, and a more equal distribution of wealth, resources, capital and tax revenue. It does not lead to inflation.
    ELEVENTH OBSERVATION: As the number of mega lending banks decreases, the competition between banks decreases resulting in the credit/bank- ratio-too-GDP increase. When the credit/bank- ratio-too-GDP approaches 100%, the economic growth of the nation decreases.

  • Davis X. Machina on March 07, 2013 4:25 PM:

    The average American's macroeconomic intuitions are identical to those of a 14th c. peasant.

    Which is why macroeconomics in practice is basically moral theology, with the occasional equation thrown in to make it look modern.

  • r on March 07, 2013 6:15 PM:

    One correction -- bringing in a few more bucks from millionaires isn't the same as "austerity." That is simply BS. I know the argument then buying another yacht creates jobs, but that isn't what they do any more....

  • Joe Friday on March 07, 2013 7:03 PM:

    "(And it's not just the right-tax increases are austerity too, Mr. President.)"

    Not on the Rich & Corporate.

    Sure, broad tax increases can be, but there's just no evidence in regards to the Rich & Corporate. They simply do not drive the national economy.

  • Neil B on March 07, 2013 8:29 PM:

    Ryan, mostly nice try - but you are misguided a bit: tax increases are austerity only if they fall on the middle class and below. Think about it.

  • Robert Waldmann on March 07, 2013 10:01 PM:

    You are unfair to German Social Democrats re the great depression. The Weimar Republic's response to the great depression was handled by Heinrich Bruning head of the Center (Catholic) party. He was a "presidential" chancellor which means he governed not through laws passed by the Reichstag but by presidential decress signed by Paul Hindenberg (who was also most definitely not a social democrat).

    Use the wikipedia http://en.wikipedia.org/wiki/Heinrich_Br%C3%BCning

  • Robert Waldmann on March 07, 2013 10:04 PM:

    Ooops by "you" I mean Henry Farrel. I ended up commenting here on a post to which you link. Sorry

  • Keith M Ellis on March 07, 2013 11:32 PM:

    The repeated claims that "austerity" doesn't include tax increases are, to be blunt, ignorant. Whether or not (all other things being equal) liberals think raising taxes on the wealthy is good and reducing military budgets is good, both are very much included in "austerity".

    Here is the story within which "austerity" is defined (forget for the moment that there's often a closely-linked story told about why there was a bubble and why the collapse is necessarily a good thing): the supposed largest hindrance to economic recovery is the drag on the economy caused by ballooning public debt. This is seen as a sort of self-fulfilling prophecy and a vicious cycle, that the loss of confidence depresses economic activity which reduces tax revenues and increases deficit and debt and which reduces confidence, rinse and repeat. Therefore, breaking this cycle will ease the recession by decreasing public debt and increasing confidence. The way to accomplish this is necessarily a combination of reduced government expenditures and increased taxation. The goal is to reduce the deficit. The UK is a good example of a doctrinaire austerity program, and it very much includes both tax increases and spending cuts.

    This whole story is hogwash. But it's the narrative and that narrative sees reducing deficit and debt during a recession as inherently a good thing, a key to ending the recession and promoting growth. While various political partisans may disagree about which spending cuts and which tax increases, those disagreements are subordinated to the overriding need to simply reduce debt.

    This is a big reason why austerity has such strong appeal to the center. It's a simpleminded solution to a complex problem that focuses on one big thing (debt) and the proposed solution is seen as being politically uncomfortable across the political spectrum, which many people naively believe somehow is a stamp of approval.

    It's a big mistake to perceive austerity through the usual political filters. It's better understood as a form of anti-populism; it pits the interests of the elites against the interest of the prole and while that often means that it's more felicitous to the right than the left, this doesn't hold for various interests on both the left and right. Lots of leftists want to see taxes raised (on the right people) and spending cut (from the right programs) — note that this applies to rightists. Where the real conflict occurs is what jobs are lost because of these things.

    Basically, austerity protects the jobs and capital of the elite while punishing most everyone else. Again, before you say that surely this means it's very right-wing and can't be left-wing, consider things like jobs lost at defense contractors or yacht-manufacturers. Lots of left-of-center folk are perfectly willing to believe that "other people" ought to pay some harsh economic price to "correct" an errant economy and government priorities and "save" for a better future.

    Austerity fundamentally sees a recession and public debt like a household that has lived high on the hog on credit card debt, but now the debt is due and sacrifices have to be made. I see this story told in some form or another, even now, on the left. It is deeply wrong about almost everything, but it's widely believed across the political spectrum. And it's very telling that the whirlwind that these policies sow, historically and presently, are deeply angry populism of both left-wing and right-wing varieties.

  • david1234 on March 08, 2013 10:44 AM:

    For individuals, corporations, municipalities and states too much debt can be disastrous. If the economy was at full employment and budget deficits were has high as they are now, the focus on the debt would be justified. The appeal of austerity should not be surprising.