Ten Miles Square


May 22, 2013 1:01 PM A Calm, Reasonable Explanation of Why Michael Kinsley Is Wrong about Austerity

By Ryan Cooper

Writing in TNR, Michael Kinsley is annoyed Paul Krugman and his “attack dogs” calling him lots of nasty names on account of his defense of austerity. Though the consequences of economic devastation are very real indeed (the Greek suicide rate, for example, just hit a 50-year high), let’s focus on the argument; as a (sometimes unsuccessful) proponent of a more generous lefty discourse, perhaps a bit of decency might get through. To wit:

1) Inflation is nothing to worry about. Kinsley has been wringing his hands about this since 2010 at least, but as you can see in the chart above, it has been moderate before and since and is in fact probably too low. Inflation is no worry because there is still a lot of slack in the economy, mostly in the form of unemployed workers. The price level is set by market forces, not by magic, and increased economic activity will come largely in the form of new jobs and services, not increased prices.

Like suppose Ben Bernanke prints up a few billion dollars and sends every citizen a big wad of cash. If this were an economy at full capacity, that extra spending would come in the form of increased prices as people bid against each other for goods and services. But in a depressed economy, there is lots of idle capacity lying around. If you want a bartender, there’s one for the hiring, you don’t have to bid one away from someone else. If people buy more shoes, companies can just run the shoe factory a bit faster, by adding an extra shift. Etc.

And furthermore, the 1970s inflation happened at a time when many union-negotiated contracts had a price-of-living clause in them, thus transmitting higher prices into higher wages in a vicious cycle. Today, union density is back to pre-New Deal levels.

If Kinsley wants Krugman et al to take his inflation concerns seriously, he needs a story for how it will happen.

2) The national debt is nothing to worry about. See above for a chart of yields on 10-year US Treasury Bonds. Since the 2008 crash, the government has borrowed hugely, but borrowing costs for new debt have plummeted to the point that people now are paying for the privilege of giving their money to Uncle Sam for ten years. Why is this happening?

Rates on US debt are the combination of expected inflation (low), expected real short-term interest rates (low), and a “term premium,” (i.e., it costs more to borrow money for 30 years than for 5). But the financial system is awash in liquidity—corporate profits are at historic highs, and labor’s share of national income is at historic lows. Because of the weak recovery and the corresponding weak wage growth, business and finance see little to invest in—why build more factories if people can’t afford more products? In other words, all this cash the economy is producing has nowhere to go, so it goes into US debt.

Kinsley keeps asking how we’re going to deal with the national debt. Krugman has said this before, but the answer is: when we get back to full employment. When we get to full employment, the Fed can raise interest rates off the floor without causing a recession. Then we can do some fiscal consolidation without cratering the labor market because the Fed will be able to drop rates to compensate.

As Matt O’Brien points out, the longer it takes to get to full employment, the greater the number of long-term unemployed there will be, who find it nearly impossible to find jobs. This is fast becoming a major structural problem in the US economy, one that took WWII to solve last time it happened.

Personally, I’d say this country could use five years at least of rip-roaring wage growth to make up for the last forty, but this is the basic picture Kinsley is asking for.

Ryan Cooper is a National Correspondent at The Week, and a former web editor of the Washington Monthly. Find him on Twitter: @ryanlcooper


  • James M on May 22, 2013 7:59 PM:

    "Kinsley keeps asking how were going to deal with the national debt. Krugman has said this before, but the answer is: when we get back to full employment."

    Exactly. What is so difficult to understand about this? It is hard to escape the conclusion that people like Mr. Kinsley want people to suffer: or at least think suffering is somehow necessary*. The problem, However, as Mr. Krugman often points out, is that lots of people are suffering: especially the long-term unemployed/underemployed and young people struggling to enter the job market.

    If there were no chance that the deficit would ever organically decline Mr. Kinsley's argument would make sense: 'Sure, some people are suffering now but if we don't take drastic steps now everyone will suffer in the future'. However, given that there is a historical precedent for alleviating the pain of current sufferers while furthering the public good, why not try it?

    *I used to do zazen (zen meditation)in a New York temple. One of the senior students in the Zendo once told us: "Pain is a very good teacher but you should never choose pain."

  • Paul Andrews on May 23, 2013 1:16 AM:

  • Anonymous on May 23, 2013 2:53 AM:

    This is such a common theme with with people attacking Paul Krugman that it almost seems as if there must be a template floating around out there somewhere that they start with and fill in. Kinsley responds with virtually nothing to support his arguments about austerity, which are what were so soundly demolished by Krugman and many others, but instead squeals about being treated unfairly and complains about the manners, basically, of those who responded to him.

    This passage from Kinsley is worth quoting at length:

    "Krugman himself started this round by saying (May 18) that he was going to stay out of it and let his attack dogs like Brad DeLong handle this one. But apparently he couldn�t resist (that�s OK�I know the feeling). Soon he was piling on and calling me all sorts of names. He said I suffered from �lack of compassion, sure; an inability to imagine what it must be like for someone less fortunate than oneself and one�s friends, definitely. � He considers briefly, but seriously, that the problem might be simple �sadism,� but retreats from that daring charge to an only slightly more plausible conspiracy theory: that austerians don�t want the economy to recover until they�ve had the chance to use bad times as an opportunity to shred the social safety net."

    There is so much to unpack here it's amazing. Start with the first line: let's remember that this all began with Paul Krugman writing a piece in The New York Review of Books that had nothing to do with Michael Kinsley personally, and Kinsley writing an article attacking Krugman for his views.

    Next, the idea of Krugman's "attack dogs", as if everyone who piled on Kinsley displaying such an ignorance of macroeconomics in his piece only did so because their master Paul Krugman whistled a command to them. As Kinsley semi-admits, Krugman had in fact not responded at all, and wrote that he would let others respond and would just stay out of it. Perhaps the use of the word "let" threw Kinsley off, but if he thinks that it wasn't a spontaneous response, that if Krugman for example had called them off, writing "let's not criticize Kinsley, folks!" that no one would have jumped all over Kinsley the way they did, he's sadly mistaken. Kinsley elsewhere refers to "anti-austerians" as Krugman's "disciples", which is a curious thing to call a prominent critic of austerity like Joe Stiglitz, as one example, a giant of economic theory who won his Nobel prize before Krugman did.

    Next, the way Kinsley presents the "lack of compassion" passage is intentionally and carefully crafted to obscure the fact that Paul Krugman was actually *defending* Kinsley against the charge by others ("his attack dogs", remember) that sadism is the motive. If you follow the link in Kinsley's piece to Krugman's, the distortion and misrepresentation is clear.

    Mainly it's just one of the most pathetic, substance-free attacks cloaked in victim's robes that I've seen since Nial Ferguson last wrote anything.

  • Rich on May 23, 2013 9:56 AM:

    Kinsley is probably the most overrated pundit of his generation and he benefited from being followed at TNR by Andrew Sullivan and having had to deal with Marty Peretz, neither of whom compare well with anyone even slightly to their left. This is the column that finally revealed the Emperor's new clothes to people who had given him benefit of the doubt in the past. It doesn't need a lengthy or even calm response.

  • gdb on May 23, 2013 3:13 PM:

    Basically, Kinsley doesn't understand Keynesian economics. It's the 21st century equivalent of one of Pope Urban VIII's Cardinals critiqueing Copernicus or Galileo 400 years ago (Economics is an emerging science in 2013 at a stage similar to astronomy in 1613).

  • David on May 23, 2013 7:40 PM:

    Kinsley says that no one wants to start austerity right away. Kinsley, let me introduce you to Paul Ryan, someone with whom, apparently, you are unfamiliar.