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.