Yesterday Paul Krugman made an important point about the underlying politics of austerity and deflation that is hard to exaggerate: supporters of such policies are frequently relying on moral rather than economic arguments:
[T]he events that brought on the Great Recession — the housing bust, the banking crisis — took place a long time ago. Why can’t we escape their legacy?
The proximate answer lies in a series of policy mistakes: Austerity when economies needed stimulus, paranoia about inflation when the real risk is deflation, and so on. But why do governments keep making these mistakes? In particular, why do they keep making the same mistakes, year after year?
The answer, I’d suggest, is an excess of virtue. Righteousness is killing the world economy.
What, after all, is our fundamental economic problem? A simplified but broadly correct account of what went wrong goes like this: In the years leading up to the Great Recession, we had an explosion of credit (mainly to the private sector). Old notions of prudence, for both lenders and borrowers, were cast aside; debt levels that would once have been considered deeply unsound became the norm.
Then the music stopped, the money stopped flowing, and everyone began trying to “deleverage,” to reduce the level of debt. For each individual, this was prudent. But my spending is your income and your spending is my income, so when everyone tries to pay down debt at the same time, you get a depressed economy.
But hey, at least imprudent people are being punished, eh? And to some observers that’s all that matters, even if everyone’s being punished as a byproduct of this moral lesson to the people–often those people–who arrogantly aspired to a middle-class standard of living their stagnant incomes could not support.
Now it’s true there’s always a “moral hazard” argument that unless people who behave imprudently are punished they (and others) will behave imprudently in the future as well. But when is enough punishment enough? And when will the collateral damage to the economy offset the emotional satisfaction of ensuring that inadequately virtuous people receive their just desserts?
As I said, it’s about righteousness — the sense that any kind of debt forgiveness would involve rewarding bad behavior. In America, the famous Rick Santelli rant that gave birth to the Tea Party wasn’t about taxes or spending — it was a furious denunciation of proposals to help troubled homeowners. In Europe, austerity policies have been driven less by economic analysis than by Germany’s moral indignation over the notion that irresponsible borrowers might not face the full consequences of their actions.
So the policy response to a crisis of excessive debt has, in effect, been a demand that debtors pay off their debts in full. What does history say about that strategy? That’s easy: It doesn’t work.
The longer it “doesn’t work” the more obvious it is that it’s self-righteousness rather than “prudence” driving these policies (especially when you take into account that many of the self-righteous are protected, via wealth assets or retirement benefits, from a bad economy, and may even profit from deflation).
Perhaps a massive national act of self-abnegation, like the flagellants’ processions of the Middle Ages, is in order, with those who have lost everything carrying signs with the legend “Guilty as charged!” to assure the self-righteous they understand they caused their own suffering. Maybe then we can move towards economic policies that actually do work instead of those designed to improve the moral fiber of the populace.