Daniel W. Drezner

The worst piece of conventional wisdom you will read this year

Paul Krugman is a very smart and very annoying person. Over the past few years he’s been hammering away at political and economic advocates for austerity policies with unmitigated glee and derision. He does so with a brio and condescension that some people can find off-putting — but that doesn’t mean that he’s wrong. His ...

Paul Krugman is a very smart and very annoying person. Over the past few years he’s been hammering away at political and economic advocates for austerity policies with unmitigated glee and derision. He does so with a brio and condescension that some people can find off-putting — but that doesn’t mean that he’s wrong.

His latest salvo is a New York Review of Books essay, which among other things discusses Mark Blyth’s excellent new book Austerity: The History of a Dangerous Idea.

After pummeling "austerians" for much of the essay, Krugman then endeavors to explain why so many policymakers and pundits still favor such policies:

The turn to austerity was very real, and quite large.

On the face of it, this was a very strange turn for policy to take. Standard textbook economics says that slashing government spending reduces overall demand, which leads in turn to reduced output and employment. This may be a desirable thing if the economy is overheating and inflation is rising; alternatively, the adverse effects of reduced government spending can be offset. Central banks (the Fed, the European Central Bank, or their counterparts elsewhere) can cut interest rates, inducing more private spending. However, neither of these conditions applied in early 2010, or for that matter apply now. The major advanced economies were and are deeply depressed, with no hint of inflationary pressure. Meanwhile, short-term interest rates, which are more or less under the central bank’s control, are near zero, leaving little room for monetary policy to offset reduced government spending. So Economics 101 would seem to say that all the austerity we’ve seen is very premature, that it should wait until the economy is stronger.

The question, then, is why economic leaders were so ready to throw the textbook out the window.…

Everyone loves a morality play. “For the wages of sin is death” is a much more satisfying message than “Shit happens.” We all want events to have meaning.

When applied to macroeconomics, this urge to find moral meaning creates in all of us a predisposition toward believing stories that attribute the pain of a slump to the excesses of the boom that precedes it—and, perhaps, also makes it natural to see the pain as necessary, part of an inevitable cleansing process. When Andrew Mellon told Herbert Hoover to let the Depression run its course, so as to “purge the rottenness” from the system, he was offering advice that, however bad it was as economics, resonated psychologically with many people (and still does).

By contrast, Keynesian economics rests fundamentally on the proposition that macroeconomics isn’t a morality play—that depressions are essentially a technical malfunction.

Now this sounds a little far-fetched — I mean, it’s not as if pundits and policymakers can be that economically illiterate, right?

And then, as if Krugman planned it all along, along comes Michael Kinsley in the New Republic — responding to a different Krugman essay that makes similar points — with an essay titled "Paul Krugman’s Misguided Moral Crusade Against Austerity." I think one of the points Kinsley is trying to make is that the policy divide between austerians and anti-austerians in Washington isn’t as great as Krugman portrays. That’s likely correct in Washington. During debates this year, even austerity "advocates" like John Boehner have made noises about not wanting to turn off the fiscal tap too soon, and even austerity "critics" like Barack Obama have talked about the need for fiscal rectitude. So yes, even austerity’s critics sound austerity-curious at times.

Still, the guts of Kinsley’s essay are … problematic. Some highlights:

It’s easier to describe what the anti-austerians believe than the austerians themselves. Anti-austerians believe that governments around the world need to stop worrying about their debts for a while and continue pouring money into the economy until the threat of recession or worse is well and truly over. Austerians want the opposite. But what is the opposite? Is President Barack Obama, for example, an austerian? To Republicans and conservatives, no: He pushed through a stimulus package of almost a trillion dollars early in his first term, and remains a symbol of “big spending.” To liberals and Democrats, yes: They feel we need a second and much larger stimulus and Obama has let us all down.…

Austerians believe, sincerely, that their path is the quicker one to prosperity in the longer run. This doesn’t mean that they have forgotten the lessons of Keynes and the Great Depression. It means that they remember the lessons of Paul Volcker and the Great Stagflation of the late 1970s. “Stimulus” is strong medicine—an addictive drug—and you don’t give the patient more than you absolutely have to.…

Krugman also is on to something when he talks about paying a price for past sins. I don’t think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be. And future sufferers are not necessarily different people than the past and present sinners. That’s too easy. Sure let’s raise taxes on the rich. But that’s not going to solve the problem. The problem is the great, deluded middle class—subsidized by government and coddled by politicians. In other words, they are you and me. If you make less than $250,000 a year, Obama has assured us, you are officially entitled to feel put-upon and resentful. And to be immune from further imposition.

Austerians don’t get off on other people’s suffering. They, for the most part, honestly believe that theirs is the quickest way through the suffering. They may be right or they may be wrong. When Krugman says he’s only worried about “premature” fiscal discipline, it becomes largely a question of emphasis anyway. But the austerians deserve credit: They at least are talking about the spinach, while the Krugmanites are only talking about dessert. [Emphasis added.]

OK, so, a few things:

1) No Republican or conservative, anywhere in the United States, will claim that Barack Obama is an austerian. I’m just gonna assume that this is a typo and move on. [Editor’s note: The typo has been cleared up on the New Republic‘s website, and the block quote above has been corrected.]

2) Stagflation in the 1970s was caused primarily by an inward shift of the aggregate supply curve due to a surge in commodity prices, particularly energy. Some central banks responded with accommodating monetary policies that accelerated inflation even further. Fiscal policy was an innocent bystander to this whole shebang. So I honestly don’t know what the hell Kinsley is talking about.

More importantly, the current macroeconomic climate is really, really different from the 1970s. Inflation was a Big Bad Problem during that decade. It is not a problem rig
ht now
. If inflation were spiking, then a genuine debate could be had on macroeconomic policy options. But that’s not the case.

3) In his final paragraphs, Kinsley has managed to epitomize the exact critique that Krugman has served up.

The irony of this whole thing is that the Congressional Budget Office’s recent figures put the lie to Kinsey’s hidden assumption that the federal budget deficit is getting bigger and bigger. Right now it’s shrinking at the fastest rate in postwar economic history.

The CBO also warns that the deficit will start to balloon up again due to entitlement spending, which suggests that Kinsley has half a point about thinking through entitlement reform. The thing is, that’s a structural problem, not a business cycle problem. Kinsley et al. are acting as if the current fiscal climate demands immediate budgetary actions. And it doesn’t — it really, really doesn’t.

Look, I think Paul Krugman has a few policy blind spots. His method of argumentation alienates as many people as it attracts. But he’s not wrong when he’s talking about austerity. In his response, Michael Kinsley has managed to embody the conventional wisdom in Washington — and in doing so, embody every policy caricature of Paul Krugman’s worldview.

Am I missing anything?

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