I came across an interesting post on Paul Krugman's blog presenting a recent speech that he gave in Europe. I have always found him very intelligent and thoughtful, yet able to raise my ire in the blink of any eye. And in this speech, he pulls off the feat again, in the span of two paragraphs. First, the good:
"It's also normal to think of economics as a morality play, a tale of sin and redemption, in which countries must suffer for their past excesses. Again, this normal reaction is wrong, or at least mostly wrong -- mass unemployment does nothing to help pay off debt. But absent clear guidance from the people who are supposed to explain that economics is not, in fact, a morality play, moralizing became the core of economic policy thinking in Germany, and hence played a huge role in European policy more generally."
I think he's right in his indictment of most economists and politicians who are johnny-come-latelys to austerity as policy. It is a political ploy and it's not based on sound arguments. I think for those who take an objective approach (or try to think like investors, to repeat a theme I've referenced before) it is not about morality so much as simple truth. And therefore disagreement exists over whether Krugman offers as alternative a solution that is really viable and sustainable.
Now, for the other stuff:
"Finally, government officials who hang out with businessman -- and almost all of them do -- naturally tend to be attracted to views that put business confidence at the heart of economic problems. Sure enough, belief that one should slash spending even in a depressed economy, and that this would actually promote growth because it would have positive effects on confidence, spread like wildfire in 2010. There were some economic studies used to justify the doctrine of expansionary austerity -- studies that quickly collapsed under scrutiny. But really, the studies became popular because they suited the prejudices of politicians, prejudices that would have been totally familiar to Herbert Hoover and Heinrich Bruning."
For those who are not from the ranks of the politicized, is that really the case for austerity? I think Krugman is arguing against a straw man, in order to avoid dealing genuinely with the line of reasoning which says that there is no easy and clear path out of this. That perhaps time (and unfortunately some pain) is the only cure. In other words, the argument is not that austerity is expansionary, but simply what we must face. That to try easy money and fiscal planning is likely to lead to more of the same problems eventually. (Yes, Minsky says capitalism is inherently unstable, but I have already raised my concerns about what his theory seems to take for granted and ignore.) And, to make matters worse, Krugman totally misrepresents Hoover. He may not have been hugely expansionary, but his policy response to the crash of 1929 and subsequent depressionary times was to increases federal deficits. Now, Krugman may not think the size of deficits was sufficient, but it is entirely misleading to present the narrative in the way that he does. So, good Krugman, bad Krugman. As usual.
