Downing Street Economics- Part 2

“Bush wanted to remove Saddam Hussein, through military action, justified by the conjunction of terrorism and WMD. But the intelligence and facts were being fixed around the policy.” – Downing Street Memo

Part 1

Now there are people who think that because I agree with some things Paul Krugman says I agree with everything Paul Krugman says.  This is a fallacy.

When I agree with him I tend to point that out because nothing says “credibility” like “Nobel Prize Winner” and I’m quick to appeal to authority because my background is History not Economics.  Additionally you don’t know me at all, I’m a pseudonymous blogger.  My only personal credibility is predictive accuracy and reproducibility of results.

If I don’t agree I’ll usually just find another source to make my point and if you then trot out Krugman in response I’ll simply shake my head and say, “he’s right about many things, but not about this.”  He’s not infallible as he frequently admits, but he does agree with me on the value of the Scientific Method-

  • Is your theory predictive?  That is to say does it make assertions about reality that can be tested by experiment and do those predictions match the results?

  • Is your methodology sound?  Do those experiments actually test the predictions of your theory or are the results coincidental and due to other factors?

  • Is it reproducible?  If I perform the same experiment under the same conditions will I get the same results?

Now in the Squishy (Social) Sciences where strict experimentation is mostly impossible or unethical there is a tendency to substitute statistical analysis of “naturally” occurring events which is fine if you realize you’re talking about likelihoods and not certainties and your observations are careful enough.

I mention this because in his most recent postings Herr Doktor Professor has been at pains to point out that he’s really a very conventional Keynesian and Monetarist except in the conditions of Zero Lower Bound, and me…

I’m not.

Anyway this is shorter than part the first and I warn you in advance that there may be some slight delay with my digest of Joe Firestone’s analysis because it’s much wonkier.

Evidence and Economic Policy

April 24, 2013, 8:03 pm

Henry Blodget says that the economic debate is over; the austerians have lost and whatshisname has won. And it’s definitely true that in sheer intellectual terms, this is looking like an epic rout. The main economic studies that supposedly justified the austerian position have imploded; inflation has stayed low; the bond vigilantes have failed to make an appearance; the actual economic effects of austerity have tracked almost exactly what Keynesians predicted.

But will any of this make a difference? The story of the past three years, after all, is not that Alesina and Ardagna used a bad measure of fiscal policy, or that Reinhart and Rogoff mishandled their data. It is that important people’s will to believe trumped the already ample evidence that austerity would be a terrible mistake; A-A and R-R were just riders on the wave.

The cynic in me therefore says that after a brief period of regrouping, the VSPs will be right back at it – they’ll find new studies to put on pedestals, new economists to tell them what they want to hear, and those who got it right will continue to be considered unsound and unserious.

Academic Non-Obscurity

April 25, 2013, 7:56 am

(W)hile R-R obviously had nothing to do with the start of the crisis, the question is how they played into the response. For the remarkable thing about this ongoing slump isn’t so much that we had a financial crisis as the fact that we responded to it, not by applying what macroeconomists thought they had learned, but by repeating all the policy errors of the 1930s.

Reinhart-Rogoff instantly became famous. Reinhart gave star testimony to the Senate Budget Committee on Feb. 9, 2010; the paper was cited everywhere in the spring of 2010.

OK, so what is the real story here? Austerity policies would probably have proceeded without Reinhart-Rogoff (and Alesina-Ardagna, another instant hit academic paper that dissolved under scrutiny). But the paper certainly helped sell the policies.

And anyway, the important story isn’t about the sins of the economists; it’s about our warped economic discourse, in which important people seize on academic work that fits their preconceptions. Even if you don’t think Reinhart-Rogoff made much difference to actual policy, the meteoric rise and catastrophic fall of their reputation speaks volumes about why this slump goes on and on.

The 1 Percent’s Solution

By PAUL KRUGMAN, The New York Times

Published: April 25, 2013

Economic debates rarely end with a T.K.O. But the great policy debate of recent years between Keynesians, who advocate sustaining and, indeed, increasing government spending in a depression, and austerians, who demand immediate spending cuts, comes close – at least in the world of ideas. At this point, the austerian position has imploded; not only have its predictions about the real world failed completely, but the academic research invoked to support that position has turned out to be riddled with errors, omissions and dubious statistics.

Yet two big questions remain. First, how did austerity doctrine become so influential in the first place? Second, will policy change at all now that crucial austerian claims have become fodder for late-night comics?

Part of the answer surely lies in the widespread desire to see economics as a morality play, to make it a tale of excess and its consequences. We lived beyond our means, the story goes, and now we’re paying the inevitable price. Economists can explain ad nauseam that this is wrong, that the reason we have mass unemployment isn’t that we spent too much in the past but that we’re spending too little now, and that this problem can and should be solved. No matter; many people have a visceral sense that we sinned and must seek redemption through suffering – and neither economic argument nor the observation that the people now suffering aren’t at all the same people who sinned during the bubble years makes much of a dent.

The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do.

Does a continuing depression actually serve the interests of the wealthy? That’s doubtful, since a booming economy is generally good for almost everyone. What is true, however, is that the years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The 1 percent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.

And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?

Grasping at Straw Men

April 26, 2013, 8:53 am

OK, Reinhart and Rogoff have said their piece. I’d say that they’re still trying to have it both ways, on two fronts. They deny asserting that the debt-growth relationship is causal, but keep making statements that insinuate that it is. And they deny having been strong austerity advocates – but they were happy to bask in the celebrity that came with their adoption as austerian mascots, and never to my knowledge spoke out to condemn all the “eek! 90 percent!” rhetoric that was used to justify sharp austerity right now. Sorry, guys, but with so much at stake you have a responsibility not just to put stuff out but to make crystal clear what you think it implies for policy.

So there’s a clear negative correlation between debt and growth, although no cliff at 90 percent or actually anywhere. The absence of a cliff is crucial: whereas R-R like to say that debt going above 90 percent cuts your growth rate by 1 percentage point, what we actually find is that raising the debt ratio by 45 points cuts growth by 1 point, which is a very different implication.

As Brad DeLong has been pointing out, numbers like that, even if you take them as causal, are a very weak argument for austerity in a liquidity trap. Suppose you cut spending by 2 percent of GDP. This probably reduces GDP by about 3 percent, and reduces the deficit by only about 1 percent of GDP; meanwhile, if we believe in this relationship, it raises GDP a decade later by 0.23 percent. A slam-dunk case for austerity this isn’t.

So, the alleged relationship is driven by (a) fast growth in the former Axis powers, which had very little debt and were recovering from war damage, after World War II; and slow growth in Japan and Italy since 1990. The latter cases were clearly a matter of growth slowdowns leading to higher debt, not the other way around; the former a case of spurious correlation.

This is not stuff that should be having any influence on policy.

The Medium Term Is Not The Message

April 26, 2013, 5:59 pm

Look, we are not going to have a deal that trades short-term stimulus for medium-term deficit reduction. Na ga ha pen. And for a good reason, too: our political parties have fundamentally different visions of what kind of country we should have, and neither is feeling politically weak enough to agree to lock in any of the other side’s vision.This means that any decisions about short-term spending have to be taken along with an asterisk: “*to be offset by longer-run adjustments to be determined later.”

That’s the real world in which macroeconomic analysis plays a role. The question is whether you support austerity now or not – saying that you would oppose austerity if politicians simultaneously did something they aren’t going to do is, de facto, support for austerity. The reality is that as an economist, you’re either trying to calm deficit hysteria or you’re helping to ratchet it up.

And R-R were clearly helping to ratchet up the fear. If that’s not what they meant to do, well, it would have been easy for them to say, clearly, that despite the negative correlation between debt and growth they were opposed to spending cuts right now. They never did that.

This is, I’d say, part of a broader point: the responsibility of public intellectuals in general goes beyond talking about the ideal. I don’t mean that you have to draft legislation that can pass Congress, or whatever; I do mean that you need to make it clear where you stand on the actual decisions being made, as opposed to merely stating what we should do but won’t. And this is especially true when you know full well that many people are invoking your work to push for policies that look nothing like your ideal.

American Austerity, An Update

April 27, 2013, 7:41 am

There is some tendency among economic commentators to think that austerity policies in a deeply depressed economy are mainly a European thing; you even find a fair number of people imagining that the United States is still engaged in fiscal stimulus. But the truth is that federal stimulus is years behind us, while state and local governments have cut back, so the overall story is one of fiscal contraction that’s smaller than in Europe, but not by that much.

To see what’s going on, you need to do two things. First, you should include state and local; second, you shouldn’t divide by GDP, because a depressed GDP can cause the spending/GDP ratio to rise even if spending falls. So it’s useful to look at the ratio of overall government expenditure to potential GDP – what the economy would be producing if it were at full employment; CBO provides standard estimates of this number.

Spending is down to what it was before the recession, and also significantly lower than it was under Reagan. Bear in mind that in the years since the recession began we’ve seen a significant number of boomers reach retirement age, which would ordinarily have led to rising spending, not to mention the effects of rising health care costs. Bear in mind also that the private sector is still deleveraging, which means that government should be spending more to help sustain the economy. So this is actually a picture of very bad policy.

The Ignoramus Strategy

April 27, 2013, 8:08 am

1. The economy isn’t like an individual family that earns a certain amount and spends some other amount, with no relationship between the two. My spending is your income and your spending is my income. If we both slash spending, both of our incomes fall.

2. We are now in a situation in which many people have cut spending, either because they chose to or because their creditors forced them to, while relatively few people are willing to spend more. The result is depressed incomes and a depressed economy, with millions of willing workers unable to find jobs.

3. Things aren’t always this way, but when they are, the government is not in competition with the private sector. Government purchases don’t use resources that would otherwise be producing private goods, they put unemployed resources to work. Government borrowing doesn’t crowd out private borrowing, it puts idle funds to work. As a result, now is a time when the government should be spending more, not less. If we ignore this insight and cut government spending instead, the economy will shrink and unemployment will rise. In fact, even private spending will shrink, because of falling incomes.

4. This view of our problems has made correct predictions over the past four years, while alternative views have gotten it all wrong. Budget deficits haven’t led to soaring interest rates (and the Fed’s “money-printing” hasn’t led to inflation); austerity policies have greatly deepened economic slumps almost everywhere they have been tried.

Monetarism Falls Short (Somewhat Wonkish)

April 28, 2013, 7:41 am

The central debate over macroeconomic policy is, of course, between Keynesians and Austerians. And at this point the Keynesians have overwhelmingly won the debate everywhere except where it matters – the intellectual basis for austerity economics has collapsed, but actual austerity continues apace on both sides of the Atlantic.

There have, however, been a couple of side shows, with what I guess now constitutes mainstream Keynesianism – carried forth in public debate by Martin Wolf, Simon Wren-Lewis, Brad DeLong, Jonathan Portes, Paul DeGrauwe, and whatshisface, among others – subjected to non-austerian criticism on both flanks. On the left are the Modern Monetary Theory types, who assert exactly what the austerians like to claim, falsely, is the Keynesian position – that budget deficits never matter (except for their direct effect on aggregate demand). On the right are the market monetarists like Scott Sumner and David Beckworth, who insist that the Fed could solve the slump if it wanted to, and that fiscal policy is irrelevant.

Now, there won’t and can’t be any current-events test of MMT until we get out of the slump, because standard IS-LM and MMT are indistinguishable when you’re in a liquidity trap. But as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.

And the results aren’t looking good for the monetarists: despite the Fed’s fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll. I would add that the UK experience provides a similar lesson. Mervyn King advocated fiscal consolidation – I’d say that he shares equal responsibility with Cameron/Osborne for Britain’s wrong turn – but more or less promised (pdf) that he would and could offset any adverse effects on growth with monetary policy. He didn’t and couldn’t.

Knaves, Fools, and Me (Meta)

April 28, 2013, 8:01 am

One criticism I face fairly often is the assertion that I must be dishonest – I must be cherry-picking my evidence, or something – because the way I describe it, I’m always right while the people who disagree with me are always wrong. And not just wrong, they’re often knaves or fools. How likely is that?

But may I suggest, respectfully, that there’s another possibility? Maybe I actually am right, and maybe the other side actually does contain a remarkable number of knaves and fools.

The key to understanding this is that the anti-Keynesian position is, in essence, political. It’s driven by hostility to active government policy and, in many cases, hostility to any intellectual approach that might make room for government policy. Too many influential people just don’t want to believe that we’re facing the kind of economic crisis we are actually facing.

And so you have the spectacle of famous economists retreading 80-year-old fallacies, or misunderstanding basic concepts like Ricardian equivalence; of powerful officials instantly canonizing research papers that turn out to be garbage in, garbage out; and so on down the line.

I know, the critics will respond that I’m the one who’s being political – but again, look at how the debate has run so far.

The point is not that I have an uncanny ability to be right; it’s that the other guys have an intense desire to be wrong. And they’ve achieved their goal.

The Story of Our Time


Published: April 28, 2013

Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.

In the economy as a whole … income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too.

And that’s what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment, creating the depression that persists to this day.

So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused.

O.K., I’ve just given you a story, but why should you believe it? There are, after all, people who insist that the real problem is on the economy’s supply side: that workers lack the skills they need, or that unemployment insurance has destroyed the incentive to work, or that the looming menace of universal health care is preventing hiring, or whatever. How do we know that they’re wrong?

Well, I could go on at length on this topic, but just look at the predictions the two sides in this debate have made. People like me predicted right from the start that large budget deficits would have little effect on interest rates, that large-scale “money printing” by the Fed (not a good description of actual Fed policy, but never mind) wouldn’t be inflationary, that austerity policies would lead to terrible economic downturns. The other side jeered, insisting that interest rates would skyrocket and that austerity would actually lead to economic expansion. Ask bond traders, or the suffering populations of Spain, Portugal and so on, how it actually turned out.

Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes – but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net. And just about everyone in the policy elite takes cues from a wealthy minority that isn’t actually feeling much pain.

What has happened now, however, is that the drive for austerity has lost its intellectual fig leaf, and stands exposed as the expression of prejudice, opportunism and class interest it always was. And maybe, just maybe, that sudden exposure will give us a chance to start doing something about the depression we’re in.

The Protectionist Non-Surge

April 29, 2013, 10:09 am

(O)utside the euro area countries are free to use monetary policy – but monetary policy isn’t very effective, because we’re up against the zero lower bound. (You can argue that there’s more scope for expansion than central banks have used, but anyway they haven’t, so the perceived constraint is there). Countries are also free to use fiscal policy, but ReinhartRogoffBowlesSimpsonRehn have scared them into worrying about deficits instead. Overall, macroeconomic policy has ended up operating within constraints reminiscent of those imposed by the gold standard cult.

So why, exactly, aren’t we seeing more protection? Why aren’t politicians – even conservative politicians – looking at the situation and saying, hmm, a tariff won’t increase the deficit, it won’t involve debasing the currency, but it could clearly help create jobs?

One answer might be the “Smoot-Hawley caused the Depression” thing; this isn’t true at all, but it might be serving the purpose of a noble lie.

Or maybe it’s the structure of trade agreements. The countries that arguably could really, really use some protection right now are inside the European Union, so no go. Countries outside still know that any protection they impose will lead to big problems at the WTO; the United States has to know that a protectionist response would break up the whole world trading system we’ve spent almost 80 years building.

So here’s a thought: maybe the secret of our protectionist non-surge isn’t macroeconomics; it’s institutions.

Not Everything Is Political

May 1, 2013, 4:30 pm

Crook demands that I engage respectfully with reasonable people on the other side, but somehow fails to offer even one example of such a person. Not long ago Crook was offering Paul Ryan as an exemplar of serious, honest conservatism, while I was shrilly declaring Ryan a con man. But I suspect that even Crook now admits, at least to himself, that Ryan is indeed a con man.

If you read my original post, and Noah Smith’s KrugTron the Invincible post that inspired it, you’ll see that it’s all about macroeconomics – about questions like whether budget deficits in a depressed economy drive up interest rates and crowd out private investment, about whether printing money in a depressed economy is inflationary, about whether rising government debt has severe negative impacts on growth.

What do these questions have in common? They’re factual questions, with factual answers – and they have absolutely no necessary relationship to the “proper scale and scope of government”. You could, in principle, believe that we need a drastically downsized government, and at the same time believe that cutting government spending right now will increase unemployment. You could believe that discretionary policy of any kind is a mistake, and at the same time admit that the expansion of the Fed’s balance sheet isn’t at all inflationary under current circumstances.

So where’s this stuff about the scale of government coming from? Well, in practice it turns out that many conservatives are unwilling to concede that Keynesian macro has any validity to it, or that you can sometimes run the printing presses without unleashing runaway inflation, because they fear that any such admission would open the doors to much wider government intervention. But that’s exactly my point! They’re letting their views about how the world works be dictated by their vision of the kind of society they want; they’re politicizing their economic analysis. And that’s why they keep getting everything wrong.

And I guess that Crook becomes part of the “they” I’m talking about, because he too seems unable to distinguish between how things are and political value judgments.

More Straw

May 2, 2013, 6:24 pm

The Reinhart-Rogoff rehabilitation tour has been really depressing. There are a number of routes they could have gone; unfortunately, they seem addicted to the notion that they can end the discussion by arguing with straw men. I noted one example in their Times piece, in which they tried to rebut the reverse-causation argument by associating it with a claim – that it’s all about the business cycle – that, as far as I know, nobody has made.

Playing Whack-a-Mole With Expansionary Austerity

May 3, 2013, 10:06 am

The rise and fall of Alesina-Ardagna didn’t make as much of a public splash as the Reinhart-Rogoff saga, but in a fundamental sense it was the same thing. An academic paper purported to show something austerians very much wanted to hear – in this case that slashing spending in a depressed economy would actually create jobs; the authors were immediately feted and the paper promoted to sacred status; but then the result fell apart under both intellectual scrutiny and the weight of real-world experience.

Unlike R-R, however, A-A didn’t crash and burn, it just sort of quietly slunk offstage. And as a result, pieces of their story are still embedded in what all the Serious People know. In correspondence, Kevin O’Rourke points me to Mario Draghi admitting that fiscal consolidation is contractionary, after all, but claiming that it will be less contractionary if it takes the form of spending cuts rather than tax increases. Where is that coming from? Why, Alesina-Ardagna, of course.

And as it happens, the IMF study (pdf) that debunked A-A also had something to say about this result. It found that when you measured austerity right, it was contractionary, not expansionary; it did, however, find that spending cuts were less contractionary. But why? Careful further analysis suggested that much of the explanation lay in the behavior of central bankers, who for whatever reason were more likely to cut interest rates to offset spending cuts than to offset tax increases.

So one way to read Draghi’s remarks is that he is saying that it’s better to cut spending, because he personally will reward spending cuts while punishing tax increases. I know, that’s a bit harsh – but remember, we’re talking serious business here, and Draghi is inserting himself into domestic policy in a way that he really shouldn’t.

In short, Draghi is stating as a fact the superiority of spending cuts, when there is no good reason to believe that it’s true under current conditions.

Varieties of Academic Temptation

May 3, 2013, 10:50 am

These aren’t good times for austerian economics; and, to be honest, they aren’t too good for economics in general. Even if some economists have come out of the Reinhart/Rogoff/Alesina/Ardagna business looking pretty good, the reputation of the intellectual enterprise as a whole has clearly suffered.

So what happened here? My interpretation is that after writing a very good book, R-R dashed off a careless paper on debt and growth that was so much what the VSPs wanted to hear that it made them instant celebrities in a way they hadn’t been before – and they didn’t know how to say stop the merry-go-round, we want to think about this a bit harder. The temptation involved was one of fame and becoming a part of the alleged real world, not some crude mercenary consideration.

I don’t know Alesina as well, and the expansionary austerity thing has deeper roots than the 90 percent thing, but again I doubt that a crude self-interest story is appropriate.

Keynes, Keynesians, the Long Run, and Fiscal Policy

May 4, 2013, 1:24 pm

One dead giveaway that someone pretending to be an authority on economics is in fact faking it is misuse of the famous Keynes line about the long run.

As I’ve written before, Keynes’s point here is that economic models are incomplete, suspect, and not much use if they can’t explain what happens year to year, but can only tell you where things will supposedly end up after a lot of time has passed. It’s an appeal for better analysis, not for ignoring the future; and anyone who tries to make it into some kind of moral indictment of Keynesian thought has forfeited any right to be taken seriously.

And there’s an important corollary: how you should go about getting to some desired long-run outcome may depend a lot on how you think the economy works in the short run.

The overwhelming fact about our current situation is that conventional monetary policy is played out, with short-run interest rates at zero. This means that there is no easy way to offset the contractionary effects of fiscal austerity (maybe there are exotic ways to do something, but they’re tricky and unproved). And this in turn means that austerity right now is a terrible idea: any fiscal savings come at the expense of reduced output and higher unemployment. Indeed, even the fiscal savings are likely to be small and maybe even nonexistent: lower output and employment reduces revenues, and may inflict long-run economic damage that actually worsens the long-run fiscal position.

Naive Fiscal Cynicism

May 5, 2013, 8:31 am

Expansionary austerity has been refuted and even the IMF sayis that short-run multipliers are big. The 90 percent red line on debt was an artifact of fuzzy math. The bond vigilantes remain invisible, and the confidence fairy refuses to make an appearance. Clearly, austerian economics has imploded (and some prominent austerians seem to be personally imploding too).

Yet there remains immense reluctance to draw the obvious policy conclusion, which is not simply that we have too much austerity, but that right now we shouldn’t be having austerity at all.

Yet the orthodox response to the austerian response seems to be at most that we should slow the pace of fiscal consolidation. Why this refusal to follow through?

One answer is sheer human unwillingness to admit gross error; “we may have been a bit overenthusiastic” is an easier thing to say than “whoops – we did exactly the wrong thing, and killed the economy”.

But my read of the discussion is that there’s also something else going on – an attitude that passes for realism, but is in fact sheer fantasy.

The line, which you see in discussion all the time, goes something like this: “OK, I see that in principle you might want to stimulate now, and pay for it later. But we all know that stimulus programs, once introduced on an alleged temporary basis, never actually go away; and the reality is that governments never pay down debt in good times.”

I see the appeal of this line; it sounds like knowing, worldly-wide cynicism. But if you look even briefly at the actual history, it turns out to bear no resemblance to reality.

Start with stimulus programs. As it turns out, there have only been two significant spending stimulus programs in US history – by which I mean programs deliberately introduced to fight an economic downturn. One was FDR’s program, the WPA/CCC and all that; the other was the spending part of the Obama ARRA. So what happened to each of these programs? Why, not only did both go away; both went away too soon, with premature austerity hitting in 1937 and again in 2010. So much for stimulus that never ends.

OK, someone will reply, but what about aid programs like unemployment benefits and food stamps? Don’t they just ratchet up after each slump?

Um, no.

(W)e see a pattern of rising during slumps, falling thereafter, and no hint of a ratchet effect.

So this whole “stimulus never goes away” claim is a figment of right-wing imagination.

What about the supposed inability of governments to pay down debt in good times?

Between World War II and 1980, every US president left the debt ratio lower when he left office than when he entered. Reagan/Bush I broke that pattern; Clinton brought it back; then came Bush II. And yes, debt is up under Obama, but a depressed economy in a liquidity trap is precisely when you’re supposed to do that.

So the story isn’t “irresponsible politicians will always squander the good years”; it is “conservative Republican politicians run up debt even in good years, because they want to force cuts in social programs.” Kind of a different story, isn’t it?

The point, then, is that the seemingly worldly-wide cynicism that seems to be the last defense against the economically obvious is in fact based on an imaginary history that looks nothing like what actually happened.

George Osborne’s Fear of Ghosts

May 5, 2013, 6:57 pm

Truly, we live in bizarro world. The stern taskmasters of the IMF are coming to Britain, to demand that the government live it up and spend more; the government, defiantly, will insist on continuing to impose suffering.

But why? The Guardian reports that it’s all about not scaring away the confidence fairy.

My question, which I’ve raised before, is this: even if you believe that markets would be unnerved by some relaxation of short-term fiscal austerity – which they shouldn’t be, because a percentage point or two of GDP now has virtually no relevance to the long-run budget outlook – how is this spike in long-term rates supposed to happen?

Remember, Britain has its own currency, which means that it can’t run out of cash. Furthermore, the short-term interest rate is set by the Bank of England. And the long-term rate, to a first approximation, is a weighted average of expected future short-term rates. Unless markets believe that Britain is going to default – which it isn’t, and they won’t – this is more or less an arbitrage condition that ties down the long run rate no matter what happens to confidence. Or to be a bit more precise, it’s hard to see what would drive up long rates except a belief that the BoE will raise short rates; and why would it do that unless it sees economic recovery in prospect?

Now, a loss of confidence in Britain’s prospects could move other prices. In particular, it could lead to a weaker pound. But that would be a good thing from Britain’s point of view, just as the weakened yen is good news for Japan.

The point is that Osborne’s case for keeping on the path of harsh austerity isn’t just empirically implausible, it appears to be a complete conceptual muddle; they just haven’t thought this thing through. But then, they never did, did they?

The Chutzpah Caucus

By PAUL KRUGMAN, The New York Times

Published: May 5, 2013

At this point the economic case for austerity – for slashing government spending even in the face of a weak economy – has collapsed. Claims that spending cuts would actually boost employment by promoting confidence have fallen apart. Claims that there is some kind of red line of debt that countries dare not cross have turned out to rest on fuzzy and to some extent just plain erroneous math. Predictions of fiscal crisis keep not coming true; predictions of disaster from harsh austerity policies have proved all too accurate.

Yet calls for a reversal of the destructive turn toward austerity are still having a hard time getting through. Partly that reflects vested interests, for austerity policies serve the interests of wealthy creditors; partly it reflects the unwillingness of influential people to admit being wrong. But there is, I believe, a further obstacle to change: widespread, deep-seated cynicism about the ability of democratic governments, once engaged in stimulus, to change course in the future.

So now seems like a good time to point out that this cynicism, which sounds realistic and worldly-wise, is actually sheer fantasy. Ending stimulus has never been a problem – in fact, the historical record shows that it almost always ends too soon. And in America, at least, we have a pretty good record for behaving in a fiscally responsible fashion, with one exception – namely, the fiscal irresponsibility that prevails when, and only when, hard-line conservatives are in power.

(T)he whole notion of perma-stimulus is fantasy posing as hardheaded realism. Still, even if you don’t believe that stimulus is forever, Keynesian economics says not just that you should run deficits in bad times, but that you should pay down debt in good times. And it’s silly to imagine that this will happen, right?

Wrong. The key measure you want to look at is the ratio of debt to G.D.P., which measures the government’s fiscal position better than a simple dollar number. And if you look at United States history since World War II, you find that of the 10 presidents who preceded Barack Obama, seven left office with a debt ratio lower than when they came in. Who were the three exceptions? Ronald Reagan and the two George Bushes. So debt increases that didn’t arise either from war or from extraordinary financial crisis are entirely associated with hard-line conservative governments.

And there’s a reason for that association: U.S. conservatives have long followed a strategy of “starving the beast,” slashing taxes so as to deprive the government of the revenue it needs to pay for popular programs.

The funny thing is that right now these same hard-line conservatives declare that we must not run deficits in times of economic crisis. Why? Because, they say, politicians won’t do the right thing and pay down the debt in good times. And who are these irresponsible politicians they’re talking about? Why, themselves.

To me, it sounds like a fiscal version of the classic definition of chutzpah – namely, killing your parents, then demanding sympathy because you’re an orphan. Here we have conservatives telling us that we must tighten our belts despite mass unemployment, because otherwise future conservatives will keep running deficits once times improve.

The Stimulus Debate, Revisited

May 7, 2013, 7:19 am

Brad DeLong finds Clive Crook making some easily refuted claims about the nature of the stimulus debate in the winter of 2008-2009, and my role in particular.

(N)owhere in the stimulus discussion, and I mean nowhere, do I demand that stimulus be contingent on repealing the Bush tax cuts, or that it be used as a way to lock in bigger government, or any of the things that Crook for some reason is sure I did.

What’s going on here? The stimulus debate was indeed political – but almost entirely on the other side, where conservatives railed against any notion that positive government action might do good, and reached for any argument, no matter how bad, against such action.

And all I can see here is that Crook’s pathological centrism – his intense desire to see that the truth is in the middle, never mind actual facts – requires that he invent a history in which Keynesians were just as guilty of politicization as the other side. Unfortunately, those actual facts – with their well-known liberal bias – do exist, and are right there in the public record.

1 comment

  1. ek hornbeck

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