Austerity
Paul Krugman
Conscience of a Liberal
New York Times
June 14, 2010
http://krugman.blogs.nytimes.com/
Antipathy To Low Rates
Richard Serlin, in comments at Mark Thoma's place, makes
a very good point about the efforts of Rajan and others
to come up with a reason to raise interest rates even in
the face of high unemployment and incipient deflation.
He suggests that it reflects a general distaste for
anything that looks like government intervention to
support the economy:
I think the thinking of the libertarians and
freshwater believers is that if there's a
recession, then the free market has a good
reason for it. It's a "real" business cycle
phenomenon, and the best thing to do is let the
free market have its recession or depression for
as long as the free market wants (and we had
some doozys before Keynes, and often). The Fed
shouldn't tamper with the free market, just like
the fiscal branch of government shouldn't. The
Fed should just maintain zero inflation, or go
on the gold standard. It shouldn't try to
manipulate the interest rates of the free
market, or get involved in business cycles at
all.
That sounds about right. The attitude on display from
quite a few economists bears a distinct resemblance to
Depression-era liquidationism, as described in Brad
DeLong's excellent but somehow never published book on
the economic history of the 20th century:
the unwillingness to use policy to prop up the
economy during the slide into the Depression was
backed by a large chorus, and approved by the
most eminent economists.
For example, from Harvard Joseph Schumpeter argued that
there was a "presumption against remedial measures which
work through money and credit. Policies of this class
are particularly apt to produce additional trouble for
the future." From Schumpeter's perspective, "depressions
are not simply evils, which we might attempt to
suppress, butforms of something which has to be done,
namely, adjustment to change." This socially productive
function of depressions creates "the chief difficulty"
faced by economic policy makers. For "most of what would
be effective in remedying a depression would be equally
effective in preventing this adjustment."
And Hayek found it
still more difficult to see what lasting good
effects can come from credit expansion. The
thing which is most needed to secure healthy
conditions is the most speedy and complete
adaptation possible of the structure of
production.If the proportion as determined by
the voluntary decisions of individuals is
distorted by the creation of artificial demand
resources [are] again led into a wrong direction
and a definite and lasting adjustment is again
postponed.The only way permanently to `mobilise'
all available resources is, thereforeto leave it
to time to effect a permanent cure by the slow
process of adapting the structure of production.
These days, relatively few economists are willing to say
straight out that they regard persistent high
unemployment as a good thing. But they find reasons to
oppose any and all suggestions to use government policy
- including monetary policy - to alleviate the slump.
Same as it ever was.
________________________________
June 14, 2010, 6:25 am
The Bad Logic Of Fiscal Austerity
So, one more time: here's an attempt to put together
some key arguments about why the rush to fiscal
austerity is deeply misguided.
Let me start with the budget arithmetic, borrowing an
approach from Brad DeLong. Consider the long-run budget
implications for the United States of spending $1
trillion on stimulus at a time when the economy is
suffering from severe unemployment.
That sounds like a lot of money. But the US Treasury can
currently issue long-term inflation-protected securities
at an interest rate of 1.75%. So the long-term cost of
servicing an extra trillion dollars of borrowing is
$17.5 billion, or around 0.13 percent of GDP.
And bear in mind that additional stimulus would lead to
at least a somewhat stronger economy, and hence higher
revenues. Almost surely, the true budget cost of $1
trillion in stimulus would be less than one-tenth of one
percent of GDP - not much cost to pay for generating
jobs when they're badly needed and avoiding disastrous
cuts in government services.
But we can't afford it, say the advocates of austerity.
Why? Because we must impose pain to appease the markets.
There are three problems with this claim.
First, it assumes that markets are irrational - that
they will be spooked by stimulus spending and/or
encouraged by austerity even though the long-run budget
implications of such spending and/or austerity are
trivial.
Second, we're talking about punishing the real economy
to satisfy demands that markets are not, in fact,
making. It's truly amazing to see so many people urging
immediate infliction of pain when the US government
remains able to borrow at remarkably low interest rates,
simply because Very Serious People believe, in their
wisdom, that the markets might change their mind any day
now.
Third, all this presumes that if the markets were to
lose faith in the US government, they would be reassured
by short-term fiscal austerity. The available facts
suggest otherwise: markets continue to treat Ireland,
which has accepted savage austerity with little
resistance, as being somewhat riskier than Spain, which
has accepted austerity slowly and reluctantly.
In short: the demand for immediate austerity is based on
the assertion that markets will demand such austerity in
the future, even though they shouldn't, and show no sign
of making any such demand now; and that if markets do
lose faith in us, self-flagellation would restore that
faith, even though that hasn't actually worked anywhere
else.
And this, ladies and gentlemen, is what passes for
respectable policy analysis.
________________________________
June 13, 2010, 3:53 am
Does Fiscal Austerity Reassure Markets?
Here's a thought I should have had earlier about the
debate over whether now is a good time to start fiscal
austerity.
For the most part, this debate has been between those
like me and Brad DeLong, who assert that budget-cutting
should be postponed until we're no longer in a liquidity
trap, and those who insist that we must cut immediately,
even though it would inflict economic damage and do
little to improve the long-run budget position, because
immediate cuts are necessary to achieve credibility with
the markets.
My response, and Brad's, has been to say that right now
there's no hint in the data that the United States (or
the UK) has a problem with the markets, and to question
why the deficit hawks are so sure about what the market
will want in the future, even though it doesn't want it
now.
But I suddenly realized this morning that there's yet
another question for the deficit hawks: what evidence do
you have that fiscal austerity of the kind you're
demanding would reassure markets, even if they did lose
confidence?
Consider, if you will, the comparative cases of Ireland
and Spain.
Both countries appeared, on the surface, to be fiscally
responsible until the crisis hit, with balanced budgets
and relatively low debt. Both discovered that this was
an illusion: revenues were buoyed by immense real estate
bubbles, and when the bubbles burst they plunged into
deficit - and found themselves potentially on the hook
for large bank losses.
The countries responded differently, however. Ireland
quickly embraced harsh austerity; Spain has had to be
dragged into austerity, and still faces major political
unrest.
So, how's it going? This article is typical of what you
read: it describes the Irish as doing what has to be
done, while the Spaniards dither. And it has good things
to say about how the Irish response is working:
Much bitterness but also stoicism; markets impressed by
Irish resolve to bite the austerity bullet.
Well, I guess that's right - if by "markets impressed"
you mean a CDS spread of 226 basis points, compared with
206 points for Spain; not to mention a 10-year bond rate
of 5.11 percent, compared with 4.46 percent for Spain.
So, I'm glad to hear that Ireland's stoic acceptance of
austerity is reassuring markets; it must be true,
because that's what everyone says. Because if I didn't
know that, I might look at the data and conclude that
markets actually have less confidence in Ireland than
they do in Spain, and that austerity in the face of a
deeply depressed economy doesn't actually reassure
markets at all.
But hey, what are you going to believe: what everyone
knows, or your own lying eyes?
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