Monday, January 30, 2012
Down, Down, Down
There are a bunch of articles/op-ed pieces out today, led by Paul Krugman, that perhaps the main reason that a financial panic in the housing market has led to such sustained economic pain has been that we have thrown out the entire Keynesian model for hard times.
Now, immediately, anti-Keynesians will scream "STIMULUS!" and point to the Stimulus bill as proof that Keynesian economics don't work. The problem, again you have to look at facts not preconceived notions, is that Summers, Geithner... hell almost everyone in the room... underestimated the crushing blow to the economy. And even if they hadn't it was very unlikely more spending could have gotten through Congress. Wars and tax cuts for the rich, sure. Aid to states and infrastructure spending, not so much.
More persuasive is the accumulating evidence of the failure of austerity programs in Europe and at the state level here in the US. In Europe, we can look at Britain - as Krugman - does. They have had a weaker recovery from 2008 than they did from 1930. In the US, they have measured the effect of state budget cuts as depressing GDP by 0.3%. An additional 0.3% GDP growth doesn't sound like much, but it is in fact a huge deal. In the third quarter, GDP grew 1.8%; it could have been 2.1%. In the fourth quarter, GDP grew 2.8%, when it could have been 3.1%. If the economy was growing at 3%, unemployment would be plummeting.
And that's simply maintaining state levels of spending. If they had actually increased under a Keynesian model of infrastructure projects, GDP growth could have been robust.
Austerity also flies in the face of good financial policy. Right now, you can borrow money at ridiculously low rates. If we assume that America's infrastructure is falling apart, an assumption we can base on evidence, then NOW would be a doubly good time to tackle our many needs.
We COULD have rebuilt American infrastructure and seen the economy rebound quickly. Instead, after two years of deficit spending that prevented a complete cratering of the American and global economy, we then turned to austerity politics. And it is austerity politics, not austerity policy. The policy side is clearly a failure. It doesn't even make basic math sense. If you subtract governmental demand, the economy will indeed shrink, too. This was entirely about politics and "optics".
We gleefully embraced deficits under Bush, but now we are supposed to care about them because the money might be spent on something besides Mitt Romney's tax cuts or killing Muslims. And the purveyors of Conventional Wisdom are not people who require state assistance on anything from education to health care to jobs, although I would love to see the entire network news corps thrown out of work and replaced by random college graduates plucked off the street.
Revisionism is a powerful force. We revised the causes of the Civil War to absolve the South of their sin for starting it. We revised the nature of "blowback" from our meddling in the Middle East until "they hate us for our freedom" became a type of punchline. We revised the criminal legacy of Nixon and Reagan until they become a foreign policy genius, instead of a crook, and a revered elder statesman, instead of a guy who illegally sold arms to Iran.
It has been well noted that Krugman is "shrill". But if you look at the data, how can you NOT be?