The Austerity Agenda
By PAUL KRUGMAN
Fred R. Conrad/The New York Times
“The boom, not the slump, is the right time for austerity.” So declared
John Maynard Keynes 75 years ago, and he was right. Even if you have a
long-run deficit problem — and who doesn’t? — slashing spending while
the economy is deeply depressed is a self-defeating strategy, because it
just deepens the depression.
So why is Britain doing exactly what it shouldn’t? Unlike the
governments of, say, Spain or California, the British government can
borrow freely, at historically low interest rates. So why is that
government sharply reducing investment and eliminating hundreds of
thousands of public-sector jobs, rather than waiting until the economy
is stronger?
Over the past few days, I’ve posed that question to a number of
supporters of the government of Prime Minister David Cameron, sometimes
in private, sometimes on TV. And all these conversations followed the
same arc: They began with a bad metaphor and ended with the revelation
of ulterior motives.
The bad metaphor — which you’ve surely heard many times — equates the
debt problems of a national economy with the debt problems of an
individual family. A family that has run up too much debt, the story
goes, must tighten its belt. So if Britain, as a whole, has run up too
much debt — which it has, although it’s mostly private rather than
public debt — shouldn’t it do the same? What’s wrong with this
comparison?
The answer is that an economy is not like an indebted family. Our debt
is mostly money we owe to each other; even more important, our income
mostly comes from selling things to each other. Your spending is my
income, and my spending is your income.
So what happens if everyone simultaneously slashes spending in an
attempt to pay down debt? The answer is that everyone’s income falls —
my income falls because you’re spending less, and your income falls
because I’m spending less. And, as our incomes plunge, our debt problem
gets worse, not better.
This isn’t a new insight. The great American economist Irving Fisher
explained it all the way back in 1933, summarizing what he called “debt
deflation” with the pithy slogan “the more the debtors pay, the more
they owe.” Recent events, above all the austerity death spiral in
Europe, have dramatically illustrated the truth of Fisher’s insight.
And there’s a clear moral to this story: When the private sector is
frantically trying to pay down debt, the public sector should do the
opposite, spending when the private sector can’t or won’t. By all means,
let’s balance our budget once the economy has recovered — but not now.
The boom, not the slump, is the right time for austerity.
As I said, this isn’t a new insight. So why have so many politicians
insisted on pursuing austerity in slump? And why won’t they change
course even as experience confirms the lessons of theory and history?
Well, that’s where it gets interesting. For when you push “austerians”
on the badness of their metaphor, they almost always retreat to
assertions along the lines of: “But it’s essential that we shrink the
size of the state.”
Now, these assertions often go along with claims that the economic
crisis itself demonstrates the need to shrink government. But that’s
manifestly not true. Look at the countries in Europe that have weathered
the storm best, and near the top of the list you’ll find big-government
nations like Sweden and Austria.
And if you look, on the other hand, at the nations conservatives admired
before the crisis, you’ll find George Osborne, Britain’s chancellor of
the Exchequer and the architect of the country’s current economic
policy, describing Ireland as “a shining example of the art of the
possible.” Meanwhile, the Cato Institute was praising Iceland’s low
taxes and hoping that other industrial nations “will learn from
Iceland’s success.”
So the austerity drive in Britain isn’t really about debt and deficits
at all; it’s about using deficit panic as an excuse to dismantle social
programs. And this is, of course, exactly the same thing that has been
happening in America.
In fairness to Britain’s conservatives, they aren’t quite as crude as
their American counterparts. They don’t rail against the evils of
deficits in one breath, then demand huge tax cuts for the wealthy in the
next (although the Cameron government has, in fact, significantly cut
the top tax rate). And, in general, they seem less determined than
America’s right to aid the rich and punish the poor. Still, the
direction of policy is the same — and so is the fundamental insincerity
of the calls for austerity.
The big question here is whether the evident failure of austerity to
produce an economic recovery will lead to a “Plan B.” Maybe. But my
guess is that even if such a plan is announced, it won’t amount to much.
For economic recovery was never the point; the drive for austerity was
about using the crisis, not solving it. And it still is.
By PAN PYLAS 05/ 2/12