Friday, April 27, 2012

Fairy Tales and Nightmares in a Keynesian Fantasyland

Paul Krugman's op-ed from yesterday--entitled Death of a Fairy Tale--is just another one of his now-common rants about what he terms "fiscal austerity" (but what many others prefer to call "fiscal responsibility"). In this piece, Krugman declares that the evidence is in, that austerity-type policies have failed, that they have made things worse. And the evidence comes from the last two years, apparently:
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.
It's a fascinating attempt at some sleight of hand on Krugman's part. He actually includes the United States as evidence for the failure of austerity measures, despite the fact that exactly the opposite occured here three years or so ago. The Bailout Bill and TARP, the Stimulus Bill, and then Obamacare, those were the initial responses by the U.S. government (under Bush and then under Obama) to the economic downturn. And the consequences? Well, unemployment and debt went through the roof, revenues stagnated, Social Security went into the red for the first time ever, and the Obama Administration was forced to apply an $8 billion band-aid to Medicare, lest people realize what was really about to happen to it. And even after all these non-austerity measures were passed, the current administration also pushed through extensions of unemployment benefits, along with payroll tax cuts (which amount to direct increases in the debt), and the like.

In Krugman-land, all of these actions are insufficient to tear away the austerity label:
The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.
Amazing, isn't it? Trillions added to the national debt over the course of a few years amounts to "de facto austerity." Granted, Krugman thinks that more should have been spent on so-called "stimulus," but it's nonetheless supremely dishonest of him to label programs involving massive government spending as "de facto austerity." Unfortunately, such machinations are pretty much all Krugman has left to offer, these days. The stars--and the facts--are aligned against him and his fellow pseudo-Keynesians, this much is clear.

In Europe, the "austerity measures" are a consequence of a simple realization: there is no more money to spend on giveaways. The problems in Greece have resulted in massive right-offs. No investor in his or her right mind is going to back the kind of loans necessary for Greece to spend its way out of its troubles. The Germans are fully aware of this and know--with absolute certainty--that propping up Greece and other nations will lead to more right-offs in the future.

But again, the language choices here are all wrong. This isn't about "austerity," as Krugman and others would have us believe. It's about fiscal responsibility. We forget that Germany--now the powerhouse of the EU--was mired in a less-than stellar economy in the eighties and before. It came late to the party, with regard to the booms of the eighties and nineties. And it might never have come at all, had it not been for changes in its own internal economic policies, changes that would--in Krugman-land--be labelled as austerity measures, as this article in the WSJ makes clear:
Throughout the 1990s and the first years of the last decade, Germany was Europe's hobbled giant, with consistently subpar growth rates and unemployment that in 2005 hit 11.3%, nearly at the top of the OECD chart. 
Then-Chancellor Gerhard Schröder, a Social Democrat, surprised the world, to say nothing of his own voters, by pushing through the labor-market reforms that paved the way for the current relative prosperity. The changes cut welfare benefits and gave employers more flexibility in reaching agreement with their employees on working time and pay. 
The Schröder government, and later the coalition under Angela Merkel, also cut federal corporate income taxes to 15% from 45% in 1998. Include state taxes, and the effective corporate rate today is close to 30%, down from 50% or more in the 1990s. These reforms made Germany more competitive, attracted investment and jobs, and paved the way for the country's economic resurgence and an unemployment rate currently at 5.7%.
Decreases in government (entitlement) spending, tax cuts, market reforms that favored business? Say it ain't so, Joe! Austerity measures in poor economy led to growth?

Alec Macgillis at the New Republic takes issue with the WSJ piece, but note that he leaves the above analysis alone, deferring instead to wise old Krugman:
In its lead editorial today, the Wall Street Journal pushes back at the broadening ranks urging Germany to loosen up on its austerity mantra for Europe. I'm not going to get into that fight now — I figure this guy's [link to Krugman's blog] got it under control.
Well done, Alec. You're not going to get into it, but instead leave it for a guy living in a Keynesian fantasyland.

But the most interesting element of Macgillis' Keynesian-oriented retort is this bit, with regard to Merkel's "kurzarbeit" (short work) program:
The logic is plain: in a big cyclical downturn, it's better to keep workers around for the eventual upturn (perhaps with some training in the interim) rather than laying them off, losing their skills, having to pay their unemployment benefits and then having to hire and train new people when business picks back up.
Read this carefully, for Macgillis has unintentionally undermined the positions of today's pseudo-Keynesian theorists, like Krugman and himself. In the Krugman-inspired vision, heavy government spending drives the economy, leads to growth, and defeats the business cycle. Yet here, Macgillis admits that additional monies serve--at best--to float workers in the economy, until there is an eventual upturn that comes from outside.

Macgillis concludes with this:
Merkel may be preaching austerity to the Greeks now, but when the recession hit, her country was as Keynesian as they come.
To be clear: the kurzarbeit program is essentially paying off workers for non-work. Functionally, it's no different than an indefinite extension of unemployment insurance benefits. Yet, the former is Keynesian--acording to MacGillis--while the latter is de facto austerity--according to Krugman, the man Macgillis kowtows to, when it comes to economics.

I can't help but wonder what textbooks these two clowns have been reading...

Cheers, all.