The Power Of Austerity Over Politicians

simon wren-lewisIn an earlier post, I reported some speculation by Coen Teulings on why politicians seem to ignore the majority of economists when it comes to austerity. (On the minority of economists that do support austerity, see here.) Mark Thoma responded that it was because austerity gave politicians the chance to pursue ideological goals, and of course he is right for some. I had made the same point on my ‘final verdict’ on the UK Chancellor George Osborne, and the motivations of the many on the right in the US and Europe are even more transparent.

Yet that original post began with a discussion of the Netherlands, where there appeared to be a political consensus in favour of austerity. Even where the strong austerity proposed by the right is opposed by the left, in both the UK and US for example, the opposition could be fairly described as tepid. Paul Krugman and others have often lamented the amount that Obama seems prepared to give in trying to compromise with Republicans, and the left in the UK hardly presents a united front on the issue. Borrowing continues to be something to avoid discussing in public.

So I think there is more to this than just an excuse for some to whittle down the size of the state. Or to put it another way, we need to explain the weakness of the opposition to austerity from those who do not have this ideological goal. This is not to underestimate the influence that those with an ulterior motive and lots of money can have. I used to think that the idea that the Great Depression was a liquidity trap that expansionary fiscal policy rescued us from was received wisdom both among economists and politicians. But I should have known better from my own experience. Duncan Weldon reminds us of how the disaster that was Margaret Thatcher’s adoption of monetarism in the early 1980s has been turned into a myth of her triumph over those foolish economists.

Politicians can be misled, or can allow themselves to be misled. It is natural for academic economists to focus on the dissention within their own ranks, either in the form of influential papers that were enthusiastically received by politicians eager to believe in expansionary austerity, or economists who appeared to leave their academic selves behind them when discussing this issue. And I guess if all economists could form a united front, with everyone singing the same tune, that might begin to alter political attitudes. But this is a pipe dream, and even the smallest deviation from unanimity allows a media that craves division to portray the profession as ‘divided’.

I also agree with Henry Farrell and Mark Blyth (the former reviewing the latter’s new book ‘Austerity: The History of a Dangerous Idea’ here) that it’s wrong to try and find a motive for everything in terms of interests groups. Ideas have a power of their own. But for ideas to have power they need to resonate. Let me try this out as to why austerity resonates with politicians even when there is no hidden agenda.

I start with human nature, and the constant debate within ourselves between current consumption and future wellbeing through saving. What for economics is just an intertemporal optimisation problem is for most people often a battle of wills between our schizophrenic selves. In this battle, spending now is often the temptation of the devil, and saving is the virtue. Now for politicians this becomes a battle over whether to succumb to deficit bias. Promising tax cuts or spending increases without spelling out the implications in terms of paying for any additional borrowing is what politicians do more often than not.

Most of the time they can get away with it, but I suspect they either feel guilty about the implicit deception, or fear they will be found out. So when the market starts to punish fiscal profligacy, it is as if a parent has discovered the child’s guilty secret. (The market is seen by many as a mysterious deity.) The politician wants to repent (or at least be seen to repent), and atone for past sins. After eating too many pastries, we go on a crash diet. After deficit bias, we have austerity.

More cynically, when the market focuses on debt sustainability, it is much harder to pretend that tax or spending decisions financed by borrowing do not involve intertemporal trade-offs. Deficit bias becomes much more difficult, so political fortunes will be maximised by taking the path of apparent virtue. The electorate, many of whom are recovering from over indulging themselves, will empathise with political ‘self restraint’ and reward apparent virtue.

So here are we Keynesians, telling politicians that they don’t need to go on that diet just yet – they can put it off until times are good. Indeed, now is just the time to eat more pastries – it will make you feel better, they are very cheap at the moment, and you might even lose weight in the long run! It sounds too good to be true, and just the kind of tale the devil might spin. Give in, and the all seeing parent/god that is the market will find you out again. So the politician ignores these siren voices, and buckles down to austerity.

This column was first published on Mainly Macro

  • Robin Wilson

    Gramsci’s concept of ‘common sense’ is perhaps helpful in this regard. Gramsci saw this as a sedimentation of popular nostra over centuries, in the context of the hegemony of the dominant class and its ideology. So yes, it was about interests and ideas. And the problem is that science (including economics) is often counter-intuitive–if the world was just as it seemed we would, after all, have no need for investigation. Quantum mechanics is nothing like the Newtonian version that comprises the ‘common sense’ of our everyday lives. Nordic-style universal welfare states, far from encouraging lassitude and dependence, promote the competitiveness of firms and risk-taking behaviour.

    And so it is with austerity. The ‘paradox of thrift’ is counter-intuitive, unless one understands Keynes. And there is a ‘paradox of competitiveness’–that all firms and all states cannot become more competitive at one and the same time–which one can’t understand unless one understands Marx and Sraffa. Yet ‘common sense’ is represented by the equation Austerity = Thrift + Competitiveness–the conception of the world of the ‘Schwabian housewife’.

    This might seem a recipe for political despair and a retreat to the ivory tower. Gramsci also argued, however, that alongside common sense in the popular mind were elements of what he called ‘good sense’, where the practical experience of members of the subaltern classes threw up ideas challenging the dominant ideology. And there is a ‘good sense’ out there, widely felt in Europe–much more widely than the indignados demonstrators–that the ‘real economy’ is suffering at the expense of the capitalist casino and that austerity simply means wages are cut and workers cannot afford to buy anything. Some recent social-democratic electoral victories show that ‘good sense’ is out there in significant quantities.

    The challenge for the intellectuals–a group Gramsci defined widely (cf the party as the ‘collective intellectual’) and to which he attributed great significance–is to ensure that alternative concepts of the world are developed which can resonate with this ‘good sense’ in the way that, hitherto, austerity has resonated with ‘common sense’. The idea of the ‘green new deal’ is a very good example. Worked up by intellectuals it has won support in recent years up to and including the UN Environmental Programme, because it offers a vision of a sustainable (in every sense) economy beyond the crisis and makes the case for the investment needed now (saving much more later) to bring it into being. And it does so in terms that can be widely understood.

    The big problem here is that social-democratic political leaders are still caught in the headlights of the crash. Having aligned themselves with the boosterism of the neo-liberal apogee, they now find it very difficult to articulate a critique and an alternative. That is their guilty secret.

  • Steven Hill

    Simon, there’s something important that the politicians understand that most economists apparently don’t understand. Here is an excerpt from an article that lays out some insightful points that you might consider:

    Europe’s Phony War: Austerians Vs. Deficitarians
    By Marc De Vos | Wednesday, March 20, 2013

    A veritable war is raging among economists over the choice between austerity and deficits in Europe. Yet despite all the idealized economic prescriptions and sobering political realities, the debt crisis is the continents’s lever to redress its derailed budgetary culture — and it is the tool to ensure a healthy economic legacy for the young generations.

    President Harry S Truman famously begged for a one-handed economist. He was tired of having his advisors always argue “on the one hand” and “on the other hand.” These days, there is no shortage of one-handed economists in Europe.

    Indeed, a veritable war of the economists is raging over the choice between austerity and deficits in Europe. Both sides — the Austerians and the Deficitarians — promote their recipes as the one and only way out of the crisis (and back to growth).

    The intellectual impasse is easily exploited politically. All over Europe, the political left and the unions have united under the banner of the Deficitarians, while parties on the right have fallen for the Austerians.

    In the meantime, the debate over debt or discipline is what such dogmatic debates always are — truly academic. The Deficitarians are evidently right in arguing that belt tightening pushes a recessionary economy deeper still into recession.

    To accept that, one does not have to read the collected works of Keynes. Fiscal policy should be countercyclical to the flow of business activity. It should be looser when the economy falters and tighter when the economy hums.

    Economic theory thus suggests that governments should spend in the bad times and cut back in the good times. But what about political practice?

    It is here where democratically elected governments falter. Almost nobody wants to, or is capable of, enforcing budget cuts upon their citizens as a matter of precaution.

    The political logic is thus the precise opposite of the Keynesian economic logic: Only when the economy falters and puts budgets under pressure will governments slash spending. Pressure is needed to touch any expenditures, entitlements and expectations.

    In contrast, running up deficits is politically easy because the bill for them will only come due in the future. That makes any act of fiscal consolidation politically difficult — because it does hurt in the present.

    Public debt thus has a natural tendency to increase over time. That game continues until a major overhaul — mostly devaluation and inflation — or until markets gets scared and start doubting whether a government’s debt will actually be repaid.

    That brings us to the beginning of the eurozone crisis, when capital markets lost their faith in the ability of Greece and other nations on the eurozone periphery to repay their debt.

    Those who now plead for more debt to be issued in order to solve a debt crisis must also explain where that debt is supposed to come from. It clearly cannot come from the countries now in trouble. Markets just wouldn’t buy it.

    It could only come through bigger transfers from Northern Europe to Southern Europe, or from the rest of the world to Europe. The first option is anathema for Germany and a few other EU nations. The second is pure utopia, except for piecemeal support with plenty of strings attached. Once again, political reality trumps economic theory.

    Europe’s Deficitarians are essentially a U.S. import. Theirs is the campaign that Paul Krugman and other progressives across the Atlantic are waging offshore, as part of their battle against the Republicans’ U.S. budget plans.

    But Francois Hollande’s government in France, and other nations such as Italy, that are fond of U.S. Deficitarians’ prescriptions ought to watch their backs.

    Larry Summers, the former U.S. Treasury Secretary, Harvard President and fellow Krugmanite deficit booster, is now stabbing France’s government in the back, for not doing enough to reform its economy.

    Of course, the French really ought to have known better in the first place. The economic and demographic reality of Europe — in particular that of Southern Europe — differs profoundly from that of the United States.

    America is an entrepreneurial country with a diverse economic base and healthy demographic growth. Compare that to Europe. France hasn’t balanced its books since the 1970s and carries the heaviest of public sectors.

    Italy is Europe’s Japan, stuck into economic stagnation and demographic decline. Spain’s pre-crisis economy was one big bubble of banking and real estate.

    The United States today can thus afford more debt because it will be able to pay off more tomorrow. It still has major growth potential — and not just for reasons of population growth.

    The dollar remains the global currency and, as a mature currency union, the United States can simply shoulder more debt than Europe’s crippled eurozone.

    Those who want Europe to go for more debt today must therefore also explain how Europe will pay off that debt tomorrow. Short-term fiscal doping carries a long-term cost — and a clear trade-off: Whatever a country spends on debt servicing, it cannot spend on investment, innovation, education and the like.

    And that erodes economic potential. Yesterday’s debt is a recurrent drain on tomorrow’s prosperity. As even the United States will learn eventually, there comes a time when these long-term costs outweigh the short-term benefits.

    Many of Europe’s debt-ridden countries are past that turning point. Piling up more debt for the future will benefit those who are able to finance it. Properly understood, it is a form of regressive redistribution — shifting future prosperity to today’s rich who receive the interest payments on that debt.

    In the final analysis, economic growth stems from innovation and productivity. Countries that score well on prosperity and job creation in the long run are not the countries with the highest public debt. Rather, they are the ones where prudent policy facilitates innovation and its transition into economic activity.

    Europe’s stark reality is that it features more than 30 years of declining growth capacity, masked by increasing debt. The total Greek debt — governments, families and companies — stood at 92% of GDP in 1980. By 2010, at the advent of the euro crisis, it was 262% of the much bigger 2010 GDP.

    In the same period total debt-to-GDP went from 190% to 310% in Italy, from 160% to 321% in France — and from 136% to 241% even in Germany. Everybody is pretty much tapped out.

    Nobody can wave a magic wand, as much as Paul Krugman — the Princeton economist and New York Times columnist (and one of the few in the trade who, by Truman’s definition, is a one-handed economist) — might wish that the Germans could do.

    Debt can turn into an addiction that becomes debilitating and unsustainable. In Europe, it has reached its last hour with the eurozone’s confidence crisis. The writing on the wall is there for all to see: More debt will not shorten the path towards new and real economic potential, but lengthen it instead.

    Given the divergence between idealized economic prescriptions and sobering but undeniable political realities, this crisis is the lever to redress Europe’s derailed budgetary culture. And it is the tool to ensure a healthy economic legacy for the young generations.

    In the crisis countries of Southern Europe, the current wave of austerity ought to be understood for what it really is: essentially the symptom of a failed system in emergency repair (albeit under peer pressure from fellow Europeans).

    What is needed there at this juncture is a parallel strategy for investment, which will require European solidarity. What goes by the name of “austerity” in Mr. Krugman’s parlance is simply a reasonable and unavoidable requirement to maintain deficits within the boundaries of reason.

    One can of course debate the economic validity of particular budget targets for any given country, but they too are essentially the expression of the politics of the euro crisis. Without common budget standards across the eurozone, there can be no common rescue strategy. The budget targets, no matter how arbitrary their percentage points may be, are the necessary means to a higher end.

    Instead of fighting battles that have been long lost, we should direct our energies towards the where and how of budget savings. The path of least resistance is the well-trodden road of one-off measures and linear cuts.

    Europe needs reforms that generate budget margins through effectiveness and efficiency. Savings should flow from structural reforms that enable economic growth, streamline the public sector and stabilize the welfare state.

    That’s what at stake. The phony war between Austerians and Deficitarians is really just a big waste of time.