Saturday, December 28, 2019

It Was Austerity Wot Done It

As the center-left (and center-right) sink slowly into the sunset, furious debate continues about who or what is responsible. The excellent Wolfgang Munchau in the FT argues that the ultimate cause is rather simple: austerity.
"There were tell-tale signs early on. In 2009, Peer Steinbr├╝ck, a former German finance minister and later the Social Democrats’ candidate for chancellor, introduced the constitutional balanced budget rule. This later gave rise to Germany’s permanent fiscal surpluses and under-investment in critical infrastructure. In a joint study, Germany’s employers and trade unions recently put the investment shortfall at a staggering €450bn. So it is unsurprising that the SPD has lost political support during the years of its grand coalition with Angela Merkel’s Christian Democrats.
In 2012, Italy’s government of technocrats, led by Mario Monti, imposed procyclical austerity in the middle of a recession. The goal was to prove that Italy was a good follower of the eurozone’s fiscal rules. The country has still not fully recovered from that shock.
In 2014, Fran├žois Hollande, the former French president, outed himself as a rightwing supply-sider when he cited Say’s law — that supply creates its own demand. Since then his Socialist party has in effect disappeared as a political force, along with its old rivals on the centre right.
In late 2015 in the UK, I overheard a group of pro-Remain politicians, academics and commentators persuading themselves that the easiest way to win the forthcoming Brexit referendum would be to scare the hell out of the electorate. We all know how that went.
What these disparate stories have in common is that they paint a picture of the decline of the political centre in Europe. I consider this, not the rise in populism, to be the main development in the EU’s largest member states.
If there was one common policy that accelerated that trend, it was austerity. We have come to judge austerity mainly in terms of its economic impact. But it is the political fallout from public spending cuts that is most likely to persist.
Austerity as a policy is the consequence of a poor understanding of economics coupled with a self-righteous mind and a tendency to spend too much time with your chums at places like Davos."
And let us not delude ourselves that such thinking has not been a problem in the US or that it has been but we are now past such misguided views. Paul Krugman mused on this a recent, lengthy interview with Ezra Klein on Vox.
"Paul Krugman : For a long period of time elites thought that debt was the greatest threat to the US economy. Now I think we’ve largely come around to the correct view, which is that debt is just not a serious problem for the United States currently.
Ezra Klein: I find it interesting that, even on the left of the Democratic Party, this really doesn’t seem to be the view. Both Warren and Sanders have detailed exactly how they will pay for all of their proposals. Nancy Pelosi has said she will impose [the budget-deficit rule] PAYGO on the House under a Democratic president. Oddly enough, it seems there has been a lot more movement on this question among center-left economists like Larry Summers and Jason Furman than even among the left-wing of Democratic politicians.
Paul Krugman: Yeah, it’s not even the radical progressive economists. Most people would not consider Larry Summers or Olivier Blanchard, the former chief economist of the IMF, men of the left. Yet they are saying a little bit more deficit spending might be a good thing given the persistent weakness of private spending. So, I don’t know why that isn’t making its way into Congress or Elizabeth Warren’s campaign."
Sad but true.Deficit-mania still stalks the corridors of power in these United States--even among Democrats who should know better. I do worry that if a Democrat wins in 2020--and I don't just mean Biden, thought he would probably be particularly susceptible in this regard--he or she would be hobbled by obeisance to outmoded thinking about deficits and debt.
As Keynes noted so long ago:
"The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. ... Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist."
From Brexit to fiscal policy, the EU’s largest member states have seen the mainstream wrongfooted

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