The False Allure of Austerity
I go away for a while and things get out of hand.
I am shocked at the current spate of calls for austerity worldwide. It’s an epidemic of Puritanical self-loathing. None of which makes any sense.
It should be obvious, but evidently is not, that the economy is still weak. Last week’s poor retail sales figures tell us that the recovery is fragile. Yet we are being treated to a constant stream of calls for belt tightening and the abandonment of both fiscal and monetary stimulus. The only motivation for such calls that I can come up with is just such a Puritanical desire to inflict pain. A pain, which, I should add, will cure nothing. In fact it will add immeasurably to our difficulty.
It is odd to see this desire to inflict pain so rampant. It is as if people need to witness dislocation and angst as part of the therapy.
Maybe it is an attribute of the helplessness they feel: their theories are bankrupt and offer no way forward, so they call for pain. It is as if they see the destruction of millions of families as a necessary part of the ‘natural healing’ process.
Oh. Wait. That’s exactly what they see.
Read the work of any of the most famous ‘free market’ economists: Hayek, Schumpeter, Friedman, Lucas et al, and it is riven through with statements calling for the therapeutic cleansing offered by recession or depression. The very essence of Schumpeter’s famous ‘creative destruction’ is the tearing down of dysfunctional aspects of the economy, and their, hoped for, replacement by newer and better pieces. Luckily for these economists they had all managed to cleanse their theories of actual human beings, so the inherent human cost of ‘creative destruction’ is nicely hidden from the sensitive eyes of academia. Plus they were all comfortably tenured so they never faced the ordeal that they called forth for the rest of us.
They are all wrong.
There is a more human economics. That is what Keynesianism is all about. We have learned from Keynes that we can manage the worst parts of a crisis, and thus mitigate its impact. The cost is a current deficit. That cost is less than the lost wealth implied by allowing events to run their own course. In times of deep crisis, such as we faced in 2007 and 2008, the cost appears huge. To the uneducated or to the alarmist that cost seems insurmountable. The numbers being thrown around today are truly massive and so create fears in the voting public that government is being profligate.
It is not.
Indeed the better theoretical argument is that government is not being profligate enough. We are still a way from the safety of solid economic groound. Raising interest rates or cutting back on government spending both run the needless risk of adding to our crisis. Unemployment remains stubbornly high. Consumption is still sputtering. Investment is weak. State spending is being slashed. All these are features of recession not expansion. Yet we are treated to calls for austerity.
Get out the hair shirts we must be punished for our sins.
It was Augustine who brought self loathing into western religion and who told slaves to accept their lot in life because they must have done something really awful for God to have made them slaves. This wreaks of a pessimistic abandonment of hope. It was economists like Hayek and Schumpeter who riddled economic orthodoxy with similar opinions. Workers must have been truly awful for the ‘market’ to want to punish them this much. We need to punish workers for their errors, that way we can cleanse the system and go forward with our precious markets intact.
Except of course that the market is an abstraction that masks the reality of a collective known as ‘us’. When we strip away that abstraction and see that it us we are hurting with austerity, it becomes a little easier to turn a deaf ear to the experts calling for such austerity.
It’s our wealth they are talking about. I would prefer to roll the dice now in the chance that Keynes was right, rather than be condemned to certain depression and its associated poverty, simply because a few economists got caught up in a wave of puritanical zeal.
In any case there is no evidence the hair shirt is rewarded. The interest rate spreads on Irish debt are worse than those on Spanish debt. But it is the Irish who are lauded for having swallowed the puritan medicine. Something’s amiss.
Maybe the credit markets are peopled by closet Keynesians?
