Monday, June 30, 2014

Test Cases

“A government that robs Peter to pay Paul can always depend on the support of Paul.”
—George Bernard Shaw

For a while there it seemed as though I couldn’t listen to any call-in radio show or watch any panel of TV pundits without hearing someone say it. In any discussion of the bad economic conditions in America and/or Europe, someone would insist emphatically, austerity doesn’t work!

In context, the austerity in question was usually public austerity, that is, reductions in government spending. And the message was always clear from this particular chorus. Governments need to spend more, not less, to get their economies out of recession. If they run low on money, they should get it from corporations and the wealthy. Prominent among the chorus in the U.S. was Nobel Prize winner Paul Krugman, who can currently be heard railing against income inequality from his $225,000-per-year perch at City University of New York, where his duties are to teach one seminar a year and participate in some events organized by CUNY.

So how is this “austerity doesn’t work” idea panning out in the real world these days? If we look at the most recent issue of The Economist we find two articles that provide an interesting pair of test cases.

In an article on Spain, we read that the country’s recession is over and jobs are being created. Says the magazine, “Growth is already boosting employment, opening the way to a virtuous cycle of increased demand and more job creation. Growth predictions for next year are being revised upwards, some to over 2%.” Investment is flowing back into the country. For those with short memories, Spain originally got into trouble, not unlike the country where I reside (Ireland), because of an uncontained housing bubble. The strategy for recovery that was adopted by its center-right government was widely derided as the kind of austerity that “doesn’t work.” And yet it has.

Make no mistake. There are still plenty of problems in Spain, and not everyone is feeling the effects of recovery. But it’s telling how surprised everyone is (economists always seem to be the most continually surprised of all observers) at how fast recovery in Spain started. Left-of-center critics can predictably move from their line of “austerity doesn’t work” to “the economy isn’t fair enough.”

The Economist also has an article on France, where things are a bit different. In contrast to Spain’s government, President François Holland has pretty much followed the advice of the world’s Krugmans. When people call Holland a socialist, it is not merely a derisive epithet but actually the name of his political party. He attempted to cut his budget deficit exclusively by raising taxes on companies and on the wealthy. The result has been two years that were economically flat and an economy that ground to a virtual halt in this year’s first quarter. Investment has dropped and French companies are looking for opportunities abroad. The government’s party was pummelled in local elections and, according to the magazine, among French presidents Holland is now “the most unpopular since polling records began.” Because no party seems to have a handle on what to do about the economy, it has provided an opening for more extreme candidates on the right.

One of the ironies in the French situation is that the condition of the economy has made academics and writers who advocate various forms of wealth redistribution pretty much irrelevant. Among these is an economist named Thomas Picketty, whose theories on the inevitability of wealth inequality in his book Capital in the Twenty-First Century are pretty much ignored in his own country. But he is something of a rock star these days in the United States, where he seems to be all over the New York-based media. His fans, which include of course Paul Krugman, seem undeterred—or perhaps unaware—of the UK’s Financial Times article, in which the paper crunched his numbers and concluded they simply didn’t add up.

Experience makes it pretty clear what works economically and what doesn’t. Why then do politicians and governments pursue policies that have no track record of success? A lot of it is human nature. People want to believe that there can be a free lunch, that a society can make money by spending money instead of producing. More to the point, the Paul Krugmans of the world find that they personally can make a lot of money by telling everyone else that spending money, rather than boosting productivity, is the way to prosperity. And politicians find it is easier to get voters to vote for them if your promises involve spending money rather than tightening the government’s belt. Given all these perverse incentives, it’s amazing any government ever manages to pull itself out of a recession.

So how is the American government doing with its economic policies? Well, the latest numbers for 2014’s first quarter weren’t great. They show the economy contracted at an annualized rate of 2.9 percent. Why, after all these years of being technically in recovery, is the economy not doing better? Well, there are lots of reasons. Surprisingly, there was some bad weather last winter, so a lot of commentators are saying that explains it. After all the Obama Administration certainly did its best to follow Professor Krugman’s advice with government spending to turn the economy around. But that darn Congress lost its nerve after pumping only $17 billion more into the 2009 stimulus bill than it did into the Iraq war.

Let’s be fair. It’s still a bit soon to judge how well the administration’s economic policies are working. After all, the president is only in his sixth year in office.

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