Thornton vs. Krugman on "Austerity"

Paul Krugman is on another "austerity" roll, as witnessed by his most recent column, although his definition of "austerity" seems to be something right out of Wonderland. As I have read Krugman, from what I can tell, he defines "austerity" as a government spending less than it did before an economic downturn began.

Mark Thornton, whose skills as a real economist I respect more than I do Krugman's (since Krugman long ago abandoned economics for political advocacy), sees things differently. In a recent article, Thornton examines the definitions of "austerity," and then takes apart the Keynesian "logic" (an oxymoron, of course):

But what is austerity? Real austerity means that the government and its employees have less money at their disposal. For the economists at the International Monetary Fund, “austerity” may mean spending cuts, but it also means increasing taxes on the beleaguered public in order to, at all costs, repay the government’s corrupt creditors.

In other words, the European style of "austerity" includes both spending cuts (or alleged spending cuts) and raising taxes, which means that while government burdens might be declining somewhat on one side of the ledger, they are increased on the other side in an attempt to prop up the banks that irresponsibly lent large sums of money to corrupt governments like Greece. Thornton continues:

Keynesian economists reject all forms of austerity. They promote the “borrow and spend” approach thatis supposedly scientific and is gentle on the people: paycheck insurance for the unemployed, bailouts for failing businesses, and stimulus packages for everyone else.

I don't believe that is a misrepresentation of either the Keynesians or Krugman, who has argued vociferously that during a downturn, the government must increase its spending and do so in dramatic fashion. (From what I can tell, he is more ambivalent regarding tax increases, at one point advocating expiration of all Bush-era tax rate cuts, including those on lower-income individuals, and elsewhere calling just for more taxes on high-income people. In other words, he tends to blow with the political winds.)

For that matter, Krugman often has claimed that because the Obama administration has not increased spending enough (or at least enough to satisfy Krugman's Keynesian tastes), that it, too, is engaged in "austerity." Defining the term in this manner, as I see it, is tantamount to moving the goalposts, as a Keynesian always can claim that there should have been more spending and borrowing. The government spends an extra $800 billion for stimulus? Not enough! Had it spent just $400 billion more, the recession would have ended!

How do we know this? Krugman says so, and that should be the only "proof" needed to confirm the thesis. The syllogism goes like this:

• The Obama administration pushed through an $800 billion "stimulus" spending package;
• Unemployment actually increased dramatically in the months afterward;
• Therefore, government did not spend and borrow enough money.

Built into the assumptions is the view that a stimulus actually would have a real effect upon the economy, creating economic growth over a longer period of time, as opposed to just making some politically-connected people better off in the short run (while making others worse off, something Keynesians don't want to admit, as they want us to believe that "stimulus" funds consist of new wealth, not transferred wealth).

When one uses such a syllogism, however, as proof that a "stimulus" actually would improve the real economy, then we are witnessing the informal fallacy of Begging the Question. Furthermore, the Keynesians want it both ways, wanting to claim that increased government spending is a response to a downturn, which is caused purely by internal "contradictions" within a market economy, while at the same time claiming that a decrease in government spending can cause a recession. (This is more of the "heads I win, tails you lose" economic propositions that Krugman and his allies like to use when engaging in what they call arguing.)

Thornton sees things differently, writing:

Austrian School economists reject both the Keynesian stimulus approach and the IMF-style high-tax, pro-bankster “Austerian” approach. Although “Austrians” are often lumped in with “Austerians,” Austrian School economists support real austerity. This involves cutting government budgets, salaries, employee benefits, retirement benefits, and taxes. It also involves selling government assets and even repudiating government debt.

Thornton then gives a very interesting example, one that I am sure will drive the Krugmanites batty, as it is totally counterintuitive to their own theories of political history:

One historical example of austerity legislation is the Economy Act of 1933. This legislation, submitted by Franklin Roosevelt six days after his inauguration, slashed government spending, wages, and benefits, including cuts of 50 percent to veterans’ benefits, which at the time constituted a quarter of the federal budget.

The Act helped jump-start the economy. Combined with the repeal of Prohibition it helped reduce unemployment from 25 percent to almost 15 percent. These two pieces of legislation were the real reason for FDR’s popularity. Unfortunately Congress acted on less than half of Roosevelt’s requested cuts and increases in government spending greatly diminished the beneficial impact of FDR’s austerity legislation.

In fact, Thornton argues that it was the later spending and regulation side of the New Deal that prevented a real recovery and turned the 1930s into a lost decade:

Worse still, FDR quickly adopted Hoover’s “New Deal” programs, expanded some, and added new ones. With respect to the Great Depression, Murray Rothbard’s thesis was that Hoover’s and Roosevelt’s “New Deal” prevented the economy from recovering. In an attempt to keep prices and wages high, they both continuously intervened with one program after another. More spending, more regulation, and more resources were withdrawn from the economy, yet nothing worked. Today, mainstream economists Harold Cole and Lee Ohanian have verified the soundness of Rothbard’s thesis.

Thornton then uses the post-World War II period to point out that "austerity" in the form of cutting federal spending did not bring about the predicted postwar depression, but actually had the opposite economic effect:

The proof for real austerity, however, came after World War II ended. All the Keynesian economists warned of a return of the Great Depression. In sharp contrast, the American Austrian School economist Benjamin Anderson predicted that the economy would recover, in a very short period, despite multi-billion dollar budget cuts and millions of government jobs being slashed. What was the verdict on this debate? There was no real Depression of 1946, as the economy recovered very quickly despite the fact that the government was running large budget surpluses.

No doubt, the Keynesians would claim that 1946 did not have "liquidity trap" characteristics, but I see that as just another example of how they "move the goalposts." (We are supposed to believe that there are certain magical conditions in which entrepreneurs are paralyzed and that individuals can find no gains from trade even though the potential for such gains is in abundance if only -- If Only! -- the government would spend more money.)

Austrians have not favored the general European approach in which taxpayers of countries like Greece, Ireland, or Spain are supposed to labor to pay back banks even while banks make new loans to their governments to try to prop up current spending. It is not sustainable, and I suppose that even the Keynesians would agree there.

However, like Thornton, I believe that neither the USA nor the Europeans can rebuild their economies by trying to launch another boom cycle. Such cycles, of course, have a way of ending in yet more busts and resulting in even more long-run government burdens that ordinary people must bear. European "austerity" and Keynesian profligacy are two sides to the same coin: both promote economic destruction.