Friday, June 11, 2010

Is it "Austerity," or is it Responsibility?

If the Keynesian cat were not out of the bag already, Paul Krugman's series of blog posts the past couple of days totally have smoked out his position: Only massive government spending can keep the economies afloat. Like another Paul of centuries ago, Mr. Revere, Krugman is on his horse (Named Mr. Keynes?) crying out, "The recession is coming back! The recession is coming back!"

Now, I tend to find myself in rare agreement with Krugman, except for different reasons. As I have written many times before, Krugman sees an economy simply in terms of spending: when people spend money, times are good, and if they stop spending money, it creates bad times. When people don't spend, then it is up to government to pick up the slack.

But what happens when governments decide not to increase their massive debts and slow their own spending? Krugman (and all Keynesians) believe that such action will create the conditions of the "double-dip recession." Whether it is Canada or Germany or whatever, the message always is the same: spend, spend, spend, or we are doomed, and anyone who disagrees is just plain wrong.

The problem I have with Krugman's protestations is twofold: first, I think that he has his causality wrong in that I believe people stop spending because the economy is in recession; and second, there is no mechanism by which people themselves start spending in order to keep the recovery moving. As I recent wrote in this blog post:
Contra Krugman and his employer, recessions don't occur because people spend less; people spend less because the economy is in recession. Furthermore, the only way to get OUT of the recession is to permit the fundamentals to get back into balance. This is not some sort of Zen "balance," but rather a reflection of the real opportunity costs of the factors of production.

Second, it is clear that Krugman and Collins and Company are clueless on what it will take to end this crisis, as they believe that the way to END the crisis is to continue upsetting the economic fundamentals, as though they did not matter. We have to face the issue that if this spending spree continues, we are headed for disaster, as the economy slowly but surely will deteriorate and our ability to repair things in the future will be even more difficult.
We also have to keep in mind that no government on earth is engaging in true fiscal responsibility. The European governments have huge welfare costs that have undermined the productive capacity of the Continent for years, and China still has massive numbers of unproductive state-run enterprises that not only drag down the economy, but force resources in the directions where the markets never would send them.

What Krugman calls "austerity" really is nothing more than some modest spending cutbacks by governments around the world. Furthermore, the huge spending sprees that governments have been creating, financed by debt and printing money, only have extended and expanded the malinvestment of resources, and the only way we can have a true recovery will be the liquidation of those malinvested resources and transferal to those uses that follow the directions set by consumers.

I am not speaking of a morality play in which we now need "austere" policies. Instead, I am speaking of the simple fact that the unsustainable booms of both the Clinton and Bush years pushed the economy in the wrong direction, and until we are able (and willing) to permit the fundamentals of the economy to get into balance, we are going to see these recessionary conditions continue.

It is true that in the short run, so-called austerity will result in even more unemployment, but if we don't stop this fiscal foolishness soon, we are going to have those rates of unemployment -- and worse -- anyway. The cure will be painful, but if we listen to Krugman, there will be no cure, only more disease.


mikeyaustudent said...
This is officially the worlds most annoying song.
Sung by the most annoying 'singer'.

Brutus said...

This isn't really related to the article, but you should create a criticisms section that's 1 or 2 paragraphs long on Krugman's Wikipedia page. You have a pretty good grasp of what he's saying, and you can cite the things like him calling for the housing bubble.