Tuesday, February 26, 2013

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.


Lord Keynes said...

"The proof for real austerity, however, came after World War II ended. All the Keynesian economists warned of a return of the Great Depression.

That is first class ignorance or utterly dishonest.

"All the Keynesian economists warned of a return of the Great Depression", you say.


(1) In 1943, Keynes was giving a lecture at the Federal Reserve and predicted a post war boom:

“Keynes harshly rejected the risk of post-war stagnation, holding that because of Social security there would be a large reduction in private saving and so that would be no problem.” (Colander, D. C. and H. Landreth (eds). 1996. The Coming of Keynesianism to America: Conversations with the Founders of Keynesian Economics, E. Elgar, Cheltenham. p. 202).

(2) Alvin A. Hansen predicted a US boom after the Second World War:

“Altogether the various factors enumerated above indicate the great possibilities for the expansion both of consumption and of private investment during the transitional period. Indeed, the potentialities for expansion of consumption and private investment in the immediate postwar period are sufficient to indicate the possibility of a genuine and fairly prolonged postwar boom. "
Hansen, Alvin A. 1943. “The Postwar Economy,” in Seymour E. Harris (ed.), Postwar Economic Problems, McGraw-Hill, New York and London. 9–26, at p. 18, and

(3) Richard M. Bissell did not predict a depression after WWII (cited in Samuelson, P. A. 1943. “Full Employment after the War,” in Seymour E. Harris (ed.), Postwar Economic Problems, McGraw-Hill, New York and London. 27–53, at p. 53, n. 1).

That's just a sample.



And even Paul Samuelson's prediction in 1943 is grossly misunderstood:


Anonymous said...

"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."

This is exactly my thought every time I hear Krugman remind everyone just how damned sure he was that the $800 billion stimulus was "too small." Does anyone, outside of the lapdogs and acolytes that infest his wretched blog, really believe that, had >5% GDP growth and <5% unemployment returned in the few months after the stimulus was passed, that Krugman would've said, "Geez, I really thought it was going to take another $400 billion or more to get the economy humming like this. Guess I was flat-out wrong."?

Granted, it's an alternate reality in which we'll never know the answer, but I think it's pretty clear from Krugman's puffed-up pride and ego and knack for self-aggrandizement what his response would be. Some kind of spin that he's good/right - always has been and always will be - and that all of his ideological adversaries are wrong/evil.

William L. Anderson said...

Here is David Henderson on Samuelson's post-WWII prediction:


Dan said...

Why do Austrians never give credit to the huge innovations that were spawned as a result of govt R&D during the war? Not to mention the investments in human capital via the GI Bill.

scottindallas said...

The argument wrongly assumes all gov't spending is the same. It's not. Spending on infrastructure, education and other investments reap dividends. Then there's defense spending which represents only future liabilities, costs to deploy, maintain and store, costs to clean up the mess.

There's 3 markets, free markets, professional markets and utilities markets. Utilities may be wholly socialized, strictly regulated, or "deregulated" they perform best when strictly regulated or wholly socialized. The Highway dept CAN INDEED build a road cheaper than the private sector.

This isn't true or appropriate of free markets. But, until Libertarians understand the 3 markets, they'll be nothing more than an adolescent critique.

William L. Anderson said...

You are speaking of apples and oranges, I'm afraid. First, it is true that military research did come up with some new things, although much of the innovation was done by private companies that were under government contracts.

(By the way, duct tape, perhaps the most important innovation in all of human history and beyond, was developed during WWII as a way to keep ammunition boxes dry in the jungles of the Pacific islands. So, maybe all of the carnage of that horrible war was worth it just for the creation of duct tape.)

That being said, there is a difference between technological innovation and entrepreneurship. The technologies become useful to the vast majority of people when entrepreneurs find a way to apply these innovations to goods that people can use -- and afford. Since Keynesians don't have a place in their theories for entrepreneurs except to assume that a burst of new government spending automatically results in useful economic activity, they cannot make a meaningful connection between something like WWII research and the economy at large.

Second, we also might want to remember that most of the research in WWII enabled the greatest mass slaughter ever. We can speak of atomic research, but we cannot speak of it without acknowledging the horror of Hiroshima and Nagasaki.

Third, while the GI Bill enabled people like my father to attend college, it also diverted human capital. It is not as though people who don't attend college are useless bums and those who go to higher education all are greatly productive. Higher education also has produced a generation of bureaucrats and when one sees the so-called Identity Studies that infest higher education, giving us things like speech codes and kangaroo courts, one has to wonder if our great experiment in higher ed has been worth it.

William L. Anderson said...

Actually, governments rarely build roads. They provide the funding; private contractors do most of the road building.

John Dunham said...

Dallas Scott makes a very good point here. There is a huge difference between a society getting together and pooling resources to build an important project (be that a pyramid, an aquaduct or an interstate)and government spending as defined by the American system which mostly consists of transfer payments.

Taking savings (stored work) from Professor Anderson and giving it to me to go off and spend does not create any economic activity and over time actully reduces economic growth by making investments more expensive.

On the other hand, were Lord Keynes, Professor Anderson and I to pool resources (using the government as a vehicle) and even borrow collectively in order to invest in our safety, our collective health, and infrastructure we can do so more productively than we can as individuals and generally benefit the economy on net.

I recall from my economic history that the richest guy in Rome ran the fire department. A fire would erupt and he and his crew were there in a flash - then the negotiations would begin. Much better if we all collectively pay for a fire department.

Dinero said...

The argument that government spending creates more prosterity than it costs can be made for any example of it in the same sence that it is can be made to particular case of it.

Zachriel said...

William L. Anderson: Here is David Henderson on Samuelson's post-WWII prediction

Was Keynes a Keynesian? Samuelson is not "All the Keynesian economists". You've made this before, and been corrected.

As for the quote from Samuelson, it turns out the U.S. did not suddenly demobilize, but kept a huge occupation force in Europe and Asia, while bringing troops home in stages. Furthermore, they didn't just dump the returning soldiers into the economy, but spent vast sums to send them to college, and to help them build homes and start businesses.

Lord Keynes: “Keynes harshly rejected the risk of post-war stagnation, holding that because of Social security there would be a large reduction in private saving and so that would be no problem.”

In addition, Social Security provided economic flexibility, by providing the elderly with independent support.

William L. Anderson said...

So, you claim that the U.S. Armed Forces kept most of the soldiers in Europe and that federal spending did not fall. Here are some charts that might say otherwise:



If your logic is correct, then U.S. tax receipts should have skyrocketed in 1946 and 47.

Here is a site that showed federal defense spending before and after WWII. Are you saying that there was only a small demobilization?


Here is a similar chart:


Mike said...

While I admire and respect the effort, you’re wasting your time. Zach has demonstrated in the past he is impervious to logic, reason and facts. Classic symptom of intellectual dishonesty.

Zachriel said...

William L. Anderson: So, you claim that the U.S. Armed Forces kept most of the soldiers in Europe and that federal spending did not fall.

We didn't say that. We said there was a staged demobilization, which took nearly two years, and instead of simply dumping soldiers into the economy, there was a program of reintegration that included unemployment compensation, education, home and business loans.

By the way, did you correct your statement about "all the Keynesian economists"?

Mike said...

“We didn't say that”
WE? Too funny. He writes as though he is a collective. The Borg?

William L. Anderson said...

Peter Klein has a good article here: "Without the State, Who Would Invent Tang?"