Monday, May 13, 2013

Why do people support austerity? A conjecture.



Paul Romer once said that "A crisis is a terrible thing to waste." A crisis, it is widely believed, gives you the chance to change long-entrenched institutions and make long-needed reforms. It's hard to read that quote without thinking the uncomfortable thought: Doesn't that mean that provoking, or at least allowing, a crisis is the best way to improve your institutions for the long-term?

This thought has been running through my head as I have interacted with three groups of people: 1) Southern European economists, 2) Western "Japan hands", and 3) American opponents of monetary and fiscal stabilization policy.

Regarding South European economists, my evidence is anecdotal, but every single Italian, Spanish, and Greek economist I've talked to has seemed very down on the notion of fiscal stimulus, and highly disdainful of Paul Krugman. Alberto Alesina seems to be an exemplar of their thinking. When discussing stimulus spending, they tend to predict that this spending will be captured by special interests and wasted. Monetary easing receives scarcely more respect. Inevitably, any discussion of the European crisis leads quickly to a discussion of broken institutions in the Southern European countries - poor tax collection systems, over-regulation, sclerotic labor markets, political corruption, and even a poor cultural work ethic.

Now, this could simply be selection bias; the U.S. is considered a bastion of laissez-faire, conservative macroeconomics, so it's possible that the conservative South Europeans are the ones who make it here. But interestingly, I see a very similar attitude among long-time Western observers of Japan (called "Japan hands"), who are mostly very skeptical of Abenomics, and very focused on structural issues. For example, here is Peter Drysdale:

The first two ‘arrows’ [in Abe's quiver] are crude Keynesianism and are controversial, not least because, if they work, they could bring unintended consequences for the currency and the Japanese government bond market... 
The ‘third arrow’ of revitalisation is therefore critical for the success of all these measures. If there is no effective reform program for promoting private sector investment-led growth, the chances of a bond market collapse and a fiscal mess multiply dramatically... 
A return to stable, relatively rapid growth, requires a more flexible and competitive Japanese economy. As Harner explains, ‘restrictions, anticompetitive and onerous laws and regulations, multi-tiered, bureaucratic interference and inflexibility, relatively high taxes — all these obstacles to free market exchange and competition have sapped profitability, international competitiveness, and growth from vast swaths of Japan’s economy’. 
Without getting rid of these burdens, Japan is not going to be able to grow its way out of stagnation and the risks would then be for deepening of the crisis.
As for American opponents of stabilization policy, these include John Cochrane, who pooh-poohs both fiscal and monetary stimulus, saying that we need to get rid of "sand in the gears" of our institutions in order to promote growth. They also include Tyler Cowen, who often disparages Keynesianism (though he sits on the fence in terms of monetary easing), and who often writes about the need to improve our political institutions.

What unites all these and other "austerians"? There are several possibilities. One is that austerity is a good idea, and that these smart people recognize that it is a good idea. Another is that these are political conservatives who are worried that countercyclical macroeconomic policy will redistribute income and regulatory privilege away from themselves or their favored social groups. A third is that the psychological impulse toward austerity - tighten your belt in bad times! - is simply very very strong among all humans. And a fourth possibility, favored by Paul Krugman, is the idea that austerity is perceived as morally virtuous.

I want to suggest a fifth possibility. I conjecture that "austerians" are concerned that anti-recessionary macro policy will allow a country to "muddle through" a crisis without improving its institutions. In other words, they fear that a successful stimulus would be wasting a good crisis.

Consider the perspective of someone who has long advocated institutional reforms. For example, imagine yourself as a Western "Japan hand". For decades, you have watched Japan stagnate. You have seen the revolving door of prime ministers come and go, come and go. You have watched the long-ruling LDP dish out trillions of dollars of taxpayer money to pay politically connected construction firms to pour concrete over every riverbed in the country, even as women were forced into unproductive housewifery by a sexist and hidebound corporate culture and foreign imports were blocked by ever more creative non-tariff barriers.

And as you watched Japan's economy stagnate and its productivity fall behind, you waited. You waited and waited for the day when things would get too dire, and the old system would eventually collapse under its own weight, and Japan would be forced to undergo an economic and social revolution. "One day," you told yourself, "they're not going to be able to muddle through anymore."

In 2011, it seemed that that day had finally come. Japan's economy had taken powerful blows from the 2008 crisis and the 2011 earthquake. The Fukushima nuclear accident had exposed the depths of government corruption. The long-ruling LDP had been replaced by the DPJ, but it was clear that the new guys were cut from the same tattered cloth, and only a massive political "realignment" could restore efficacy to Japan's Diet. And most of all, the Japanese debt continued to skyrocket, until it seemed inevitable that deep cutbacks were coming.

And then came Shinzo Abe, a stalwart of the old LDP, swept into power on a promise to beat deflation and use monetary stimulus to get Japan back on its feet. And Abenomics seemed to be working: the yen fell, inflation expectations budged, and the stock market soared. Suddenly there seemed to be a real possibility that Japan would "muddle through" yet again. Sure, Abe has also promised structural reforms, but - you think to yourself - you've heard that song and dance before. If Japan manages to muddle through under Abe's aggressive recession-fighting policy, there will be no real incentive for the old system to change. The day of reckoning will be pushed back another decade.

I can only imagine that a similar thought process is running through the heads of many South Europeans as they watch the macroeconomic debate. If monetary stimulus (including a euro exit) and fiscal stimulus manage to just barely save Greece and Italy and Spain from their own days of reckoning, won't the euro-sclerosis just deepen before things finally collapse in ten years' time? And I imagine that something similar might be running through the minds of John Cochrane and Tyler Cowen (Update: And Richard Fisher!), as they decry "sand in the gears". Suppose a Krugman-style stimulus really did work! Wouldn't that allow the sand to stay in the gears, reducing our long-term growth rate just to produce a little short-term stability?

In other words, maybe people like the idea of austerity because they think an economic stagnation is our best chance to address what they perceive to be our long-term challenges. Allowing a crisis might be less terrible than wasting it.

Now, when stated that way, the idea sounds kind of silly - why don't we just periodically bomb our own cities, in the hope that governance will improve during the rebuilding? But I find it very difficult to state with any confidence that the idea is wrong. When economists discuss the costs of stabilization policy, they limit their discussion to distortionary taxation, unexpected inflation, and things like that. They almost never bring politics or institutions into the picture. The fact is, we just don't know how institutions really work. So I can't dismiss the idea that anti-recessionary macro policy might, in fact, rob us of our best chances to make needed reforms.

But what I think we should do is to discuss this idea explicitly. If people really do think that the danger of stimulus is not that it might fail, but that it might succeed, they need to say so. Only then, I believe, can we have an optimal public discussion about costs and benefits.

Update: Eerily, the very day after I wrote this post, Steven Pearlstein of the Washington Post made exactly this argument for austerity. Tyler Cowen links approvingly, calling the argument "wisdom".

165 comments:

  1. "Paul Romer once said that "A crisis is a terrible thing to waste." A crisis, it is widely believed, gives you the chance to change long-entrenched institutions and make long-needed reforms. It's hard to read that quote without thinking the uncomfortable thought: Doesn't that mean that provoking, or at least allowing, a crisis is the best way to improve your institutions for the long-term?"

    Just wanted to say that this sounds sooo much like early 20th century socialist thinking. With Romer as Lenin, the Mensheviks as the pro-stimulus and the Bolsheviks as Austerians. The split in Russia occurred over a really similar topic. Whether or not the working conditions of russia's working classes needed to be mitigated or exacerbated. The Bolsheviks (Austerians) argued that conditions shouldn't be improved at all, in fact the opposite, to encourage revolution and won and the rest is history as they say. Thought the intellectual parallel would interest you and as I know you're not au fait with the history of actually existing marxism I thought I'd point it out. https://en.wikipedia.org/wiki/Menshevik

    I think both Bolsheviks and Austerians are wrong for similar reasons. Make stuff better now. Kick that can! Plus reform is easier and people more virtuous when not mired in recession and suffering.

    Some evidence against good policy being encouraged by crisis conditions : http://scholar.harvard.edu/files/bfriedman/files/widening_inequality_combined_with_modest_growth.pdf

    The author argues that inequality, combined
    with only modest growth, can have grave moral
    consequences. History suggests that, in the past, a
    rising standard of living has promoted tolerance for
    others, commitment to economic opportunity, and
    democracy. But stagnating incomes due to inequality
    can lead to the opposite outcomes. The nation’s
    response to immigration is a good example, says the
    author.

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    1. Why did the US introduce the welfare state? Could it possibly have been in response to a crisis called the Great Depression?
      Why did they maintain it (and a somewhat veiled hegemony)? Could it have been in response to a crisis called the Cold War?
      And what happened as soon as the age of crises seemed to be over? A massive (and on-going) attempt to dismantle that welfare state.

      It is irrelevant whether or not policy SHOULD change outside a crisis. The reality of life is that, outside a crisis, those in power, by definition, are quite happy with the status quo and unwilling to change it.
      The only chance one EVER has of significant change is in the face of a crisis which looks severe enough that it might actually even hurt god's chosen people, namely the 1% of any particular nation.

      For a similar example of this dynamic, look at, eg, the history of environmental laws, or the on-again off-again history of the US' interest in alternative energy.

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    2. Nathanael5:18 AM

      "The Bolsheviks (Austerians) argued that conditions shouldn't be improved at all, in fact the opposite, to encourage revolution "

      The biggest danger of this is that, when you have a revolution, you never know what you're going to get. Stalin?

      The only way to get the post-revolutionary results you want is to lay the groundwork in people's minds (something both the Bolsheviks and Austerians seemed to understand).

      However, while you're doing this, why not try to implement what you can of the improvements NOW? That is far better at proving to people that your ideas are right than anything else. It's also better at proving that your opponents are obstructionists.

      And, most importantly, if your ideas are actually wrong, it would be good to test them now so that you can fix them and not screw up after the revolution -- this was the big failure of both the Bolsheviks and the Austerians.

      In short, the "why bother to fix things when the revolution is coming, let us hasten the revolution" philosophy is a philosophy of laziness, and a philosophy of intellectual laziness. It makes no sense.

      Even if you that, in practice, things will not really get fixed until the revolution (a belief I am strongly leaning towards), you should still be trying to make things better NOW.

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  2. If a true motivation, this is really stupid. I don't understand why belt-tightening has anything to do with addressing structural issues. Krugman's explanation is likelier — the urge to belt-tighten in depressions is strong, because many believe it to be virtuous.

    If anything, I think a successful stimulus undertaken by someone who cares about fixing the structural issues is the best path. You get the economy back to growth, thereby winning voters' and business' trust through growth, and then as the economy grows you undertake some structural and regulatory adjustments.

    That's what I would have done if I was David Cameron, or Shinzo Abe, or Barack Obama or Angela Merkel — stronger stimulus, aimed at things society and the economy actually want (maybe — although this is a controversial idea — distributing cash to projects by referendum to minimise accusations of "misallocating capital" and building bridges to nowhere) but cannot presently afford via private enterprise. And when the economy was growing again, I'd undertake structural reforms, and eventually start austerity programs to get to a structural or even nominal budget surplus.

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    1. I don't think it's stupid. You see these types of structural reform advocates pop up in every recession in the US, including this one and the one in the early 1990s (Jeremy Rifkin's The End of Work). Either they're deluded enough to latch on to every downturn as proof of their argument before it becomes untenable to do so in a recovery, or they're thinking that the downturn is a sign that we must do structural reforms, and it's a good time to do them.

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    2. I've been thinking about this some more, and I'm pretty sure almost everyone who I know who is pro-austerity would say that austerity is necessary now because there is no choice and if we don't do it now every dollar we spend is a dollar closer to a Greek-style fiscal crisis... So it's a case not just of perceived virtue (avoiding a supposed fiscal crisis) but of perceived necessity.

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    3. The idea that now when Southern economies are struggling is the best time to make "necessary reforms" seems to be widely believed among Eurocrats and German politicians. I suppose that could be viewed as supporting John's argument that this is stupid.

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    4. Nathanael5:21 AM

      The really odd thing is, there ARE necessary structural reforms, but they aren't these stupid reforms everyone is suggesting.

      The ECB is totally corrupt and operated for the benefit of Germany. Worse, people have noticed and trust in EU institutions is very very low. And meanwhile the ECB is wrecking the European economy.

      Hmm, perhaps some structural reform? Maybe putting the ECB under the control of the European Parliament or something?

      But that's not the kind of structural reform they're talking about. They're pushing a preconceived set of unrelated structural "reforms" which have nothing to do with the current problems. A bit like the disaster of welfare "reform" in the US.

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  3. Anonymous7:40 PM

    Abe himself has said structural reforms are necessary, and the "third arrow" terminology is his own. So it's hardly fair to say people calling for him to make use of it are just trying to use a crisis.

    As for the "crude Keynesianism" charge re: his stimulus- the construction has a poor multiplier, so it's perfectly consistent to be a Keynesian and still think its a bad idea. You yourself were saying it was just an excuse for more LDP construction-donor pork not long ago.

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  4. Abe himself has said structural reforms are necessary, and the "third arrow" terminology is his own. So it's hardly fair to say people calling for him to make use of it are just trying to use a crisis.

    But those people are spending most of their time and effort decrying the monetary stimulus part of "Abenomics".

    As for the "crude Keynesianism" charge re: his stimulus- the construction has a poor multiplier, so it's perfectly consistent to be a Keynesian and still think its a bad idea. You yourself were saying it was just an excuse for more LDP construction-donor pork not long ago.

    And yes, it was! But this is why I have some sympathy with the austerian point of view, when politics and political economy are brought into the equation. Which is why I wrote this post.

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  5. Economics is political and there seems that this particular bias against the institutions in their current form has to be made explicit and subject to scrutiny.

    Are all of Italy's problems caused by Berlusconi or all of Japan's by the LDP? To argue against this proposition is like saying the Beatles suck in a polite company - makes intelligent people hate your guts.

    Never trust economists who use their knowledge or authority just to back up their claims on their pet issues or political prejudices is what I'll say.

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  6. MaxUtility8:35 PM

    Seems to fit well with the "sugar fix" critique of stimulus that while the extra spending will stimulate the economy in the short run, it is an "artificial high" that will just plop you back in the same spot when it ends, but with more debt load. Of course, it seems to me the answer to that is "that may be true, so let's avoid short term tax cuts and spending that just carries people through and instead dump money into infrastructure and other long term positive investments. Even if the short term economic boost is short lived, we'll end up with valuable investments that will improve our outlook for the future."

    I'm not sure why it would be bad to "waste a crisis" by not reforming our institutions, but it would be fine to waste a crisis by not using the opportunity to build a ton of needed stuff at discount prices and relieve suffering at the same time.

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    1. Anonymous11:31 AM

      The problem is that we can't just "dump money into infrastructure." It may surprise you, but many conservatives like me would be more than willing to do real investment in infrastructure like roads, rail, water supply, etc. But all of that takes planning, engineering, and other things that require patience and time measured in years.

      If you just "dump money into infrastructure," then political considerations, bribes, and other nefarious things result in wasted money rather than good investment.

      Said differently, the problem as I see it with stimulus spending, even at the ZLB, is that the investments that are truly worth making take a lot of time and planning to implement. Having Congress decide to spend a massive amount of money in a relatively short period of time leads to malinvestment and waste.

      Of course, doing infrastructure spending when the economy is weak makes sense because raw materials' prices are low and labor is easy to come by. But that still requires careful planning.

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    2. "The problem is that we can't just "dump money into infrastructure." It may surprise you, but many conservatives like me would be more than willing to do real investment in infrastructure like roads, rail, water supply, etc. But all of that takes planning, engineering, and other things that require patience and time measured in years."

      Yes, perhaps we'll have to wait 3 or even 4 years after the Great Financial Crash for the right in the USA to come up with some (worthwhile, non-fraudulent) plans.

      Or more likely, for the next GOP presidency, at which point 'Deficits Don't Matter' will be pulled out of the Memory Hole.

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    3. I don't believe anonymous at all - there are almost certainly lots of existing plans made by state and local governments that were shelved for lack of finance.

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    4. Although Anonymous has a plausible point, I don't recall that it took many years of planning to set up the WPA, TVA, and CCC in the 1930s. Is hiring men to dig holes and other men to fill them up wasteful? What if the unused resources just rot, is that less wasteful? We see long-term unemployment that seems to be producing hysteresis, rendering millions of people, who were productive, unemployable. How many schools did the WPA build? How many Post Offices? How many government office buildings? How many courthouses? How many years did it take to plan them? Are we now less competent than we were in 1933 (my suspicion is, yes)?

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  7. Anonymous8:48 PM

    On the Southern European economists being stimulus skeptics I'd bet on selection bias, hands down. At least in Spain the dominant view is for scaling down austerity at home (majority predicted its failure) and some form of stimulus abroad (ECB and/ or Germany, but not a chance until september elections past).
    As per Paul Krugman being despised, well, he is the single most cited foreign economist, by far, so he'll get his fair share. I'd say, barring his eurodoom predictions, he is very mainstream, in Spain. Not that the national government could do anything about that, since the mainstream in Brussels and Berlin runs the other way around.

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  8. Noah, I believe your thesis to be partly correct. What if, hypothetically, there is a political party that intentionally creates crisis in particular programs (institutions) in order to create the situation for their so called reforms. Let's just call the program "starve the beast". This is very similar to the “bomb our own cities” strategy except it is targeting certain cities (institutions). The very nature of this targeted destruction is essentially a policy strategy by that political party. Now, if one policy is designed to destroy another policy, how efficient is that policy process and the possibility for collateral damage in the overall economy (Theory of Second Best gone haywire, policy vs. anti-policy). Eventually, the political party creates a crisis but it ends up affecting the entire economy. In “A crisis is a terrible thing to waste” attitude, that political party doubles down and advocates for austerity in an economic downturn, hoping for the so-called “targeted” program to be dismantled (their goal of removing “sand in the gears”) while subjecting the entire economy to more collateral damage. This all sounds of some terrible evil plot, but what if it is true.

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    1. Anonymous3:12 PM

      Isn't this basically what happened in Scott Walker's Wisconsin?

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  9. @Noahpinion
    I conjecture that "austerians" are concerned that anti-recessionary macro policy will allow a country to "muddle through" a crisis without improving its institutions. In other words, they fear that a successful stimulus would be wasting a good crisis.

    This I believe too. These type of "structural cause of the crisis" people always come out of the woodwork when the economy tanks during a recession, to talk about how it's the result of bad labor policy (even when the economy was thriving under it before), the Rise of the Machines, or what not. If or when the economy starts rolling again, they'll fade back into the noise, occasionally bleating about how we need to do X and Y for "real" growth.

    But we really ought to be pointing out when they're wrong. Matt Yglesias did that on Greece and Italy IIRC, pointing out that both were thriving and growing for decades under their own currencies, despite labor policies that the unions over here seem like the Cato Institute. And I strongly suspect that the Europeans pushing for Eurozone expansion into these countries secretly thought it would be a good way to get Club Med to stop behaving like Club Med.

    I'll admit that it tempts me, once in a while. It does bother me that Japan has the whole bifurcated economy, where the export sector is world-class and everything else (including most of the Service Sector) is low productivity and using fax machines like the 1980s never died. Or that more and more of their young folks end up as "temps" because the major companies are waiting for a bunch of old folks to retire and/or die. I mean, what's going to happen to them if a bunch of the National Champion-ish companies really tank hard, like Sony?



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  10. I have always thought 'never waste a crisis' was more of a silver lining than let's engineer a crisis to get stuff done. As it turns out crises are not good times to redesign institutions. Putting out fires takes a lot of energy and the trusted toolkit gets used first. If the standard approaches or institutions are not enough, then innovation is 'on demand' and thus not first best. Innovation in crises expend a lot of political capital so there's almost an unfair advantage to the first problem that needs to be solved. Finally in crises the world is not acting as expected and thus it is hard to test out approaches.

    On that last note, in the US, we had several rounds/forms of stimulus. One could argue that the less than expected (by everyone) economic results and not some growing affection with austerity set us on the current policy path. I am not saying its a good direction, but there is some reaction to what did not appear to work as advertised. It's not odd to pivot to more structural concerns and looming deficits in a social insurance programs only show there's more to come. I think there are some legitimate differences of opinion in trend, cycle, expectations, and institutions. Maybe 'austerians' think their policies a good path for these economies ... averting not causing a crisis.

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    1. I have always thought 'never waste a crisis' was more of a silver lining than let's engineer a crisis to get stuff done.

      But I think engineering crises and letting them continue are two different things. Lucas spent a lot of time arguing that the importance of long-term growth swamped the welfare effects of the business cycle. Maybe austerians just don't think recessions are that harmful.

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    2. No one, not even an economist, would prolong a crisis if they believed they had the tools to make it end. (Please don't give the historical counterexample because I really don't think a tight belt fetish holds water as a rational.) Muddle through may be the best we can do (or think we can do) and we may have different policy discount rates. But who would pick muddle over stride in an attempt to set up an institutional overhaul. Again good times are more supportive of change (not always for the better). Also this recession was harmful and I suspect Lucas and the 'austerians' would agree.

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    3. No one, not even an economist, would prolong a crisis if they believed they had the tools to make it end.

      Well...maybe...

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    4. Actually, in the early 2000s, I remember very distinctly an article from 'The Economist' explaining that the problem with the crisis in France was that it was not deep enough, that the French people weren't suffering nearly enough to force them to change out of their (bad) habits and, this being 'The Economist', finally liberalise their labour markets...

      IIRC, it was Schumpeter himself who was protesting counter-cyclical policies because they were not letting the crisis wash the rottenness away.

      Despite claims to the contrary, it's hard not to see this as, at least in part, the adoption of powerful moralistic tendencies ("pain is good for the soul/pain is redemptive") to an economic setting.

      If you feel offended by the turning of 'austerians' with potentially valid economic concerns or differences into 'calvinists' easily dismissed as 'morons' or 'crazies' (Krugman, despite his Nobel etc, is a bit too fond of the technique for his own good), you could say that some of these people are falling prey to the 'Just-world-fallacy' i.e. we get what we deserve. We over-borrowed and over-spent and now we must suffer the consequences. That's John Mauldin's pov, for example...

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    5. "No one, not even an economist, would prolong a crisis if they believed they had the tools to make it end."

      I think the evidence is very strong that many, if not the vast majority, in control of the Republican Party want the economy to be as bad as possible on a Democratic Presidents watch to increase their odds of taking power greatly. And you see this by their actions -- for example, they love monetary stimulus when a Republican President is in office. But it's a dire threat when we have a Democrat. There's a very good quote on this from Jonathan Chait I'll try to find.

      If you believe strongly enough in your dogma, or your libertarian ideology, you can think the good outweighs the bad. An extreme libertarian places even a minute increase in personal freedom above even massive suffering and loss of hundreds of millions. He would gladly cause that if it led to even a tiny decrease in government "restricting our freedom".

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    6. I was simply pushing back on Noah's post ... taking a page from his Culture Fairy attacks on Scott Sumner (http://noahpinionblog.blogspot.com/2012/04/in-which-i-shoot-down-culture-fairy.html). I am not offended by his conjectures. I simply don't see this as a productive analysis of the various policy approaches. Sure there is strategy and norms in the mix (on all sides), but for a mainstream economist it's almost an insult to say the best argument the other side has is 'culture.' It may be true (particularly as tied to institutions), but that argument is seldom crafted in a careful, paint the other side in the best light possible way. Still it's a good conversation to start up, so kudos to Noah.

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    7. Claudia, check this out:

      http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/14/the-case-for-austerity-isnt-dead-yet/?wprss=rss_ezra-klein&utm_source=feedly

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    8. My own take on the subject: http://theredbanker.blogspot.com/2013/05/you-get-austerity-you-deserve.html

      Thanks for the inspiration, Noah.

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  11. The worse things get the better they get? If one's idea of "better" amounts to some form of right-wing dictatorship (something like the Greek colonels 1967-74 or Pinochet's Chile) then maybe that's what the austerian Council of Guardians is actually hoping for.
    Jest kiddin'...

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  12. Hayek gave much this reason for not opposing the depression. He wanted to see the unions crushed. No gain without pain. That really worked out well.

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  13. Anonymous11:21 PM

    Let's see if we can break this down in terms that anyone can understand.

    1) At any given time, there is a set amount of wealth in an economy.

    2) Money--units of currency--is a claim to that wealth. In other words, wealth = a pizza pie and money = the slices.

    3) For every unit of currency that the government takes out of the private sector, be it through taxes, borrowing or inflation, the private sector is then deprived of the use of that unit of currency for a time.

    4) Therefore, for government "stimulus" to work, the government's decision of where to insert that unit of currency back into the private sector must be more productive than the use the private sector would have otherwise put it toward.

    5) Since all government "stimulus" is a form of central planning, and since history has shown beyond a reasonable doubt that outside of certain very limited exceptions (large infrastructure, infant industries already proven viable elsewhere) government economic planning is extremely cost ineffective at best, and a complete failure at worst, we can safely say that all government "stimulus"--unless it goes directly into the pockets of every man, woman and child in the nation--is artificial and therefore destined to fail.


    Wealth does not come from a central banker's keyboard. Government is not a source of sustainable economic growth. Austerity can't not work, because government central economic planning by definition can't work. This generation is going to learn those lessons harder than anyone ever thought possible once the back of this Krugmaniacal scheme finally breaks.

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    1. So let's tackle this:

      "Therefore, for government "stimulus" to work, the government's decision of where to insert that unit of currency back into the private sector must be more productive than the use the private sector would have otherwise put it toward."

      Yep. Keynesian argument is that after a Great Depression/Recession, the private sector is too damn afraid to put money to work anywhere. Velocity goes way down.

      "Since all government "stimulus" is a form of central planning, and since history has shown beyond a reasonable doubt that outside of certain very limited exceptions (large infrastructure, infant industries already proven viable elsewhere) government economic planning is extremely cost ineffective at best, and a complete failure at worst, we can safely say that all government "stimulus"--unless it goes directly into the pockets of every man, woman and child in the nation--is artificial and therefore destined to fail."

      So here's the crux: Krugman would argue that when under specific economic circumstances (up against the zero bound after a Great Depression/Recession) is another condition where "central planning", as you put it, is more cost-effective than no central planning. Empirically, can you show that "government economic planning is extremely cost ineffective at best, and a complete failure at worst" when done while after a Great Depression/Recession? The historical evidence seems to argue against you: Japan barely suffered compared to the US from the Great Depression because of their massive military build-up in the '30's (and WWII got the West out of the Great Depression). Recently, East Asia has done better than the austerity-obsessed Europeans while having comparatively more stimulus/less austerity.

      BTW, you aren't really making an argument against Keynesianism, per se. Massive tax cuts/free money for everyone, preferable for those with lower incomes because they have to spend more of what they have/get (financed by borrowing) with zero extra building by the government after a Great Depression/Recession is, if not Krugman's preferred option, still perfectly Keynesian (and a decently-sized part of the Obama stimulus).

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    2. Basically, a full employment economy argument. Worthless.

      And that is assuming that it's true, in which case wealth and growth rates of countries would be strongly correlated with smaller government spending. Which, IIRC, they are not.

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  14. Anonymous12:00 AM

    I would submit that it's less about improving institutions than about dismantling them. Which is to say, crises can make necessary reforms easier because they make it easier to bypass the normal democratic process, but then what's our process for deciding which reforms are necessary? Are these reforms that will actually improve things? What does "improve" mean in this context? Who decides? I'm skeptical of anyone who has to resort to this kind of sleight of hand to make their ideas acceptable.

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  15. Noah

    If you replaced "reform" with "the social fantasies of mainstream economics" the argument makes perfect sense. Now explain why we should pay more attention to this desire than to say, the desire of aristocrats to use the crisis to abolish democracy?

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    1. Anonymous4:00 AM

      Exactly.

      Delete
  16. While it is not the whole explanation, you're "fifth alternative" does, in fact, plausibly describe the motivation of the majority of those who believe austerity is the right approach. Note that in both Europe and Japan, many adjustments needed to adapt to decreased demand are far more difficult than in the US. Thus, using austerity to force them may not be as unreasonable as it first sounds. This notion echoes a discussion you and I had a few weeks ago where we discussed whether it was important or not to configure economic stimulus to avoid propping up inefficient industries, companies, and so forth.

    In the US, stimulus or not, companies are much more likely, for example, to lay off workers they don't need. Try that in, say France or Greece! There would be enormous pressure to use the government largesse to maintain the status quo.

    The bottom line is that economic policy does not exist in a vacuum. The Weltanschaungen of the societies in question can have profound effects on how policies affect the economy. Thus, austerity for some societies may not be as destructive (because I believe in the larger context it is always destructive during periods of contraction) as for others because it is needed to trigger certain necessary changes in some societies while it realizes no such benefits in others.

    Perhaps the optimal policy for Japan, Europe et al. is an initial period of economic austerity followed by one of economic stimulus. The trouble, of course, is that policy makers in these regimes have backed themselves into a philosophical cup-de-sac by justifying austerity using arguments that avoid the unpleasant truth. This is, of course, is a failure of leadership.

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  17. Great point, very important.

    This may sound big headed, but I really like to know everything about an issue I'm interested in pretty intuitively and well before I take a position, and I'm not really as expert as I'd like to be on where people like Stephen Williamson are coming from. That's just not an area of economics I really got to the core of intuitively, so I could feel confident. Last Summer, I amazingly found some time to go through one of the main papers inside out. See:

    http://richardhserlin.blogspot.com/2012/09/want-to-understand-intuition-for.html

    But that was just a start. So, I always wonder, do Williamson and some others actually have something, at least to the extent that smart Keynesianism can't work, or is bad? I get more and more doubtful as I read more and more of them (and get questions answered by Williamson). But now I'm really thinking that a lot of the explanation for what a lot of them say is what you're saying. They don't want us to leave the crisis through government action; they want to make people think the crisis can only be ended by slashing government, and if there's no crisis, then there's no way to make people think we need to slash government to end the crisis.

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  18. Spain has well over 50 percent unemployment. Why that should be necessary for institutional reforms is to me an insane idea. This creates a generation of unemployable individuals. Why on earth is it either/or?

    There's nothing preventing institutions from walking and chewing gum at the same time. Why not advocate an optimal efficiency from government institutions.

    I shouldn't have to starve my child to get him to study hard. That would be called child abuse. This article is ludicrous.

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    1. Anonymous12:14 AM

      "I shouldn't have to starve my child to get him to study hard. That would be called child abuse. This article is ludicrous"

      What about no dessert until you've studied for two hours tonight? Strict, yes. But cruel?

      Delete
  19. Anonymous4:25 AM

    I consider myself as someone convinced by Krugman's argument for fiscal stimulus in the US during a recession.

    However, when you put it like you have Noah, I am not entirely sure that the "austerians" aren't a bit more correct regarding countries like those in Southern Europe. If we are to believe that institutions are the most important determining factor for long run growth, than you can clearly see that countries like Italy and Greece would benefit more from "structural reforms" rather than just stimulus.

    These countries have GDP per capita at least 30% lower than the US, a stimulus that would just bring them back to that level would be less powerful than reforms that could push their long run growth further. And in that case, Romer is right. A crisis would be too good to waste.

    This leads me to two concluding remarks. First, let's try to understand even better how institutions work. Acemoglu's work is a breakthrough in this regard and there lots more younger economists working in that direction. Second, let's all understand that this argument becomes less relevant in the US case. Further institutional reform in the US is harder simply because the US in on the technology frontier, anything we do beyond this is stepping unto the unknown. For countries that are further back in the their development then this is easier as they would have to copy institutions, practices and stadnards that other countries have already achieved.

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  20. I believe that austerians partly believe what you said.

    However, I can see how this reasoning is tricky: it simply puts the institutions before the people. Those guys might have studied the institutions all their lives, as you said, and they would love institutions to move closer to perfection. However in the process they somehow seem to forget that institutions are there for the people, and that improving the people wellbeing is actually the ultimate goal of all the politic system (at least according to the constitution).

    This is my opinion, and I agree with you: if we had an explicit discussion on this, we could clarify whether "wasting a good crisis" isn't putting the institutions before the people.

    PS: I also personally believe that one trouble with institutions is that there are folks on the top of them, reach and powerful folks. So putting institutions before the people may be in part a subtle way of being concerned by "their favored social groups".

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    1. You're leading up to an important point, somehow skipped by economists (who are good at ignoring incentives):

      The 'virtue' being practiced is screwing over others, particularly those without power.

      Not one Chicago fraud lost his job due to this crisis, nor any Harvard prost*tute. Not one.

      If we were to look at dysfunctional institutions in the USA which need to be trimmed with a lawnmower (or better, a guillotine), we'd start with Wall St. And that would include that part of the economics profession who lied to us, telling us that financialization and deregulation would lead to greater growth and stability.

      Delete
  21. Kevin6:43 AM

    When has "structural reforms" ever cured a recession?

    Serious, honest question. Is there an example?

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    1. Anonymous7:10 AM

      I guess the examples of Sweden and Netherlands in the late 80s might be an instance of structural reforms working. I am not completely sure though so if anyone knows the examples better, than they are more than welcome to jump in.

      Delete
    2. Wasn't there massive currency devaluations? Also a nationalization of the banks?

      Pretty certain that was what Sweden did. Is that what Cochrane is calling for?

      Delete
    3. Never.

      As for Cochrane, it's clear that reality is not his strong suite at this point.

      Delete
  22. Jeroen Dijsselbloem agrees with you:

    "Monetary policy can really not help us out of the crisis. It can take away the pressure, it can accommodate new growth, but what we really need in all countries is structural reforms in the first place. I'd just like to stress the point that in the policy mix of fiscal policy, monetary policy and structural reforms — I'd like the order to be exactly the other way around. Structural reforms in the first place, fiscal policy and viable targets in the mid-term for all regions in second place — and monetary policy can only accommodate domestic economic problems in the short-term."

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  23. This seems like it's making the accelerationist error. Forcing a revolution for the sake of a revolution is foolish unless you're well-prepared to capitalise on it, because the revolution won't necessarily be a good one. Worsening a crisis for the sake of forcing reforms gives the privileged interests in question a chance to further consolidate power. Of course if you think that's a good thing and just what the country needs, this strategy will work, and has worked.

    An example is the UK. The recession has helped the Tories to implement a lot of reforms, and it will take decades to fix the damage (where fixable, you can't 'fix' suicides and long-term unemployment) even if Labour doesn't follow in their footsteps.

    'We should make the situation worse to force reforms' can't be endorsed without answering the question 'Who will be reforming who, for whose benefit?'

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    1. Spot on.

      Noah, all your idea has done is to dress up the idea "austerians are conservatively biased" (which they are). Though the problem is the degree to which the conservative label (or for that matter, Noah characterization) obscure what the problems (and proposed structural solutions) are.


      Delete
  24. I dunno... I see the point that austerian economists resist stimulus, claiming it won't work in "their" countries, and that "reforms" of some nature are necessary first. But is this the view of the ordinary citizens in those states? Are there great numbers of Greek/Spanish/Italian voters pressing for these reforms? If there aren't masses of such voters, how are political and social changes going to be decided upon and put into effect? It strikes me as conceivable that ordinary voters might not favor "reform" under any circumstances, no matter how much the austerians might desire them. Which would argue that austerity is not a very helpful policy.

    I mean... you're asking ordinary people, who darned well KNOW how their country operates, to suddenly be honest about the value of their houses when they fill out their tax forms, to stop offering bribes to get telephones installed or their traffic tickets shredded (and for public officials to stop taking bribes to supplement their official salaries), and so on. Nobody in his right mind in such circumstances is going to take the first step voluntarily, no matter what high level economists say.

    So, if stimulus and austerity are both off the table, what's left to do? Wait for a new dark age? Send in the Wehrmacht? Muddle along till the old folks have all died and the young have all emigrated and declare the formation of a new nation?

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  25. Viriato7:34 AM

    I am a regular visitor to your blog. I find you provocative, with good taste and in most times I find your arguments quite persuasive.

    By the way, I am a southern European economist. And today, by reading this your new entry, I found a simplistic type of argument. You seem not to have the slightest idea of what is the kind of austerity that is hitting the southern of Europe or the Celtic tiger (remember: the latter, before disgraced, used to be the raw model for a perfect growing economy).

    When you write: "maybe people like the idea of austerity because they think an economic stagnation is our best chance to address what they perceive to be our long-term challenges. Allowing a crisis might be less terrible than wasting it.", you show that you know very little about what's going on here. In fact, nowadays (after more than two years of tremendous austerity) nobody "likes the idea" anymore. When the "idea" initially got on the move, the political right, the three employers associations, and many commentators, did in fact favoured the new "opportunity". The time had come to cut down the fat in public spending (good all the time) and slash the Welfare State. A new invigorated economy would be just around the corner. Nowadays, some years later, it has been discovered that there was not so much fat to cut, and that austerity created a reality that they had never dreamed about. It is a monstruous reality ... and nobody, really, really nobody "likes the idea" now. Not the left wing parties, not the center left party, neither the center right party, not even the right wing party. The unions don't like it either, and the various employers associations abominate the idea now. Not even the majority of our current government "likes the idea" now. The only ones that are still pushing for this brilliant idea are our prime minister and the finance minister. Well, most of the entire country think that they are puppets of Ms. Merkel, not members of the government of our sovereign country. But this country was caught in a trap --- we gave up one of the fundamental symbols of sovereignty (money creation) --- and there is very little we could do now. The only option is leaving the Euro and moving to a widespread default. This is not easy to do. So reality is not that simple as you make it.

    Choose better your sources and you will find out many southern European economists that may not like the "idea" so much . Chris Pissarides and Athanasios Orphanides have just come to my mind. But you have plenty of others, don't you? Even non southern European economists, I guess.

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    1. Well, Noah did mention selection bias.

      Maybe all the southern European economists who still like the idea of austerity have immigrated (and don't have to deal with the tragedies caused by the implementation of their ideas).

      Delete
    2. Viriato6:02 AM

      Well, Noah has (I think) a bachelor degree in physics. Right? He knows, I am sure, very well the difference between the serious argumentation that we are supposed to find in any scientific field (like in physics) and the argumentation type "let's make it up" that we met in some fields, like economics (by the way, I am an economist). I know that he knows because Noah has certainly come across a humble book by Richard Feynman: "The Pleasure of finding Things Out".
      I propose you a humble insight by one of the most brilliant physicists ever and (just as a note) a good human being: it's about us, what we do (or rather, what we do not do), about economics and our proposals, about intimidating people:
      "Because of the success of science there is, I think, a kind of pseudoscience. Social science is an example of a science which is not a science ... they don't get any laws, they haven't found anything. They haven't got anywhere yet, maybe someday they will but it's not very well developed. They are not scientists. They sit at the typewriter and make things up. [...] I know what it means to know something, and therefore I see how they get their information and I can't believe that they know it. They haven't done the work necessary, haven't done the checks necessary, haven't done the care necessary. I have a great suspicion that they don't know, that this stuff is wrong and they are intimidating people."
      From the "Pleasure of Finding Things Out", by Richard Feynman, Penguin Books, 2001, page 22.

      Yes, Noah is making it up, like Rogoff and Reinhart did it as well. Noah knows very well that if he had the impression that his "selection was biased", well he should have concluded that his conclusions should be biased as well. It is as simple as this! But do we see such kind of conclusion in his entry here? No, I don't find it anywhere.

      His conclusions are derived by construction, and one crucial step (assumption) was that southern European economists do like the "idea" of austerity. This is a silly construction. Really.

      Delete
    3. Feynman's not all that he cracked up to be (I read his opnion on AGW a while back, and it was crankish).

      Delete
    4. Feynman's not all that he cracked up to be (I read his opnion on AGW a while back, and it was crankish).

      Got a link?

      Delete
    5. Guess you don't have a link...

      Delete
  26. Noah, Noah, Noah. Such a naive young man. The austerians do want structural reforms, but it's the return to the Gilded Age caste system that they want. They are ultra-reactionaries, hiding behind a libertarian curtain. They are comparable to the landed English gentry, scoffing at the introduction of mere paper stocks when everyone knew it was only land that should rule the economic roost, as it had for centuries. Politics is the art of gaining and maintaining sheer power. Whatever economics that provide that power is what will be used. Normally the economics used is corporatism, or fascism. Don't worry Noah, you will be greatly rewarded if you can just help burnish a patina of economic respectability to what is, in fact, simply brutish maintenance of power.

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  27. Nate O7:58 AM

    Just going by the experience of the 20th century, it's more likely social unrest and grinding economic problems will lead to worse institutions (Nazism, Fascism, Communism, etc.) than better institutions. I'd rather have sclerotic capitalism than the above alternatives.

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  28. I think the argument needs a little structure.

    The interesting question isn’t why various people think Austerity is a good idea. The question is, why do the policy makers choose Austerity when 1) The enormous costs are so obvious 2) There are better alternative policies 3) even the policy makers are not optimizing their wealth by choosing Austerity.

    I think this last piece is a part of the puzzle. The fuzzy ‘they’ who is choosing austerity isn’t maximizing the size of their piece of the pie, they are maximizing their share of the pie. There is a very strong finding in behavioral economics that people often choose to increase relative wealth rather than absolute wealth which is consistent with this behavior.

    Claudia contends that not even an economist would prolong a crisis, and for the most part she is right. There was near unanimity on coordinated fiscal and monetary response to the post Lehman collapse. Once crisis was averted however, the conversation changed from avoiding disaster to increasing relative wealth.

    These are the same people who whip up rhetoric hostile to the government and then exploit the government in support of their various rent seeking exploits.

    Beware rent seekers clothed as job creators, they are the ones we call slum landlords.

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  29. "Regarding South European economists, my evidence is anecdotal, but every single Italian, Spanish, and Greek economist I've talked to has seemed very down on the notion of fiscal stimulus, and highly disdainful of Paul Krugman."

    Hmm. My evidence is also anecdotal. I suspect I know a few more Southern Europeans, and a lot less SE economists (ie none). But my impression is that just about every Souther European is against austerity. See sales of End this Depression in Spain.

    Out of interest, does anyone think that structural changes are easier in good times than bad?

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    1. Anonymous3:04 PM

      Definitely, the deeper the economy tanks, the easier to push through changes. It's just that the more it tanks, the likelier that it's the populists who get to do the changes. And if it's bad enough we get extremists who are very keen to implement their violent vision of utopia.

      Delete
  30. While working in several multi-national corporations, I knew many managers who believed that a crisis was the only way to get warring departments to work together, and who intentionally created crises to take advantage of that effect.

    I always thought it was bullshit, but that's probably why I didn't rise higher in the hierarchy.

    Anyway, if this attitude exists in corporations, it surely also exists in other large institutions like governments.

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  31. Putting Tyler Cowen and John Cochrane in the same boat as "opponents of stabilization policy" is incredibly unfair to Cowen.

    Cowen, who is arguably a founding member of the Scott Sumner fan club, rails against fiscal stimulus because he believes that it is *ineffective* stabilization policy, not because he is *opposed* to stabilizing the economy. Granted, he does frequently raise questions about the economic theory upon which monetary policy might be based (i.e. how long do prices remain "sticky"?), but to my knowledge he has never said anything that could reasonably be construed as opposing monetary stabilization, especially with regard to future crises.

    I would regard you, Noah (with your hypothesis of discontinuous inflation acceleration), as more of a monetary stimulus skeptic than Cowen.

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    1. I would regard you, Noah (with your hypothesis of discontinuous inflation acceleration), as more of a monetary stimulus skeptic than Cowen.

      It's true, I am!

      Delete
    2. I'm hoping that Abenomics can change your mind! And if that doesn't work, maybe this paper by Christy Romer will...

      Delete
  32. Wonks Anonymous10:17 AM

    My understanding is that Alesina's own research shows that accomodative monetary policy is necessary for "expansionary austerity". But it wouldn't be a first time a scholar ignored the results of their research. I've heard others argue that while policy may be more likely to be shaken up during a crisis, it's actually easier to do good reforms when times are good.

    Luke, I'm surprised as well but Pew shoes most Europeans favor spending cuts:
    http://www.slate.com/blogs/moneybox/2013/05/14/pew_european_stereotypes_list.html

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  33. I want to suggest a fifth possibility. I conjecture that "austerians" are concerned that anti-recessionary macro policy will allow a country to "muddle through" a crisis without improving its institutions. In other words, they fear that a successful stimulus would be wasting a good crisis.

    I think that's right, although maybe a better term would not be "austerians" but "anti-stabilizationists" - where austerity is only one form of anti-stabilizationism. As you say, they are not all of the right. One of the opponents of countercyclical "crude Keynesianism" has been the left-leaning Jeffrey Sachs, who seems to argue that focusing on Keynesian stabilization will make it more difficult to pass major structural reforms.

    Of course, on the right the desired structural changes are things like a "reform program for promoting private sector investment-led growth," while on the left the desired structural changes tend to be things like public investment in major infrastructure overhauls or government-led investments in changes in the education or health care systems.

    I see no reason, in principle why we can't do both, and indeed one of the structural changes we should make is setting up more automatic stabilization systems that kick in automatically following economic crises and don't require the ad hoc passage of a stimulus package.

    But the anti-stabilizationist argument isn't entirely crazy. If an economy has major structural deficiencies, then carrying out any kind of stabilization policy could be seen as carrying out a policy designed to restore the status quo and alleviate the political pressure.

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  34. Anonymous11:41 AM

    "A crisis, it is widely believed, gives you the chance to change long-entrenched institutions and make long-needed reforms"

    Excellent idea!! Here are a few more:

    Slavery makes black people stronger
    Systematic rape will persuade women to be more careful on what to wear
    Policies toward getting people sick will help them develop a better inmune system.
    Starving every day is key to avoid obesity in the long run

    On the economic side, the same logic could apply to the following "capitalist" policies:

    Reduce profits to get capitalist work harder
    Raise taxes on business with the same aim
    Allow workers to participate on manager positions to increase competition among business men


    We really need more economic philosophers like Romer!!

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  35. Odd. Sitting here in an Italian University, I can think of one colleague who probably opposes stimulus. In contrast two recently wrote an editorial denouncing austerity. I just accosted someone in a rush to leave and asked her what she thinks -- she supports Keynesian stimulus (she said so with some caution as if it were an eccentric position).

    In constrast the Italian economists in the USA who I have met are very fierce opponents of all things Keynesian. This is clearly the result of self selection.

    OK I won't name names, but I only can think of one Italian who opposes Keynesian stimulus and was not a member of the extreme Leninist group "Potere Operaio" meaning workers's power (it went underground became or merged with Autonomia Operaio which is Not Not at all just another name for the Red Brigades although there was significant joint membership).

    Now clearly the idea that Italy needs a crisis to stop meddling through - that everything must be smashed to start fresh -- is strong. That's why the 5 stars movement (Beppe Grillo) received so many votes.

    I don't think there are consistent anti Keynesians who can read without moving their lips.

    Tyler Cowen once conceded that it was silly to lay off teachers during in a severe recession. That means he accepted Keynes's argument for stimulus. Of course he back slid, but the concession is on the web.

    Cochrane conceded that if there were worthwhile public infrastructure investments (a big if in his case) now would be a good time to do them. He did not concede that a project which didn't pass cost benefit analysis in normal times would now (I think he conceded only that low costs now mean that if the benefits are higher than costs in normal times then the investment should be done now).

    Basically neither of them consistently argues against the Keynesians. Rather when pinned down, they concede, but then when not pinned down they denounce us.

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  36. Seems like an old argument, with Hoover recounting how Treasury Secretary Mellon told him to liquidate, liquidate, liquidate.

    "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

    But when you liquidate so many income earners, where is the demand going to come from to support full employment?

    Government can pick up the slack. Also we have the historical examples of non-independent central banks enacting monetary policies that help pick up the slack: Roosevelt went off the gold standard. Chamberlin in the UK in the 30s, Japan in the 30s and today. These policies focused on raising the price level and raising domestic demand in the face of a deleveraging shock.

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  37. Please Noah, listen to Karl Smith:

    "Though things can get quite bumpy along the way and of course all stories end exactly the same way: Everyone you care about dies. Every thing you care about erodes away.

    On the bright side, crushing existential uncertainty and inevitable doom reminds us that if we can just make sure the world doesn’t end tomorrow, we are doing well. And, from time-to-time the world ending tomorrow is a serious possibility, so there is useful work to be done here."

    There's nothing but muddle through. Kick the can down the road. Empurre com a barriga.

    "The fact is, we just don't know how institutions really work. So I can't dismiss the idea that anti-recessionary macro policy might, in fact, rob us of our best chances to make needed reforms."

    You are right on this. But if we don't know how institutions really work, we cannot impose pain on people now, hoping our institutional theory is right and everyone will be better tomorrow.

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  38. Costas Alexandrakis (CA)3:17 PM

    Noah, we have talked about this in person. Maybe I should have accepted your invitation to write about this. Anyway, here are a few points from a Greekonomist, even in the comments section:

    1. I feel you are unfair when you equate opposing fiscal expansion with supporting austerity. One can disagree with Krugman's "spend like a drunken sailor" remedy and still oppose the big cuts on pensions and basic public services that have taken place in Greece. Not increasing spending (beyond that mandated by the built-in stabilizers like unemployment insurance and Medicaid) is not the same as cutting spending!

    2. You have to look hard to find an economist who does not accept that running larger deficits during a recession is OK, PROVIDED that they are made up by suprpluses during expansions, at least once public investment is excluded. The problem with Greece is that it was running relatively large deficits even during good times, thus allowing its debt to GDP ratio to keep increasing. The U.S. is on a similar path. Many people would be O.K. with more spending now, provided that the long-term fiscal imbalances due to the entitlement programs are addressed at the same time. But this is not what Krugman says. He wants to spend now, and deal with the long-run problems later (...and later, and later, until it is too late). This is exactly how Greece got in trouble in the first place.

    3. Greece was not always a high-debt country. This is a graph on the public debt-GDP ratio from a post I wrote in Greek on the issue. The letters may look all Greek to you, but the bars tell the story.
    http://anamorfosis.net/blog/wp-content/uploads/2011/05/Chart2.gif
    In 1981, Greece's debt to GDP ratio was 35%, among the lowest in Europe. It grew to 115% from 1981 to 1996. What was special about that period? Except between 1990 and 1993, it was governed by PASOK (pahellenic socialist party) and prime minister Andreas Papandreou, a Green and American citizen (served in the U.S. navy) with a Ph.D. in economics from Harvard, who had been a professor of economics at Harvard, Northwestern, U.C. Berkley (where he also served as Chair) and elsewhere. Here is his Wikipedia page.
    http://en.wikipedia.org/wiki/Andreas_Papandreou
    Papandreous was a hardcore Keynesian, friends with Galbraith, and came to power in 1981 with the political slogan "Change". He advocated for growing the economy by stimulating demand, redistributing income, and empowering unions. Hmm, I wonder which Nobel lareaute economist reminds me of him. The result was not only a growing debt, but also increased corruption, increased market frictions, less competition, missallocation of resources particularly away from productive activities and towards rent-seeking, and so on. Not to forget about the political business cycle driven by the use of monetary policy to stimulate the econonomy prior to an election year. Here is another graph, this time of inflation, from my post,
    http://anamorfosis.net/blog/wp-content/uploads/2011/05/Chart3.gif
    contrasting the path of inflation in Greece with that in other European countries with high inflation in 1981. Note that 1985 and 1989 were election years. Also note how these cycles ended after Greece joined the European Monetary System in the early 1990s.

    These are elphants in the room that any economist who grew up in Greece in the 1980s, or anyone familiar with the Public Choice literaure, cannot ignore. I personally decided to leave Greece in 1993, while still an undergrad, after Papandreou was reinstated following a three-year conservative rule. I was not in search of a laissez-faire heaven. I just I did not want to be in Greece when it went bankrupt, which seemed inevitable to anyone with reasonable foresight. It just so happened that American universities were willing to finance my graduate education. All the other BS about some perverse moral masochism causing people to enjoy austerity are ridiculous, to say the least!

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    1. All good points!

      Yes, I was definitely thinking of you when I wrote this, although I was thinking even more of the entire Stony Brook econ department... ;-)

      Delete
    2. "The problem with Greece is that it was running relatively large deficits even during good times, thus allowing its debt to GDP ratio to keep increasing."

      Agree that Greece is a basketcase.

      "The U.S. is on a similar path."

      http://commons.wikimedia.org/wiki/File:US_Federal_Debt_as_Percent_of_GDP_by_President.jpg

      Krugman recently wrote a post about this. Namely, that the US only goes down the road of irresponsibly piling on federal debt even while times are good only when headed by recent GOP presidents.

      It's a fairly convincing case that if you truly care about the US debt/GDP trajectory, you should always vote Democratic during Presidential elections.

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    3. The reason for this is because the Democratic party is now essentially the party of Rockefeller Republicans (socially liberal, pro balanced budget/fiscal responsibility, indifferent to taxes) while the GOP is the party of reactionaries (socially conservative, extremely anti-tax, indifferent to a balanced budget/fiscal responsibility).

      The last time the GOP controlled all branches of government, they spent like drunken sailors when Keynesian theory called for a cutback.

      "He wants to spend now, and deal with the long-run problems later (...and later, and later, until it is too late)."

      He would say you're mischaracterising him. Did he not oppose the Bush tax cuts when they were proposed? He's written quite a bit about that.

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    4. Dohsan, I do not disagree, exept on Krugman. I remember reading him say that there are long-term fiscal imbalances, but those should not be of concern at the present. Obviously I disagree. The responsible thing to do is to tie any form of current stimulus to reforms that will ensure a cyclically-adjusted balanced budget.

      Delete
    5. The responsible thing to do is to tie any form of current stimulus to reforms that will ensure a cyclically-adjusted balanced budget.

      I agree with CA. Of course the particular reforms I want to see in the US are: (1) increased taxes on high incomes; (2) increased funding for research; (3) increased funding for infrastructure; (4) military cutbacks; (5) full and fair financial reporting by public companies; (6) single payer health care.

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    6. "I agree with CA."

      One fluke too many? :)

      The problem is that without controlling Medicare spending you cannot accomplishh the goal. Now here is Krugman's solution, from a December 3, 2012 post:

      "The key is having a health insurance system that can say no — no, we won’t pay premium prices for drugs that are little if any better, we won’t pay for medical procedures that yield little or no benefit".

      But this is precisely the reasoning behind mandating catastrophic insurance (private or public), and letting individuals pay out of pocket (with the establishment of health accounts) or buy supplementary insurance for everything else. This idea is appealing to Republicans, but unfortunately it is not shared by the current administration, as its fight with religious organizations over whether insurance should cover contraception clearly indicates.

      Delete
    7. One fluke too many?

      Maybe one of us is the proverbial stopped clock.

      Health care spending is a superior good - with a population which is both richer and older there is nothing inherently wrong in health care consuming a growing share of GDP. The challenge is to try to deliver it in a cost effective manner. I personally doubt that private sector/market based solutions will work. If they would work then major employers would have been able to negotiate much lower costs for employee medical coverage.

      Delete
    8. Most studies I have seen find that the major contributor to rising costs is overprescription. In other words, the problem has less to do with private vs. public, and more with the fact that a third-party payer system gives little incentive to the providers and consumers of the service to ration. The result is an overuse of resources, and a high cost. The major difference is how the two parties want to address the problem.

      Liberals want to force everyone into the same plan, and have administrators make decisions on what should be covered and what should not, while using their monopsony (single buyer) power to negotiate lower prices. HMOs tried that, but with little succes. Often times, providers of health care consolidated, thus creating monopolies that were able to counter the monopsony power of HMOs and Medicare. Would the government be better at rationing if everyone is forced into a single public plan? Maybe, but I remain sceptical, and somewhat worried of what may happen once competition has been eliminated. Stories like this certainly do not strengthen my faith in the ability of the government to protect the health of the public:
      http://features.blogs.fortune.cnn.com/2013/05/15/ranbaxy-fraud-lipitor/?iid=HP_LN

      The other side wants rationing to take place like with any other good, by having the decision-makers incur the cost of their decision so as to induce them, when they decide how much to purchase, to consider not only the benefits but also the costs of provision. Moreover, by having people pay for doctors visits out of pocket they can reduce the administrative costs of dealing with insurance companies. Of course, this approach has its own flaws...maybe Noah should write a separate post on the issue. Until then, here is a piece I liked from CNN money, published before the 2008 presidential elections:
      http://money.cnn.com/2008/03/10/news/economy/tully_healthcare.fortune/

      Delete
    9. HSA's with a contribution (from the government or employer) for mandated primary care _might_ do it.

      Delete
    10. Bill Ellis4:22 PM

      CA says...."I feel you are unfair when you equate opposing fiscal expansion with supporting austerity.

      I disagree. It is absolutely fair. You can't oppose cuts without agreeing in principle with the fact that government spending is expansionary when there is no "crowding out" .

      So the real disagreement is over the degree of spending needed. I wonder why you are seeing government spending as "just right". I see an economy in need of expansion.

      Right now... Austerity = anti-stimulus.
      But when the economy is going along well and government borrowing is pushing up intrest rates then... Austerity = Stimulus.
      I don't see how it can be neither.

      Delete
    11. Bill Ellis4:48 PM

      Why do conservatives doubt that America can provide healthcare for all our people for less by going to a more regulated system ?

      The Europeans have proved it can be done. So all of the conservative arguments against it boil down to..."Americans can't".

      On issue after issue, modern American conservatism has become "Americans Can't Conservatism."

      Lib/dems should not be shy about pointing out that the GOP is the party of Americans can't. We made a mistake when we tried to brand the GOP as the party of "NO". "No" can be prudent. "No" can be smart.

      But saying Americans can't do anything that other people can do... is a completely repugnant, elite serving lie. And the Right should not be allowed to get away with repeatedly slandering and libeling Americans.

      Delete
    12. Bill,

      also see my response to your comment below. On this point,

      "You can't oppose cuts without agreeing in principle with the fact that government spending is expansionary when there is no "crowding out""

      you are wrong, Not all spending is created equal. There is spending in the form of transfer payments, spending in the form of public good provision, spending in the form of private good provision, and so on. And studies show that the type of spending matters both in terms of its impact on employment, and its impact on social welfare.

      Delete
    13. Bill Ellis7:44 PM

      CA...You still agree in principle. You agree that government spending is expansionary when there is no "crowding out". (I asume you do believe that crowding out can happen. )

      Now all you are saying is that it has to be the right kind of spending. I agree. You just made my argument more specifically than I did.

      So, more specifically... I wonder why you are seeing the "right kind" of government spending as "just right' now. I see an economy in need of more of the "right kind" of government spending.

      Delete
  39. Let the beatings continue until morale improves, in other words.

    This "conjecture" seems to assume that pro-austerity people share the economist's hand-wringing concern over future growth and efficiency, rather than the man on the street's vulgar concern for his own status relative to the canaille. This assumption does not withstand much scrutiny.

    ReplyDelete
  40. A sixth is that at least in the US, Congress has never been very good at the "counter" part of counter-cyclical during the boom times. Govt grew enormously under Bush. Many people feel that counter-cyclical policy means that govt grows during a recession and grows even more during a boom. Human nature is to get complacent during good times, that's why risk mangers like me make a lot of money - to remind people not to get complacent. I tell my daughter all the time, she can learn from books or other people's experiences, she can learn by figuring stuff out, or she can ignore all that and learn from the school of hard knocks. If she picked a or b parenting would be a breeze. I think that politics is not much different. Counter cyclical policy is a theory that exists in textbooks, not so much in the undisciplined real world. Ironically, I think that if we had a balanced budget requirement whereby the state and local govt could eat no more than (say) 40% of gdp, more people would support counter-cyclical policy.

    ReplyDelete
    Replies
    1. "A sixth is that at least in the US, the GOP has never been very good at the "counter" part of counter-cyclical during the boom times."

      Fixed it for you.

      http://commons.wikimedia.org/wiki/File:US_Federal_Debt_as_Percent_of_GDP_by_President.jpg

      Debt/GDP went down under Clinton (and the whole post-WWII era before Reagan when Democrats dominated Congress).

      BTW, how do you square a balanced budget requirement with counter-cyclical policy? Think it through. Do not tax receipts go down in a recession?

      Delete
    2. exactly: austerity often means that we skimp on your projects so that we can spend it on mine, later, like a war.

      The form of balanced budget amendment i favor is one where the federal budget is limited to x% of gdp average over a 7 year rolling period, where x<=25% (note that state and local ads another 15% ish, so we could say total govt <=40%). We have checks and balances in the Constitution for almost everything except spending authority. Since it would have to be balanced over a rolling period, the govt could go over for a 2-3 year period as long as they rolled it back over the next 3.

      Delete
  41. Actually, your theory is not only a theory. For example, the ECB spelled it out clearly. It refused to perform its own obligations (thereby itself causing the "spread" crisis or making it worse) unless and until the hit countries accepted to pass (thereby forcing them to pass) the policy measures decided by the ECB itself.

    ReplyDelete
  42. It is wrong to conflate the problems, and the solutions, in different countries. Cochrane, in particular, is guilty of saying things that amount to: "Greece is in a terrible mess so the United States needs to cut Medicare and Social Security."

    For Italy and Greece one can legitimately fear that stimulus which allows the country to muddle through, without structural reform, will make the ultimate crash even worse than it would be if the country did not do short term fiscal stimulus but rather met structural issues head on now. That is different from your suggested fear that stimulus will succeed but long term growth will be sub-optimal. It seems clear (at least to me) that short term stimulus (one or two years) in Japan or Italy or Greece should be tied to a concrete structural reform plan that would be fully implemented within five years.

    ReplyDelete
  43. Anonymous7:28 PM

    Excellent post. Britain's decade of structural reforms under the Thatcher government were only imaginable because the 1976 IMF loan was seen as a national humiliation.

    ReplyDelete
  44. Tim Duignan8:09 PM

    Interesting post thanks. But this justification for austerity seems ridiculous to me, it is as if a pack a day smoker (structural problem) is admitted to hospital with a gun shot wound (unrelated external shock). And the doctors stand around saying, well we can't just take the bullet out, he will go back to smoking a pack a day and be unhealthy in the future.

    Now it's possible that the fear of death or something will cause the patient to stop smoking, human psychology is complex. But as Noah says you have no idea what he will do! And it is terribly inhumane to inflict massive suffering based on a wild guess.

    Not to mention that the downside risks are just as bad if not worse. Dictatorships tend to take over in times of economic hardship.

    ReplyDelete
  45. What about Scott Sumner's argument that recessions can exacerbate structural problems, e.g. tight money causing high unemployment and as a reaction unemployment benefits are extended to 99 weeks...

    ReplyDelete
    Replies
    1. . . .which has slowly been cut back.

      Is it a structural problem if the structural problem goes away?

      Delete
  46. How about: They are insulated from the consequences, and they are MEAN! And since they dress up their cruelties in a plaintive: "But it's good for you," they are not particularly honest about their sado-masochistic inclinations.

    Also they are greedy, and don't want to let go of the profits they have made by keeping the productivity gains of the last 40 years to themselves.

    It takes a hard heart to destroy the prospects of a generation, and the best of motives, even if we assume that is what they have, is no excuse.

    ReplyDelete
  47. Phil Koop9:05 PM

    "I find it very difficult to state with any confidence that the idea is wrong"

    Well, you are usually pretty clever, so against my worse nature I am going to have to cut you some slack here. "Let no new thing arise". That has been the byword of conservatives throughout the ages. Has it really escaped your notice that this is why they are called "conservative"?

    Revolution and change are positive e.v. for the downtrodden of the earth because they have so little to lose. But the trouble for people with people of substance is that there are far more ways of making things worse than of improving them. Sure, it might be that a crisis increases the probability of moving in the direction of productive "structural changes." But it also increases the probability of every other type of change. There is no iron law of nature that says Greece cannot become Somalia. Only relative increases in probability really help.

    I am not saying that you are completely wrong and that no Austerian thinks in the way you describe. I am just contesting your claim that it is difficult to reject this; on the contrary, it is an intensely stupid idea.

    ReplyDelete
  48. Anonymous2:38 AM

    What Noah misses in his very interesting piece with regards to the South European countries is that with weak institutions prone to corruption it is nearly impossible to have an economic policy based on a sound economic theory. So it does not really matter whether these countries adopt austerity or stimulus. The end result will be practically the same – further enrichment of the rent-seeking elites. The only difference under an austerity regime will be an increased competition within those elites based on how close they are to the central decision-making players. Look what happened in Cyprus. Firms belonging to the relatives of the Cypriot president received an advance warning of the impending depositors hair-cut. If this is the way the game is played, chances are the austerity option will not in any meaningful way promote any structural reforms.

    ReplyDelete
    Replies
    1. Anonymous9:49 AM

      My hope is that people will finally see it and will start to selforganize into and vote for parties which are not rent seekers. Without this we are doomed.

      Delete
    2. Nathanael5:12 AM

      Trouble is, most people want to be rent-seekers. So, aspirationally, they vote for the rent-seeker party... even though that party has no interest in sharing the rent with the voters!

      Delete
  49. Noah,

    This may be a time you try too hard to be open minded about the possibility of the counterintuitive. True, crisis can motivate and break down entrenched political barriers to reform. These can be divided into two kinds of political reforms. The first is structural reform that attempt to directly address the cause of the crisis or to mitigate the damage if it happens again, such as the attempt at banking reform after 2009. The second, which I think you are referring to, is crisis induced broad-scale structural reform to solve perceived problems that may be only indirectly involved in the immediate crisis, if at all.

    The first seems to have mixed results. The second has some disastrous examples and few positive ones. Naomi Klein's book The Shock Doctrine attempts to prove exactly this point. She is too much an ideologically based advocate for my taste but her examples do cause concern. Crisis mentality does not seem to encourage inclusive, win-win problem solving skills. Klein makes the argument, that economic, political and natural crisis in our more globally connected world gives greater political advantage to the already powerful and wealthy. It is no surprise that the argument for “not wasting a crisis” is made much more by those on the right of the political spectrum.

    Even more scary is when crisis is leveraged by the intolerant and reactionary. I do not even have to be guilty of Godwin's law to show this (notice what I just did there). Current events in Romania make the point. Francis Fukuyama seems to be correct in “End of History” when he said the biggest threat to liberal democracy is from the right, not the left. And when they come they will come in the guise of saviors from crisis, manufactured or otherwise.

    ReplyDelete
  50. Anyone who appreciates Italian shoes and fabrics will tell you there's nothing lacking in their work ethic....

    ReplyDelete
  51. Anonymous9:39 AM

    It has long been the case that some economists and policymakers care more about immediate, near-term suffering, and about distribution, than others do. Austerians give little or no priority to these "variables," if they are considered at all in theories or policy recommendations. That's not necessarily why they have been and continue to be wrong, but it certainly influences their mental models.

    ReplyDelete
  52. Anonymous9:44 AM

    You may be right. A small introduction - I am living in Croatia a country which has declining GDP for the fourth year in a row. Although our financial system is stable one can argue that we are the worst part of Europe after Greece. I am a physicist with interest in economics, so I am familiar with Keyness - austerians debate and all that. In the case of many other countries I am absolutely on the side of stimulus, but I am REALLY afraid that we will get out of our nightmare with a very very fragile growth at certain point without any reforms which are much needed. And believe me there are few countries which need more reform then Croatia since we practically used all our industry, government bonds and surpluses from tourism to sustain level of living for devoted voters of two largest parties. Consequence is that our international education scores are in a free fall, that we have 400 economists on one working place, that it is still impossible to lay off a person form public sector unless it literally finishes in jail or that our exit rate on elections is atm around 20%. It would be easier to make structural changes while growing, unfortunately the logic of political cast in southern Europe generally and Croatia in particular is to use growth to literally pay certain portions of society which will ultimately vote for the status quo - i.e. leading party (examples of this cases are: veterans of war, peasants with small farm land and conservative Catholics)

    ReplyDelete
  53. The crisis has already been wasted. Banks could have been nationalised instead of bailed out. Financial criminals could have been prosecuted. The fiscal cliff could have been gone over and relief to the truly stressed could then have been afforded. Single payer health could have put a greater halt on spiralling health care costs. Bush era changes to bankruptcy laws could have been reversed. Patent protections could have been rationalised. The filibuster could have been ditched.

    Who stood for not taking advantage of the crisis as above?

    ReplyDelete
  54. Anonymous12:17 PM

    A while back, Krugman et al debunked the idea that governments never pay down the debts they incur through fiscal stimulus. The structural reform argument for austerity seems like a variant of that same argument, and I suspect it fails in pretty much the same way.

    But it's not obviously an unsound argument, and it's much harder to rebut empirically.

    ReplyDelete
  55. Several comments:

    First, the austerians promised that austerity would lead to short-term results (see 'confidence fairy). They are now lying to cover up their failures.

    Second, in the USA at least the structural reforms we should be seeking are precisely those which the austerians are not pushing for: cutting Wall St in half, re-regulating banking, punishing fraudulent economists who wh*red for Wall St.

    Third, the 'virtue' here consists of those without suffering while those with gain more.

    Fourth, leading back to first, it's clear that these people are liars. Krugman pointed out back around 2000 that many on the right would claim reason A, and then switch to anti-A when A proved false, all for the same policies. They were lying then, and are lying now.

    Fifth, read Krugman's article: http://www.nybooks.com/articles/archives/2013/jun/06/how-case-austerity-has-crumbled/?pagination=false

    ReplyDelete
  56. peterh322:35 PM

    It's the "I hope I get laid off because then I'll finally have time to clean out the garage" theory.

    ReplyDelete
  57. "Third, the 'virtue' here consists of those without suffering while those with gain more."

    Condensing my previous comment:

    The austerians are liars. You can't judge their motives by what they say - you have to look at what they do. Also, the whole point of austerity is that some people profit and some people suffer. Any analysis which doesn't take that into account is worthless.

    ReplyDelete
  58. Anonymous4:33 PM

    Indeed austerity is both morally virtuous and a great opportunity to challenge existing institutions. This is why you never really hear precise economic arguments from austerians or concrete reform proposals, other than complaints of how "sclerotic" job markets and social systems are (by many measures, the German labour market is much more "sclerotic" than the Spanish one). In short, austerity is a political ideology. It is quite easy to see what political consequences austeritarianism will have, in conjunction with the 30-year increases in income inequalities, adverse demographics (ageing populations with large unemployed immigrant populations), the relative decline in Western economic power and the increased competition in
    world trade (caused by the decline of world trade): the resurgence of fascism.

    ReplyDelete
    Replies
    1. You obviously have not seen the collective bargaining agreement traditionaly signed between the Greek General Workers Union and the union of employers!

      Delete
  59. Two questions for you, Noah Smith...one on-topic, the other off-topic.

    1.) Are you planning on expanding your thoughts on why people support austerity with a book review of this recently-published work?

    http://www.amazon.com/Austerity-The-History-Dangerous-Idea/dp/019982830X

    2.) Could you please engage with me in e-mail correspondence? I feel like I have to ask you something in private.

    ReplyDelete
  60. Excellent post. Britain's decade of structural reforms under the Thatcher government were only imaginable because the 1976 IMF loan was seen as a national humiliation.

    ReplyDelete
  61. "And I imagine that something similar might be running through the minds of John Cochrane and Tyler Cowen (Update: And Richard Fisher!), as they decry "sand in the gears". Suppose a Krugman-style stimulus really did work! Wouldn't that allow the sand to stay in the gears, reducing our long-term growth rate just to produce a little short-term stability?"

    I don't quite understand this. Surely "Sand in the Gears" affects short term allocative efficiency, not long term growth. Why do they think otherwise?

    ReplyDelete
    Replies
    1. This reminds me of people who confuse price increases with increased inflation. Do economists always have trouble keeping their derivatives straight?

      Delete
    2. It also reminds me of people who argue for cutting out public holidays as a way of financing something or other. Lets think about this - a public holiday is about 1 in 250 of a years worth of working days, so the maximum impact on GDP would be about .4%. And average growth in real GDP/capita is about 1-2% a year (in an average developed economy). Are they serious?

      Delete
    3. P.S. This last argument was made by the equivalent of the Chamber of Commerce in Germany as a way to finance Nursing Home Insurance (Pflegeversicherung).

      Delete
  62. It seems to me, the thought process you are talking about has more chance of being fruitful under a two party system than under a proportional system. To see what I mean look at Greece and Italy. If it is hard for minor parties to grow on populist platforms, then there is some chance of a national consensus to develop on a reform strategy. The problem with using a crisis for reform, is that a crisis generally takes down the government of the day, so unless there is consensus, andy reforms might soon be reversed.

    P.S. This line of thought of course makes the current GOP approach look even more ludicrous that it already does.

    ReplyDelete
  63. Anonymous10:36 AM

    noah, why should we listen to any of these austerity pushers? why are their ideas correct? They mostly seem self-interested. If they cannot even bothered to make an honest argument then they should be dismissed.

    The case for reform if it is to be made, should be on its own merits.

    ReplyDelete
  64. Anonymous11:17 AM

    I don't see this as hard to understand at all. Antonio Gramsci rightly placed the intellectual stratum of society as part and parcel of the ruling class's hegemonic superstructure: "The intellectuals are the dominant group's 'deputies' exercising the sub-altern functions of social hegemony and political government." They are simply expressing the values of a large swath of the ruling class and transmitting it in their role articulating the dominant ideas of this period.

    ReplyDelete
  65. Reading the Paul Krugman response to this:
    http://krugman.blogs.nytimes.com/2013/05/16/the-smithkleinkalecki-theory-of-austerity/

    What strikes me about this (Noting the Kalecki argument) - is this in fact a capital strike? After all, if wealth is becoming more concentrated, this is easier than ever to organise.

    ReplyDelete
    Replies
    1. Same old, same old! Krugman is drifting more and more into paranoia. Once again, he describes everyone who does not agree with his idea of spending binge as austerian or anti-Keynesian. Well, here is what a fellow liberal, Jeffrey Sachs, has to say.
      http://www.huffingtonpost.com/jeffrey-sachs/professor-krugman-and-cru_b_2845773.html

      Second, Krugman clearly has very little understanding of how economic institutions in the European economies he uses as examples to make inferences about the U.S. work in practice. At least this is true about Greece. Does he really think that some of us pushing for reforms were willing to sacrifice our relatives' jobs, our parents' pensions, and our own wealth for the sake of ideology? Or are we so blinded that we fail to see what is in out best interest, but Guru Krugman can? How much of a jerk can someone be to imply this? And how does he explain that the same people who are pushing for certain "neoliberal" reforms are also pushing for higher spending on education, public infrustructre, and social safety nets for those that trully need them? This strategy of creating vilains to present himself as the knight in shining armour is getting really old! Anyone who enjoys it would get a much better kick out of reading Cervantes' Don Quixote.

      Delete
    2. Bill Ellis3:27 PM

      So Krugman is wrong 'cuz he is a rude-ignorant-jerk ?

      No matter how many times I hear this argument it fails to convince me. Guess I am just dense.

      Delete
    3. Krugman is wrong because he is wrong. Being a jerk is an added bonus. But it really doesn't matter now, does it? As your comment below implies, you don't want to be convinced. Or are you seriously unaware of the structural reforms that are being debated? As far as the U.S. is concerned, here are a few:
      1. Replacing the payroll tax with a carbon tax.
      2. Reducing the corporate tax.
      3. Increasing investment in infrustructure.
      4. Increasing taxes on high income.
      5. Reducing tax deductions, particularly for the wealthy.
      7. Revoking the tax-free status of emploer-provided health benefits and moving away from comprehensive insurance to Health Savings Accounts.
      8. Raising the age for Medicare eligibility
      The list goes on. Is this detailed enough for you?

      Delete
    4. Who is debating these 'structural reforms', CA?

      You accuse Krugman of not understanding how European economic institutions work. Here is a question for you: do you understand how US political institutions work?

      Delete
    5. Bill Ellis5:31 PM

      Perhaps you did not mean to put words in my mouth...but you did.

      I never said or implied I was "unaware of the structural reforms that are being debated" and I don't see how a fair reading of what I said would make you think that.

      What I said was that the people in power don't and wont' agree on reforms...as you say, they are being debated. And I would add ...with no possible resolution to the debate. (policy can be resolved, the debate never will. )

      Every reform you mentioned above has its detractors.

      I am Not trying to be a jerk here...but you seem to be dodging my point, by attributing a straw man to me. Not cool.

      I am all for making structural reforms, And all for debating the efficacy of proposed reforms.
      What I am against is advocating for letting the economy flounder just for the sake of making reforms, because one believes that "reforms" WILL be the answer. That is what a lot of these arguments boil down to.

      Honestly, how confident are you that the "Right" reforms will be made ? Would you still argue for Austerity induced reform if you thought it likely the "wrong" reforms would be put into place? Are you so desperate that you see any reforms as being better than the statu quo ?


      Also, What about my comment below makes you think I "don't want to be convinced" ? Because I believe that the Elite has a lot of power ? Do your ears close automatically when you hear class arguments ?



      Delete
    6. mattski,

      I have lived in both countries, in Greece for 24 years and in the US for 15. I do believe that I therefore understand reasonably well how institutions in both countries work. These issues are being debated in the sense that they were brought to the public forum at some point, some in Simpson-Bowles, some in a presidential platform, and so on. Unfortunately, the discussion seems to have frozen.

      Bill,

      I am not sympathetic to class warfare rhetoric. Among the elites, different people stand for different things. There are the Koch brothers, but there are also Soros, Buffett, almost the entire Hollywood, and so on. This is why, rather than talking about "elites", "austerians", "Very Serious People (VSP)" and other catchy phrases coined for public consumption, I prefer talking about specifics. Towards this goal, here is my question:

      1. Who is an "austerian"?
      a) Someone who believes that cutting spending and raising taxes is sometimes justified.
      b) Someone who wants to balance the budget during a recession.
      c) Someone who disagrees with the notion that any type of government spending of any magnitude is a cure for an ailing economy.

      Definitions are important because if the answer is (b) then we are talking about a small minority that is hardly worth making so much fuss about. If the answer is (c) then we are talking about a rather large number of people, including many liberals. People who fall in that camp do so not because they would rather see the economy flounder than forgo the reforms. It is because they believe that without the reforms the economy will flounder, and if in the meantime we rack up the debt with ineffective spending, the government's ability to continue to protect the most vulnerable segments of the population through Medicaid, the income tax credit, unemployment insurance, and to finance the necessary reforms, will be compromised. This is the Greek experience in a nutshell, and it a possibility for the U.S.. Also read Jeffrey Sachs' piece by following the link I posted.

      Delete
    7. "Or are you seriously unaware of the structural reforms that are being debated? As far as the U.S. is concerned, here are a few:
      1. Replacing the payroll tax with a carbon tax.
      2. Reducing the corporate tax.
      3. Increasing investment in infrustructure.
      4. Increasing taxes on high income.
      5. Reducing tax deductions, particularly for the wealthy.
      7. Revoking the tax-free status of emploer-provided health benefits and moving away from comprehensive insurance to Health Savings Accounts.
      8. Raising the age for Medicare eligibility
      "

      Hmm. Here's the thing: Some of these issues may be debated by some people somewhere, but given what I understand of current US politics, here are the odds I give of them being relevent (in the sense that anything will be done about them) unless the GOP fundamentally changes its nature or they lose both the House and Presidency and have 40 or less Senators:

      1. Replacing the payroll tax with a carbon tax.

      Less than nil.

      2. Reducing the corporate tax.

      Very low probability.

      3. Increasing investment in infrustructure.

      Close to nil.

      4. Increasing taxes on high income.

      Absolutely nil.

      5. Reducing tax deductions, particularly for the wealthy.

      A very slight chance, though reducing tax deductions for the middle-class seems far more politically feasible, given the game theory aspects.

      7. Revoking the tax-free status of emploer-provided health benefits and moving away from comprehensive insurance to Health Savings Accounts.

      Conservatives without power talk about this a lot. The conservatives that matter come nowhere close to the rhetoric.

      8. Raising the age for Medicare eligibility

      Actually might happen. Unfortunately, it's the worst idea of the lot.


      I would say that Krugman at least has a better grasp of American politics.

      Delete
    8. This is due to the modern day GOP essentially being the "old irrational incoherent emotional angry party (for rich people)".

      I think Krugman grasps that better than most folks.

      Delete
    9. Anonymous8:22 PM

      You should have credited Naomi Klein, that would have been correct and taken a little courage.

      LTR

      Delete
    10. "Definitions are important because if the answer is (b) then we are talking about a small minority that is hardly worth making so much fuss about"

      Except they happen to be the small majority in charge of the conversation and the crazy "nop" party with considerable political power. You seem to think academia and the broader society are the same thing.

      Delete
    11. "Does he really think that some of us pushing for reforms were willing to sacrifice our relatives' jobs, our parents' pensions, and our own wealth for the sake of ideology? Or are we so blinded that we fail to see what is in out best interest, but Guru Krugman can? "

      These things are perfectly possible. Are you never wrong? He may be mistaken about these things, but so might you.

      Delete
    12. Or are you seriously unaware of the structural reforms that are being debated?

      CA

      As others have pointed out the points you make are not where the real battle is happening. Don't blame Krugman for running to the heart of the struggle rather than wallowing around playing with academic fantasies.

      The real fight comes down to this: There is a point of view among the wealthy and their hirelings/lackeys/useful idiots that the fundamental structural problem is that the poor, middle class and elderly have too much money and the wealthy have too little. Everything else is a sideshow.

      Delete
    13. I am not sympathetic to class warfare rhetoric.

      Yes, this comes through in your writing. I think it represents a rather glaring blind spot in your outlook. As though you were wishing unpleasant facts away.

      May I paraphrase the great George Mitchell?

      [When the poor & middle class attempt to squeeze a nickel out of the rich, that is "class warfare." When the rich attempt (and often succeed) to squeeze a nickel out of the poor & middle class, that is called "business as usual."]

      Delete
    14. Absalon (and mattski),

      "There is a point of view among the wealthy and their hirelings/lackeys/useful idiots that the fundamental structural problem is that the poor, middle class and elderly have too much money and the wealthy have too little. Everything else is a sideshow."

      Come on, you are better than making such oversimplifications. Among the most vocal advocates of the reforms I mentioned (and of Obama) are billionaires like Buffett, Soros, Penny Pritzker, James Crown, Steven Spielberg, Bill Gates, Ted Turner, the list goes on. Who opposes them? Everybody keeps pointing to the Koch brothers, but it is people like Joe the plumber that are having the most influence on GOP reps, particularly those from sounthern states. I know it is popular for some on the left, particularly in academia, to romanticize the masses, but maybe because contrary to Krugman I have done blue collar work, I think there is a reason the founding fathers created a republic and not a democracy! So before you accuse me of playing with academic fantasies, just contemplate the possibility that it may be you who is guilty of that.

      Delete
    15. CA

      You may have a view on what the Republicans could or should be asking for. However, what they are demanding is cuts to entitlements - Medicare, Medicaid and Social Security.

      I might believe that something like a carbon tax would be a good idea. But it does not matter outside of academia because it is a political non-starter.

      Delete
    16. CA, how do you account for the fact that Republican platform positions taken on their own poll miserably with the public? How do you account for single payer health care being highly popular?

      You want a good rule of thumb? The ignorant are easily misled. And the obstacles to implementation of your list of issues/reforms comes first from monied business interests and second from Rupert Murdoch's low-information clientele.

      Delete
    17. mattski,

      but a Republican could (and many do) say the same thing you wrote about Murdoch about CNN, MSNBC, Soros, Hollywood, or academia. So why is it that the ignorant are misled by Murdoch and Koch and not by your rich guys? Could it be that you think so because it is convenient, in the same way that it is convenient for conservatives to believe that they hold the truth and that the mainstream media are preventing you and every other liberal from seeing this?

      The point is that your class warfare rhetoric takes us nowhere. First, it does not seem to be supported by the data. One can find many rich people supporting a progressive platform, and many middle income people supporting a conservative platform. Last time the GOP presidential candidate got 47% of the vote. I listed some names of billionaires to show that this is about the same as the percentage of super-rich who support the GOP. So I see no class division. Billionaires are divided, the population is also divided. Yes, there are special interests, but those are mostly industry-related rather than class-related (the Koch's do what they do not because they are rich, but because they have a vested interest in fossil fuel).

      Absalon,

      You are so very wrong about the carbon tax. Here is what the non-academia has to say, in fact within the last month:
      http://www.washingtonpost.com/blogs/post-partisan/wp/2013/04/25/carbon-tax-on-the-table-in-the-senate/
      http://www.salon.com/2013/05/03/four_reasons_why_obama_should_push_for_a_carbon_tax_partner/

      Cuts to entitlements are unavoidable given projections. See page 23 of this report. http://www.cbo.gov/sites/default/files/cbofiles/attachments/43907-BudgetOutlook.pdf
      Spending on major health care programs is expected to increase from less than 5% to over 6% relative to GDP in just the next 10 years. This is a 30% increase in the share of our income spent on Medicare and Medicaid. How are we going to pay for this? Are we going to increase the average tax rate by 30%? This is a significant tax increase only to cover the cost of these programs (not to mention closing the deficit)! And things get worse beyond 10 years.

      Delete
    18. CA If you look at the article on a carbon tax at the Washington Post it says that the proposal for a carbon tax is just one item on a list of possibilities put together by staffers. The article itself says in the second sentence: "But it’s been even more obvious that the policy is politically toxic."

      Given the Republican hostility to taxes of any kind and their refusal to believe in global warming, a carbon tax will remain toxic for the foreseeable future.

      Delete
    19. but a Republican could (and many do) say the same thing you wrote about Murdoch about CNN, MSNBC, Soros, Hollywood, or academia.

      Sorry for the delayed response, CA. Yes, many Republicans argue that the mainstream media and academia is biased. I think there is sufficient evidence supporting the conclusion that the facts have a liberal bias. Broadly speaking, conservatives tend to attach themselves to ideas and doctrines to a greater extent than liberals. Broadly speaking, liberals are more inclined to accept uncertainty as the price for gaining knowledge. That is why science is liberally biased in the eyes of some conservatives. That is why conservatism is closer to authoritarianism than liberalism. I understand if you disagree.

      At a certain point, the insistence that there is symmetry between right and left becomes absurd, CA. Sure, there are some similarities, but denying the qualitative differences is foolhardy. There are differences. Left gravitates towards the welfare of the group, towards the search for knowledge of the world. Right gravitates towards the welfare of me-first and the embrace of abstract platitudes as a remedy for the chaos and uncertainty of the real world.

      Delete
    20. CA, more Sunday reading for you!

      http://www.mediaite.com/online/yet-another-survey-fox-news-viewers-worst-informed-npr-listeners-best-informed/

      Delete
    21. mattski,

      the Nazis also gravitated towards the welfare of the group, and we saw the results. I only wish that they had gravitated towards individual rights. You should read "The Road to Serfdom". The worst crimes have been committed in the name of some "common good". So I do not see conservatism as being closer to authoritarianism than liberalism. But then again, there are different types of each. You keep repeating one-sided stereotypes and regard anyone who doesn't buy into them foolhardy. But who is more likely to be biased, you being a liberal, or me being neither a liberal nor a conservative? I suppose we have to agree to disagree.

      Absalon,

      since the proposal is to use the carbon tax to replace the payroll tax, the net effect is neutral so there is no reason for Republicans to oppose it. In fact, several Republicans who are sceptical about climate change support it just because they strongly dislike the payroll tax. Even Norquist said as much, before Koch pulled his ear causing him to change positions:
      http://www.nationaljournal.com/energy/norquist-carbon-tax-swap-for-income-tax-cut-wouldn-t-violate-no-tax-hike-pledge-20121112
      I am not saying that it is an easy sell, but it is definitely worth fighting for. And, to bring the discussion back to my original point and close it from my part, this is my disagreement with Krugman. I much rather fight for a carbon tax, for more infrustructiral investment, for education and health care reform, and so on than for continuing stimulus spending on transfer payments and entitlement programs. Again, I think Jeffrey Sachs (also a liberal economist) is correct, and Krugman is wrong. What can I tell you, this is my honest opinion.

      Delete
    22. the Nazis also gravitated towards the welfare of the group, and we saw the results.

      Yes, we have to agree to disagree, and I'm grateful for your civil engagement. Thank you, CA!

      But, when you say stuff like that... Certainly there is a kernel of truth in what you say. That is, High Criminals almost invariably attempt to justify their crimes with some absurd appeal to morality. And what is morality? It is doing right by other people. So from my perspective, of course criminals like Hitler are going to justify their behavior with some egregious argument or other. So what?! Are they really, in fact, acting in the interests of the "group" we call humanity? Of course not. The proof is in the pudding.

      Do you feel like FDR was Hitlers soulmate? Do you feel the Swedish social-democratic model is on the slippery slope to the final solution?

      Inquiring minds want to know.

      Delete
    23. mattski,

      my response may come too late, but in any case, my personal philosophy summarized in three paragraphs is the following:

      Each individual has certain inalienable rights including life, liberty, and the pursuit of happinness. You may recognize this phrase, as it is in the United States Declaration of Independence. The government exists to protect these rights, and not to violate them in pursuit of whatever goal it sees fit. A culture that recognizes the rights and value of each individual regardless of gender, race, religion, income, intellectual capacity, and so on is the best safeguard against tyrannical governments that see individuals as a means to an end. Now, I do understand that by participating in a society individuals are asked to make compromises that lead to its better functioning. So not all liberals (including FDR) are Hitlers simply because they believe in redistributive taxation, and neither are all conservatives. But collectivists, liberal or conservative, do share DNA with Hitler. The issue has to do with who has the burden of proof.

      For someone like me, when the government wants to reduce the autonomy of a person it must make a strong case that the benefit justifies the infringment on the individual. For example, just because I think that shooting at targets with semi-automatic weapons is silly and barbaric does not give me the right to ban people from using them, unless the government can show that doing so will have a meaningful impact on the murder rate. Similarly, given that only one out of eight of the 684,000 mostly blacks and latinos stopped in NYC in 2011 under the stop-and-frisk program were eventually accused of a crime, mayor Bloomberg's policies share DNA with Hitler's, even though as a person and policy-maker Bloomberg clearly is no Hitler. To add one more, I feel the same way about the French government's decision to ban public school students from wearing Jewish Kippahs or Muslim headscarves.

      In contrast, for a collectivist (communist, nationatist, racist, etc.) it is the individual who has the burden to prove that they should be given a particular freedom, as rights belong not to individuals but to the government, which can delegate them in any way it sees fit. So if you believe that it is OK for the government to force an individual to serve a group that you feel is worthy of that service, then at some level you are like Hitler even if you are the nicest person on the planet.

      I hope this answers your question.

      Delete
    24. Doesn't everyone share most of their DNA with Hitler?

      Just sayin'...

      Delete
    25. I meant political DNA, you troll you!

      Delete
  66. Mitch1:55 PM

    What's so funny about this reasoning is it's like the old marxist cliche about how some negative thing or other "heightened the contradictions in the system" and brought "revolution" closer.

    From the right it sounds just as stupid.

    ReplyDelete
  67. It's all about morality. Economics is largely a religion with the pious economists viewing the world through their prism of how the world ought to work. Reality is irrelevant in religious thinking. It is the theology that matters.

    ReplyDelete
  68. Bill Ellis3:20 PM

    Many arguments for Austerity induced structural reform are hubristic. They just assume that the Right structural reforms will be made. How ? Maybe the structural reform Fairy guided by the invisible hand ?

    Arguments for Austerity induced structural reform are pro-elite political arguments disguised as economic arguments. They make the Political argument that the "right" reforms can't be made until society is so beaten down that they will accept change...But ignore the fact that there is no more agreement on what the best structural reforms are than there is over what the best fiscal or monetary policy is.
    So they fail to ask the questions... Who will make them ? And who's structural reforms? And in so failing, they miss/ignore the undeniable answers: The elite and their reforms... mostly.

    Right now arguments for Austerity induced structural reform boil down to wanting to give the elite more authority make changes... and faith that they will make the right changes for all.
    That is incredibly naive in my book. I wish we were at the dawn of a Neo "Noblesse oblige" ethic coming to prominence in the culture of the elite, but we ain't .

    Over the last 30-40 years the elite in America have been successfully expanding their rent seeking, while chipping away at the rent seeking for the common person. Right now the power of the common person is at a low ebb compared to the power of the elite. I think it far more likely that the elite will block efficacious reforms and instead seek to expand their privilege.

    If you are gonna argue for structural reform then you should have a detailed explanation of what those reforms should be. Then when half the world tells you your ideas are harmful and that we should do the opposite, maybe you would think twice about the wisdom of using Austerity to induce a population to be plaint so that reforms can be made.

    ReplyDelete
  69. Anonymous4:38 PM

    Different people support Austerity for different reasons. All of the above.

    The people out to steal our Social Security are relentless. If Austerity helps them steal our SSTF, then they will support Austerity.

    - jonny bakho

    ReplyDelete
  70. I conjecture that "austerians" are concerned that anti-recessionary macro policy will allow a country to "muddle through" a crisis without improving its institutions.

    Noah, are you winking at us when you write "improving"?

    Improving?

    ReplyDelete
  71. Anonymous7:32 PM

    Aren't explanations 2 and 5 basically inseparable in practice? Yes, elites want to use crises to drive through structural reforms, but in practice those structural reforms almost always favour the powerful and affluent. Economists like to talk a lot about efficiency, but they have a very narrow understanding of the term, and the gains from 'efficiency'-related reform seem curiously to accrue overwhelmingly to political elites, and more importantly their paymasters.

    ReplyDelete
  72. Anonymous8:03 PM

    Look, if aid for countries like Greece were conditional on things like better tax collection, more productivity in the public sector, and even less protection for certain entrenched business interests, I could probably get behind that. Instead, the aid is conditional on giant meat-axe cuts to government spending. Certain reforms might actually make Greece more competitive in the long term, but slashing funding for education and health so that schools can't afford textbooks and hospitals can't afford medicine aren't among them.

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  73. It's fundamentally a stupid and dangerous combination of Utopianism and the "no pain, no gain" ideas of people to whom the pain will not be applied. In other words, why should these Utopianists be any more respected than all the other ones, whose "in an ideal world" policies have invariably led to disaster, ruin and agony for (mostly) other people?

    ReplyDelete
  74. Anonymous1:11 PM

    Slight aside: just saw Krugman comment on your views- except it took me a minute to realize he was referring to your views: Smith is simply not distinctive. I recommend dropping the Smith and simply going by Noah. If your not being a Brazilian soccer player prevents you from doing this, why not invert your names?

    ReplyDelete
  75. Anonymous6:23 PM

    I'm trying to figure out what the picture has to do with the post.

    ReplyDelete
    Replies
    1. Anonymous2:30 PM

      I happen to be an expert on this. In ye olden days Minas Tirith's economy had entered into a vicious downward circle (The Ring Recession). So Professor Aragorn, son of Austerion, recommended plundering the neighboring realm for its riches. Things looked a bit dicey but after a bloody huge war they toppled the tyrant Sauron. There wasn't much to plunder in the lava fields but curiously the economy was humming along again. Anyway, not one to waste a crisis he also launched some major institutional reforms such as replacing the inefficient stewardship with a dynamic monarchy. No guesses as to who became the Philosopher-King.

      Delete
  76. I recently came across your blog and have been reading along. I thought I would leave my first
    comment. I dont know what to say except that I have enjoyed reading. Nice blog.
    I will keep visiting this blog very often.
    flights to jeddah

    ReplyDelete
  77. Anonymous5:26 AM

    The more you hear about structural reform the more it seems like just an argument for the status quo. The eschewal of empiricism is likely not because it works but precisely because it largely doesn't much like the old Business Process Engineering. "Yet there are deeper psychological reasons for sticking with traditional management. The assumptions of traditional management help preserve the illusion of being in control. A feeling of being in control is reassuring. Wall Street reinforces the illusion by rewarding companies that are able to present a facade of being in control. Objective evidence is irrelevant. The comforts of the mutual illusion are preferred to the discomfort of recognizing that traditional management has failed.

    You won’t however read this in HBR. HBR has too much invested in the status quo of traditional management. Too many established dogmas would have to be thrown out. You should no more expect Harvard Business Review to abandon the values, attitudes and philosophy embedded in traditional management than you should expect the Vatican to announce that it has begun to have second thoughts about the Virgin Birth." http://stevedenning.typepad.com/steve_denning/2010/07/what-hbr-wont-say-why-bpr-failed.html

    ReplyDelete
  78. Nathanael5:10 AM

    "The fact is, we just don't know how institutions really work."

    Study the "institutionalists", Noah!

    I realize your college and PhD curriculum was woefully deficient of actual economics, but surely you at least read a FEW of the institutionalists? You must have read Veblen. And J.K. Galbraith

    http://en.wikipedia.org/wiki/Institutional_economics

    We do know quite a lot about how institutions really work. But a lot of the work is not in so-called "economics". Heck, have you ever read _The Peter Principle_?

    The trouble is that most of our knowledge has been declared to be "not economics" by the high priests of the free-market-worshipping cult. Now, if you want to understand this stuff, you will probably need to go educate yourself in a lot of ways which aren't considered economics...

    Nobody ever said doing actual intellectual work was easy. But they may not have told you that most of what you learned for your PhD was a waste and that you would have to start fresh and learn your subject from scratch...

    ReplyDelete
  79. Anonymous12:31 PM

    Another explanation of austerity: http://www.counterpunch.org/2013/05/31/austerity-is-confusing-only-to-liberals/

    ReplyDelete
  80. In my opinion, the support of austerity has nothing to do with wasting crisis opportunities or perception of austerity as a morally virtuous idea. This support is linked to long-term stability instead of short-term gains. Current support of austerity policies is perfectly aligned with the current position of the U.S. economy in the economic cycle. Figure 1 illustrates the phases of economic cycle.

    Figure 1. Economic cycle
    (source: http://www.retailinvestor.org/images/businesscycle.jpg)
    Currently, the U.S. economy is moving from the early upswing to the late upswing phase. There are all signs of this: there is slow growth of inflation rate, Treasury yields show gradual increase, commodities show a tendency to increase as well, stock market demonstrates rather strong performance, and property prices started picking up in 2012.
    What is the major goal of economic policy? It is commonly thought that core goals are maintaining stable GDP growth, moderating inflation and keeping employment as close to the full employment level as possible. However, at different stages of economic cycle, it is reasonable to set different objectives in order to reach long-term development. During recession, the major task is to reduce the depth of the trough, and this opinion is commonly supported.
    The major arguments are around the actions during the recovery phase: should the government try to accelerate economic growth as much as possible, or should it slow the growth to achieve a prolonged period of recovery.
    In my opinion, the primary objective of economic policy during upswing should be to accumulate a safety reserve for the next recession. The common methods of supporting the economy during the recession cycle are government spending, tax cuts, interest rates and other monetary instruments. As a result of the 2008-2009 recession, the government accumulated a significant budget deficit (due to the combined effect of spending and tax cuts) and interest rates decreased to a record low level. Therefore, the primary target of economic policy should be to replenish the budget using the combination of reduced spending and tax increases, and gradually increase interest rates. The latter measure might also attract more foreign investments into the country, therefore balancing the moderating effect of austerity policy on economic development.
    Of course, accelerating the economy will quickly produce beneficial results (compared to austerity), but the collapse during recession will also be of the same magnitude as the current rise, and the reserves for alleviating the effects of recession will be exhausted. Therefore, the austerity policy is justified by the logic of economic cycles and long-term expectations.


    ReplyDelete
  81. In my opinion, the support of austerity has nothing to do with wasting crisis opportunities or perception of austerity as a morally virtuous idea. This support is linked to long-term stability instead of short-term gains. Current support of austerity policies is perfectly aligned with the current position of the U.S. economy in the economic cycle. Figure 1 illustrates the phases of economic cycle.

    Figure 1. Economic cycle
    (source: http://www.retailinvestor.org/images/businesscycle.jpg)
    Currently, the U.S. economy is moving from the early upswing to the late upswing phase. There are all signs of this: there is slow growth of inflation rate, Treasury yields show gradual increase, commodities show a tendency to increase as well, stock market demonstrates rather strong performance, and property prices started picking up in 2012.
    What is the major goal of economic policy? It is commonly thought that core goals are maintaining stable GDP growth, moderating inflation and keeping employment as close to the full employment level as possible. However, at different stages of economic cycle, it is reasonable to set different objectives in order to reach long-term development. During recession, the major task is to reduce the depth of the trough, and this opinion is commonly supported.
    The major arguments are around the actions during the recovery phase: should the government try to accelerate economic growth as much as possible, or should it slow the growth to achieve a prolonged period of recovery.
    In my opinion, the primary objective of economic policy during upswing should be to accumulate a safety reserve for the next recession. The common methods of supporting the economy during the recession cycle are government spending, tax cuts, interest rates and other monetary instruments. As a result of the 2008-2009 recession, the government accumulated a significant budget deficit (due to the combined effect of spending and tax cuts) and interest rates decreased to a record low level. Therefore, the primary target of economic policy should be to replenish the budget using the combination of reduced spending and tax increases, and gradually increase interest rates. The latter measure might also attract more foreign investments into the country, therefore balancing the moderating effect of austerity policy on economic development.
    Of course, accelerating the economy will quickly produce beneficial results (compared to austerity), but the collapse during recession will also be of the same magnitude as the current rise, and the reserves for alleviating the effects of recession will be exhausted. Therefore, the austerity policy is justified by the logic of economic cycles and long-term expectations.

    ReplyDelete