Paul Krugman: The 1 Percent’s Solution


Economic debates rarely end with a T.K.O. But the great policy debate of recent years between Keynesians, who advocate sustaining and, indeed, increasing government spending in a depression, and austerians, who demand immediate spending cuts, comes close — at least in the world of ideas. At this point, the austerian position has imploded; not only have its predictions about the real world failed completely, but the academic research invoked to support that position has turned out to be riddled with errors, omissions and dubious statistics.

Yet two big questions remain. First, how did austerity doctrine become so influential in the first place? Second, will policy change at all now that crucial austerian claims have become fodder for late-night comics?

On the first question: the dominance of austerians in influential circles should disturb anyone who likes to believe that policy is based on, or even strongly influenced by, actual evidence. After all, the two main studies providing the alleged intellectual justification for austerity — Alberto Alesina and Silvia Ardagna on “expansionary austerity” and Carmen Reinhart and Kenneth Rogoff on the dangerous debt “threshold” at 90 percent of G.D.P. — faced withering criticism almost as soon as they came out.

And the studies did not hold up under scrutiny. By late 2010, the International Monetary Fund had reworked Alesina-Ardagna with better data and reversed their findings, while many economists raised fundamental questions about Reinhart-Rogoff long before we knew about the famous Excel error. Meanwhile, real-world events — stagnation in Ireland, the original poster child for austerity, falling interest rates in the United States, which was supposed to be facing an imminent fiscal crisis — quickly made nonsense of austerian predictions.

Yet austerity maintained and even strengthened its grip on elite opinion. Why?

Part of the answer surely lies in the widespread desire to see economics as a morality play, to make it a tale of excess and its consequences. We lived beyond our means, the story goes, and now we’re paying the inevitable price. Economists can explain ad nauseam that this is wrong, that the reason we have mass unemployment isn’t that we spent too much in the past but that we’re spending too little now, and that this problem can and should be solved. No matter; many people have a visceral sense that we sinned and must seek redemption through suffering — and neither economic argument nor the observation that the people now suffering aren’t at all the same people who sinned during the bubble years makes much of a dent.

But it’s not just a matter of emotion versus logic. You can’t understand the influence of austerity doctrine without talking about class and inequality.

What, after all, do people want from economic policy? The answer, it turns out, is that it depends on which people you ask — a point documented in a recent research paper by the political scientists Benjamin Page, Larry Bartels and Jason Seawright. The paper compares the policy preferences of ordinary Americans with those of the very wealthy, and the results are eye-opening.

Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do.

Does a continuing depression actually serve the interests of the wealthy? That’s doubtful, since a booming economy is generally good for almost everyone. What is true, however, is that the years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The 1 percent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.

And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?

I hope not; I’d like to believe that ideas and evidence matter, at least a bit. Otherwise, what am I doing with my life? But I guess we’ll see just how much cynicism is justified.

The 1 Percent’s Solution –

This entry was posted in austerians, Austerity, “Saltwater” vs “Freshwater”, NYT, Paul Krugman. Bookmark the permalink.

2 Responses to Paul Krugman: The 1 Percent’s Solution

  1. João Ejarque says:

    Consider Portugal (again). Suppose the government increases spending, but raises taxes at the same time, and does not add to the deficit. Will it work? The honest answer is nobody knows (at least for Portugal). Maybe the famous multiplier will wake up. Suppose it does. Will it work enough to make the country grow at a rate higher than the interest rate on current debt oustanding? Unlikely since that has never been the case in recent (and not so recent memory). Suppose the government increases spending without raising taxes. More debt, which currently is placed on the market at rates higher than the growth rate of income per capita. Suppose it works and the conomy starts growing. Will it grow enough? Unlikely. Too much red tape, too many vested interests have suffocated Portugal and Greece in the last 30 years. Asset sales have not been enough. And some are too close to the heart of political parties (like the state TV and the largest bank in the country) and their sale always ends up being postponed. Big Tabu. So: asset sales are not enough, and now the only way to place debt at a rate that makes it safe enough not to make the debt explode even faster is for the ECB to buy it, and set a rate of no more than (say) 2%. It is not happening. And if none of these are happening, arguing for more spending is the same as arguing for a default (which I think will happen in Portugal, the question being when). So, maybe there is a class struggle over this in the US. But the US is not the entire world, and the problem remains. As I see it, none of this is about fiscal policy but about whether or not to monetize the debt, and accept that inflation will one day come knocking at the door (and that the huge Moral Hazard in all this will bring the problem back again in a decade or two).

  2. Filipa Gonalves says:

    Ola tiozinhoooo!

    Quando chega a Vieira?

    Beijinhus para a tia, o tio e ao Filipe

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s