Expansionary austerity has been refuted and even the IMF sayis that short-run multipliers are big. The 90 percent red line on debt was an artifact of fuzzy math. The bond vigilantes remain invisible, and the confidence fairy refuses to make an appearance. Clearly, austerian economics has imploded (and some prominent austerians seem to be personally imploding too).
Yet there remains immense reluctance to draw the obvious policy conclusion, which is not simply that we have too much austerity, but that right now we shouldn’t be having austerity at all. As Simon Wren-Lewis says,
If you are walking along a path, and there is a snake blocking your way, you don’t react by walking towards it more slowly!
Yet the orthodox response to the austerian response seems to be at most that we should slow the pace of fiscal consolidation. Why this refusal to follow through?
One answer is sheer human unwillingness to admit gross error; “we may have been a bit overenthusiastic” is an easier thing to say than “whoops — we did exactly the wrong thing, and killed the economy”.
But my read of the discussion is that there’s also something else going on — an attitude that passes for realism, but is in fact sheer fantasy.
The line, which you see in discussion all the time, goes something like this: “OK, I see that in principle you might want to stimulate now, and pay for it later. But we all know that stimulus programs, once introduced on an alleged temporary basis, never actually go away; and the reality is that governments never pay down debt in good times.”
I see the appeal of this line; it sounds like knowing, worldly-wide cynicism. But if you look even briefly at the actual history, it turns out to bear no resemblance to reality.
Start with stimulus programs. As it turns out, there have only been two significant spending stimulus programs in US history — by which I mean programs deliberately introduced to fight an economic downturn. One was FDR’s program, the WPA/CCC and all that; the other was the spending part of the Obama ARRA. So what happened to each of these programs? Why, not only did both go away; both went away too soon, with premature austerity hitting in 1937 and again in 2010. So much for stimulus that never ends.
OK, someone will reply, but what about aid programs like unemployment benefits and food stamps? Don’t they just ratchet up after each slump?
Um, no. Unemployment benefits as a percentage of GDP:
Unemployment benefits as % of GDP
By the way, look how low those benefits are already.
SNAP (food stamps) as a percentage of GDP:
SNAP (food stamps) as percent of GDP
Again, we see a pattern of rising during slumps, falling thereafter, and no hint of a ratchet effect.
So this whole “stimulus never goes away” claim is a figment of right-wing imagination.
What about the supposed inability of governments to pay down debt in good times? Well, here’s the ratio of gross debt (including the Social Security trust fund) to GDP:
Hmm. Between World War II and 1980, every US president left the debt ratio lower when he left office than when he entered. Reagan/Bush I broke that pattern; Clinton brought it back; then came Bush II. And yes, debt is up under Obama, but a depressed economy in a liquidity trap is precisely when you’re supposed to do that.
So the story isn’t “irresponsible politicians will always squander the good years”; it is “conservative Republican politicians run up debt even in good years, because they want to force cuts in social programs.” Kind of a different story, isn’t it?
The point, then, is that the seemingly worldly-wide cynicism that seems to be the last defense against the economically obvious is in fact based on an imaginary history that looks nothing like what actually happened.