Tuesday, May 15, 2012

Austerity v. Drudgery

. Tuesday, May 15, 2012



I recently posted on Twitter something to the effect of "what does 'austerity' mean when every country practicing it is running massive deficits?" It was meant to be provocative -- I know full well that deficits can come from a decrease in revenue as well as an increase in spending -- and led to an interesting but brief exchange with @dandrezner. My point is that different countries face different constraints, have different institutions, and have responded to the crisis in different ways. Describing them all as practicing austerity therefore doesn't seem appropriate. My takeaway from the exchange was that we don't have a good definition of what austerity is. We used to associate it with Washington Consensus policies enacted under duress in the midst of financial crises in exchange for emergency finance. That definition works alright for Europeriphery countries today, but not the U.S. and U.K. which were a) already following most of the Washington Consensus principles; b) not subject to external pressures from financiers; c) not really significantly altering fiscal policies in a contractionary way at all at least to this point.*

But people still use the term, often to denote something to the effect of "not enough Keynesian/monetarist stimulus". It seems to me that that is a different thing from austerity, and implies a different political interaction. As Steve Waldman notes, we're choosing our depression, and we're doing it in a way that prolongs the recovery but does not choke it off. This is being done for political reasons, but the reasons are very different than those that currently obtain in Greece, e.g. Greece is practicing true austerity -- or at least something closer to it... they keep agreeing to austerity but then missing their targets -- under duress; the U.S. is simply choosing to accept the risk of a slow recovery over the risk of higher inflation.

So why do we use the same work to refer to these two different things. I suspect there is an ideological component to it in many cases, but that's not satisfying enough. This sort of thing from Krugman** -- arguing that austerity is happening everywhere -- does not compute:

For the fact is that you can’t just look at spending levels to ask what is happening to spending programs. Here in the United States spending on unemployment insurance and food stamps has risen sharply, not because the welfare state has expanded, but because a lot more people are unemployed and poor. Similar effects are at work in European countries, which have stronger safety nets than we do. 
Right, but cutting social spending programs is pretty much the definition of austerity, at least as it used to be defined in relation to the implementation of the Washington Consensus during crisis periods. In fact, Krugman refers specifically to spending cuts elsewhere in the same post. So if we're doing the opposite of that how is it we're practicing austerity as well?

Mark Blyth has been working on a book (due out next year) detailing the history of austerity as a policy idea, so perhaps he can give us a better definition. In the video above, he describes austerity as paying down public debt through the slashing of social services. But if we're not doing that in the US (and some other countries) -- if automatic stabilizers have kicked in -- then are we really practicing austerity? If so, only on the margins and not in aggregate.

I was thankful to see Tyler Cowen considering the same question and coming to a similar conclusion. He notes that for some, it seems like "doing less than the Keynesian optimum is always a form of austerity". But does the "Keynesian optimum" really apply to countries like Greece where the bond vigilantes have already shown up? Once we start talking about cross-national transfers we're well outside of the world of the General Theory.***

I think this is important because it implies different political logics. This is what Waldman was writing about. The political logic of "austerity as penalty for emergency finance", usually to prevent moral hazard and/or force through politically unpopular reforms, is quite different from "tolerate slower recovery because of concern about future inflation".

To give one example: both the Tea Party and the Occupy Wall Street movements arose out of protest over the policy responses to the financial crisis and recession. One of them is more or less explicitly anti-inflation and also espouses principles of laissez-faire. The Tea Party movement began in 2007 during Ron Paul's presidential campaign, but really took hold in early 2009, right after the bailouts and as the stimulus fight was being played out. This was a direct response to significant government intervention into the economy via bailouts and stimulus spending. This group wanted austerity, in large part because of fears of future taxation and inflation (which they often view as a form of taxation).

Occupy Wall Street, on the other hand, is not ideologically opposed to government intervention. That movement did not form until 2011, when it became clear that the economic recovery was going to be slow overall but that the banks had recovered relatively quickly. OWS opposed the types of intervention that we, pace Waldman, chose. This group wasn't professing opposition to austerity... they were protesting expansionary fiscal policies! They opposed the distributional nature of those expansionary fiscal policies. In some cases they too wanted austerity, but via tax increases on corporations and wealthy individuals rather than cuts in spending.

The Greeks, meanwhile, are protesting the slashing of pensions and raising of taxes. These are very different movements, animated by opposition to different sets of policies. Lumping all of those policies together as "austerity" doesn't capture that. Given that, and given the loaded nature of the term, I think we need another word to describe the U.S. experience as distinct from the Greece experience. For the latter "austerity" works fine. For the former I propose "drudgery".

*Is c) true? Maybe in the eye of the beholder. In my view, the U.S.'s bailouts of Wall St/GM + extension of tax cuts + new tax cuts + automatic stabilizers + increase in nominal government spending + stimulus > the miniscule cuts that have been imposed since 2008. In which case... is that really austerity?

**Picking on him again out of laziness... I had this link at hand already.

***At least I think we are. It's been awhile since I've read it.

1 comments:

Anonymous said...

With a few exceptions, "social spending" is the lion's share of most states' budgets. Even in the US, social security, medicare/caid, unemployment/welfare, and non-military discretionary spending overtake DoD, Homeland security, veterans affair, etc... spending. So it's no surprise that they bear the brunt of budget cutting policies.

As for defining austerity: What about looking at government outlays in absolute numbers? Obvious problems with that approach (and there seem to be problems with any approach), but Greece's 2011 outlays are just under what they were in 2008. Assuming there wasn't a massive retiring boom in those 3-4 years, hard for me to take that as a gilded-age social darwinist soak the poor policy. As you point out, most Keynesian anti-austerity types always seem to forget that in the EZ periphery, austerity plans have included tax hikes. I would also add that they omit that there has been little to no actual public sector firing (just pay decreases). Furthermore, they get the causal chain all wrong - the crisis started when Greece's government debt and bond yields spiraled out of control, not when austerity started to try and reign that in. No serious attempts to curtail spending existed in the PIIGS before then.

Correct me if I'm wrong, but doesn't paying down debt de facto not contribute to GDP? Unless you find creditors willing to borrow to you absent conditions and never expecting repayment, I don't understand how such a system is sustainable.

Austerity v. Drudgery
 

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