Unfunny Money

The first Keynesian.

The first Keynesian.

Nice cover story by Kevin Drum in the new (Sept-Oct) Mother Jones on austerity and the bad math that folks like Paul Ryan have been spouting to support it. The hinky numbers came from a 2010 paper by Harvard economists Carmen Reinhart and Ken Rogoff that appeared at first glance to prove that too much debt – specifically, debt exceeding 90% of GDP – smothered economic growth. Our national debt was then just at that point, and by some measures even beyond it. So Rep. Ryan and other Reinhart-Rogoff acolytes, including heads of state in Europe, were able to change the debate and snuff out any further talk of stimulus. In 2011, House Republicans held the economy hostage by refusing to raise the government’s debt ceiling – expenditures, mind, that had already been approved by Congress – without budget-cutting concessions. A “supercommittee” failed to come up with a workable compromise, so a poison pill called “sequestration” automatically cut federal budgets across the board on January 2, 2013. (When a shortage of air traffic controllers threatened lawmakers’ trips home in April, they quickly exempted the FAA from the sequester. Frugality’s fine, as long as you’re not stuck in an airport full of proles who might even realize that you’re responsible.)

Just one problem. The Reinhart-Rogoff paper, by now holy writ to debt hawks, was dead wrong.

On April 15, three researchers at the University of Massachusetts reported that they’d looked more closely at Reinhart-Rogoff. It hadn’t taken them long to notice an entry error in the Excel spreadsheet that provided the crucial figures. Not a dealbreaker in and of itself, but it called everything else into question. Other data – enumerated in the MoJo piece, which I commend to you – suggested Reinhart-Rogoff had made a “reverse causality” error. High debt doesn’t cause low growth; in reality, it’s the other way around. (Not to disparage Reinhart and Rogoff, who were presumably trying their best, but retesting to confirm a stated hypothesis is the scientific method.) More researchers piled on, and a consensus began to form: stimulating the economy now – particularly in an era of historically low interest rates – would seed a faster recovery and save us from much greater fiscal pain later. But the austerity train had long since left the talk-show station. The received wisdom from conservatives was that “the stimulus didn’t work,” we still need more jobs. That plays in Peoria because you can’t prove a counterfactual: things would have been a lot worse without federal economic stimulation. You can only infer such a thing, and conservatives refuse to do so, at least in public. You can’t talk about more stimulus these days without having your head bitten off. But it’s exactly what we need, and right this instant. “We can’t just cut our way to prosperity,” said President Obama, and he was exactly right. Here’s why.

It seems so logical: if your family has too much debt, then tighten your belts and pay it down. Make do with less. Duh. So if the government has too much debt, tighten the federal belt and quit spending so much. What could be simpler?

The economist John Maynard Keynes – whose theories are, to be fair, hotly debated today – posited what he called the “paradox of thrift.” If a single family pays down its debt, that’s healthy, laudatory. But if everybody – families, businesses and government – all do that at the same time, the resulting loss of spending makes things worse. If nobody’s buying, nobody’s hiring – in fact, they’re laying off. A sudden dropoff in economic activity, which we experienced in 2008, means more foreclosures, fewer jobs, less tax revenue, lower GDP, extended stagnation. As we’re discovering in Europe, austerity is the exact opposite of what’s needed at this particular time. Cut federal budgets and you cut even more jobs, which sends vicious circles whirring through the economy. By some estimates, recent budget cuts and sequestration have shaved as much as 2% off where GDP growth should be at this point in our recovery from the Great Recession.

Now, only a fool would deny that there’s plenty of waste in government. The Pentagon budget, for example, is so bloated that lawmakers insist on preserving weapons programs the generals don’t need or even want. Why? “Cut the programs and you cut my constituents’ jobs!” Precisely. Precisely. You can’t cut your way to prosperity.

So why not stimulate the economy where it could actually do some good? Our infrastructure – roads, bridges, tunnels, railroads, airports, electrical and gas grids, etc. – is crumbling. People are starving for jobs. Interest rates are at jaw-dropping lows. Why not borrow the money to do the work now that we’ll eventually have to do later at a much higher price? MoJo points out that until recently, real interest rates were actually negative, meaning we could have paid back less than we borrowed. Government should act countercyclically. It’s the job creator of last resort. Without it, the misery goes on.

I suspect that more people appreciate Keynesian principles, as opposed to Ayn Rand’s law-of-the-jungle selfishness, than actually let on. In the real world, debt hawks are mighty selective. (Remember those air traffic controllers?) For instance, House Republicans managed to split the traditional farm bill in half: subsidies for rich “farmers” (including huge corporations and not a few lawmakers) are just dandy and don’t weigh on the national debt at all, but the separate “food stamp” program that keeps impoverished children alive has to be cut because it’s wasteful? A less charitable person might observe that the Pubs are using the excuse of a “debt crisis” simply to gut the programs they don’t like, just as they continue an impotent battle to retroactively deny the Congressionally-passed, Supreme Court-affirmed Affordable Care Law. If true, that would be awful; it would render their sanctimonious debt-based pronouncements cynical and hollow.

An even less charitable person might discern some method in the apparent madness of the past five years. Could some top one-percenters – insulated by their wealth from the effects of the colossal downturn which has ripped the middle class asunder – have concluded that anything which might help the economy would only harm the chances of returning yet another plutocratic Republican to the White House? After all, they’ve taken hostage the full faith and credit of the United States once already, and the craziest of them – too many for poor John Boehner to manage – are threatening to do it again. A sick economy is a great talking point for a challenger – even if you did your level worst to keep it that way.

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