Friday, July 2, 2010

Austerity economics will undermine recovery

A month ago the Milwaukee Journal Sentinel ran a column by Sheldon Lubar arguing:" The Age of Austerity is also what lies ahead for all of us today, not our grandchildren. This is the painful reality."

Putting aside the fact that tens of millions of working and middle class Americans, including the fifteen million who are unemployed and fifty million without health care insurance, have already been subject to the austerity of declining real wages, stagnate family incomes and soaring medical, education and real estate prices (until recently), Lubar is prescribing exactly the wrong medicine for what ails the U.S. economy.

Nobel Prize winning economist Paul Krugman repudiates Lubar and the austerity crowd:

For the last few months, I and others have watched, with amazement and horror, the emergence of a consensus in policy circles in favor of immediate fiscal austerity. That is, somehow it has become conventional wisdom that now is the time to slash spending, despite the fact that the world’s major economies remain deeply depressed.

This conventional wisdom isn’t based on either evidence or careful analysis. Instead, it rests on what we might charitably call sheer speculation, and less charitably call figments of the policy elite’s imagination — specifically, on belief in what I’ve come to think of as the invisible bond vigilante and the confidence fairy.

Krugman concludes:... the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation.

Krugman's column is worth reading and is linked here.

The Milwaukee Journal editorial Board also weighs in today with an editorial that explains why focusing on deficit reduction is not only wrong, but likely to undermine the recovery and revive the worst recession since the Great Depression.


Peter said...

Particularly instructive has been the popular writings of Krugman and Brad DeLong, among others, on the trajectory of contemporary macroeconomics as an academic discipline. In the latter half of the 20th century, the model-makers and rational expectations theorists essentially forgot the lessons of the first half. So we end up with people tossing out these really cockamamie ideas about fiscal austerity, deficits, and enriching the wealthy -- not because there are legitimate scientific/policy disagreements, but instead because the layperson like Sheldon Lubar has been so led astray by a group of macro theorists who are just no longer grounded in anything anchored in reality. Of course, this lets them off the hook completely for the moral and political condemnation I would have for those who would further screw over working people and the poor; but that's another story for another day.

Michael Rosen said...

I don’t think austerity advocates are led astray by macro economists. I doubt they even read them.

Most are simply wealthy ideologues who promote austerity policies and laissez fair economics for the working class because it increases their wealth and political power. They have opposed every social program or economic policy from Social Security to workers comp, from the minimum wage to Medicare designed to protect working and middle classes from market failures. They believe austerity for America’s working families means increased prosperity for them. That is why the Republicans have refused to support legislation that would make hedge fund and private equity firm executives pay the same income tax rates as other Americans, preferring instead to throw 1.4 million off unemployment, claiming the nation cannot afford it.