Monday, June 24, 2024

Econ 101: Austerity Has Unicorns

It’s not my intention to turn this blog into all-econ, all the time.  But, maybe, if we repeat it enough, this message will get through to the amazing number of Arkansans who don’t get it, especially those in office or running for office.

[S]omehow 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 […].

Yes, America has long-run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems. As Douglas Elmendorf, the director of the Congressional Budget Office, recently put it, “There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.”


What’s the evidence for the belief that fiscal contraction is actually expansionary, because it improves confidence? (By the way, this is precisely the doctrine expounded by Herbert Hoover in 1932.) Well, there have been historical cases of spending cuts and tax increases followed by economic growth. But as far as I can tell, every one of those examples proves, on closer examination, to be a case in which the negative effects of austerity were offset by other factors, factors not likely to be relevant today[.]


So 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.

We should be so lucky that the speakers of such nonsense in Arkansas would be basing their statements on something approaching a belief tied to economics.  Here, if you parse an austerity-pusher’s statement, you’ll almost certainly discover that what sounds like hardheaded realism actually rests on a foundation of talking points that one of their conservative non-economist demigods told them to repeat.

Unfortunately, discovering and pointing out the underlying flaws does nothing to dissuade the speakers; after all, it’s much easier to chalk anyone who disagrees with them us as “a progressive” or “a tax-and-spend liberal” than acknowledge that the people on the other side might actually be proposing a better solution.

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