The Austerity Delusion Paul Krugman Guardian April 29 2016
‘It is rare, in the history of economic thought, for debates to get resolved this decisively. The austerian ideology that dominated elite discourse five years ago has collapsed, to the point where hardly anyone still believes it. Hardly anyone, that is, except the coalition that still rules Britain – and most of the British media’.
In the aftermath of a shock Conservative general election victory there is inevitable fall out across the mainstream left and nowhere more so than in the Labour Party camp.
I argue that ‘classical’ economics has become increasingly irrelevant in the new world. Comprehensive state control of the economy means that there is no economics now; only politics –and that is one party politics.
Since there is no way to manifest and resolve differences through economics, culture is re-emerging as the defining pivot around which social conflict is based. With this in mind I argued that the Conservative victory was essentially the result of playing to a cultural constituency and not any economic rationale.
Nevertheless, despite the widespread admission among the left that culture is raising what they regard as its ugly head, many on the ‘left’ are not willing to kiss goodbye to old fashioned economics just yet.
Two camps are emerging to contest leadership of the English opposition in the aftermath of the elections. In the blue corner we have ‘Blairism’ and in the red corner ‘Keynesianism’ is being dusted off for a re-run against austerity.
The nominal question being asked is: Which of these two economics can best offer an alternative to the program of the Conservatives over the next five years?
Blairism was concocted as a replacement for the Keynesianism that had become discredited as a result of 1970’s industrial production collapse. Tony Blair famously signalled the end of independent political or economic perspective when he abandoned the Labour Party commitment to Clause 4 and wealth redistribution. Whatever opposition in Britain would be from now on, it would not be based on alternative political economy.
Fast forward twenty years and post Credit Crunch, Blairism itself was utterly discredited. The gap between rhetoric and reality encapsulated in an infamous speech to the City of London in which Chancellor Gordon Brown opined that the world was witnessing the emergence of a ‘Golden Age of Banking’. Then came, well you know.
Following a leadership election Ed Milliband appeared waving the banner of ‘Not Blairism’. That’s not rhetoric on my part – ‘Not Blairism’ is literally what Miliband said he was campaigning under! And now that ‘Not Blairism’ has been roundly defeated there seems to be nowhere left for the ‘left’ to go.
Except perhaps back to Keynesianism, or Neo Keynesianism anyway.
Which brings us to Paul Krugman and his lengthy Guardian piece: ‘The Austerity Delusion’
Written shortly before the British election, it captures the essence of the Neo Keynesian argument; there was no need for Austerity and no economic justification for it. More surprisingly, Krugman then argues that it is only in Britain that a residual attachment to austerity remains,
‘I don’t know how many Britons realise the extent to which their economic debate has diverged from the rest of the western world – the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere’.
Even a superficial survey of developed economies would quickly show that this is wishful thinking. All across the globe there is a sustained attack on levels of government spending on social programs. This is Austerity by any definition. The difference between those countries that have severe Austerity and those that don’t is the willingness on the part of the broad population to oppose such attacks and its ability to do so. Austerity is not the consequence of any intellectual difference on the part of politicians and economists.
Krugman argues that the drive for Austerity is motivated by business and media interests that are ideologically committed to ending the welfare state and which used the Credit Crunch as a pretext for doing so. This is essentially a variation on the ‘Shock Doctrine’ analysis popularised by Naomi Klein and this observation is surely basically right.
From this position Krugman continues that Austerity is essentially an optional choice and that politicians could go another way should they decide to. The Keynesian alternative of deficit borrowing and spending can be used to refloat the economy or at least offset the effects of cyclic crisis. He argues this has happened to some extent elsewhere. He is at a loss to explain why it hasn’t happened in Britain.
‘Is there some good reason why deficit obsession should still rule in Britain, even as it fades away everywhere else? No. This country is not different.’
And since Krugman cannot think of a good reason why there should be Austerity, he is persuaded to think that maybe there is no Austerity, at least not any more:
‘The key point to understand about fiscal policy under Cameron and Osborne is that British austerity, while very real and quite severe, was mostly imposed during the coalition’s first two years in power’
‘Given the fact that the coalition essentially stopped imposing new austerity measures after its first two years, there’s nothing at all surprising about seeing a revival of economic growth in 2013’.
So British polity is labouring under the grip of an ideology – except that it isn’t !?!
Krugman readily understands that his analysis will require some clarification:
‘By this point, some readers will nonetheless be shaking their heads and declaring, “But the economy is booming, and you said that couldn’t happen under austerity.” But Keynesian logic says that a one-time tightening of fiscal policy will produce a one-time hit to the economy, not a permanent reduction in the growth rate. A return to growth after austerity has been put on hold is not at all surprising’.
‘Keynesian logic’ says that permanently lowering wages and benefits for the working population will not permanently lower their purchasing power and affect demand in the broader economy?
How does that work then?
No answer I am afraid, because Paul Krugman has moved onto more important matters. Not only is there not really any Austerity but it turns out that the media that Krugman said helped introduce Austerity never really supported it anyway:
‘…what’s with sophisticated media outlets such as the FT seeming to endorse this crude fallacy? Well, if you actually read that 2013 leader and many similar pieces, you discover that they are very carefully worded. The FT never said outright that the economic case for austerity had been vindicated. It only declared that Osborne had won the political battle, because the general public doesn’t understand all this business about front-loaded policies, or for that matter the difference between levels and growth rates. One might have expected the press to seek to remedy such confusions, rather than amplify them. But apparently not.’
And if you find Krugmans account of the activities of ‘sophisticated’ media outlets such as the FT confusing, wait until he turns to the‘left’:
It has been astonishing, from a US perspective, to witness the limpness of Labour’s response to the austerity push. Britain’s opposition has been amazingly willing to accept claims that budget deficits are the biggest economic issue facing the nation, and has made hardly any effort to challenge the extremely dubious proposition that fiscal policy under Blair and Brown was deeply irresponsible – or even the nonsensical proposition that this supposed fiscal irresponsibility caused the crisis of 2008-2009.
And not only the British labour party but just about everybody else East of New York:
‘… the whole European centre-left seems stuck in a kind of reflexive cringe, unable to stand up for its own ideas. In this respect Britain seems much closer to Europe than it is to America.’
It almost beggars belief that Krugman is seriously trying to imply that Democrats under Obama have offered ANY serious alternative to Austerity and that this response can be compared favourably with anywhere else in the world. And yet here we are.
How can Krugman have drifted so far from reality? The answer lies in his ‘Neo’ Keynesianism.
How does Neo Keynesianism differ from classic Keynesianism? Let’s look at Krugmans characterisation of his opponents as ‘Austerians’; obviously a play on Austrians
‘People holding these beliefs came to be widely known in economic circles as “austerians” – a term coined by the economist Rob Parenteau’
Which is something of a revelation, at least to me. I certainly had never heard of ‘Austerians’ before I read this article; but then again, I don’t move in ‘economic circles’.
Krugman is obviously reluctant to name his opponents as Monetarists, which is what they are. What could be the reason for his coyness?
Democrats in the USA and the Labour Party in Britain both accepted the basic principles of Monetarism over twenty years ago- ‘Blairism’ in Britain and ‘Clintonism’ in the USA. Krugman has no interest in discussing this history because if did, he would have to criticise the so called ‘left’ as much as the so-called ‘right’- if he was really a Keynesian, that is. And whatever else he is, Krugman is essentially a party man.
Outside of ‘economic circles’ the whole world knows that Labour is up to its neck in the Monetarist project even if Krugman is reluctant to come right out and admit it. Instead the truth is obliquely referred to by Krugman when he observes that :
‘ the crisis occurred on Labour’s watch; American liberals should count themselves fortunate that Lehman Brothers didn’t fall a year later, with Democrats holding the White House’
This is breathtaking, absolutely astounding, cynicism. Krugman is hanging the pretence that Democrats can lay claim to anti Monetarist Keynesianism on the fact that they weren’t actually caught with their paws in the Monetarist cookie jar in 2008!
- The economy is now controlled by the state. This is Monetarism.
- There is no possibility of economic conflict as we have previously understood it. Now conflict is cultural.
- Blairism expressed this truth (see my last post)
- But Blairism was discredited by the Credit Crunch
- Now Labour needs an alternative to Blairism. The remains of the ‘left’ hope it can be built on Keynesianism.
- But this can’t happen because no genuine Keynesian could support a Monetarist Labour/Democrat party. So now we have got Neo Keynesians, which are Keynesians that accept Monetarism.
- Neo Keynesians argue that so long as we don’t actually get caught directly implementing Monetarist policies, we can perhaps convince people that we are Keynesians (sort of).
- If we do this we can pretend that there is some kind of economic alternative.
- Which implies that some kind of economic debate is possible.
- Which means that the debate does not necessarily have to come down to culture.
- Because if it does, we are well and truly f*cked.
That more or less covers everything. Oh, except for:
Putting all the cynical narrow political interests of ‘economists’ like Krugman aside, would it be possible to actually implement some kind of Keynesian alternative to Monetarism?
Regretfully, the answer is no.
As it develops Capitalism increasingly makes stuff that is increasingly useless by processes that are increasingly inefficient and chaotic.
But not to worry, Capitalism has an app for that.
It is called economic collapse brand name ‘Creative Destruction’.
All the bad stuff is wiped away and we can all start again. Which is fair enough. Except that when ‘Creative Destruction’ was first cited as a good idea, there were a lot less people who lived in a much more resilient and sustainable way.
In USA for example, the European population lived in relatively dispersed settlements with reasonable access to necessities such as food and water. When there was the inevitable economic crisis and clear out in the late C19th, it could be weathered by the population without much government interference.
But by the early C20th, urbanisation and the concentration of populations meant that it was not possible to have a Capitalist clear out without catastrophic social consequences and unrest. So the state had to get involved.
The basic idea of Keynesianism was to use government spending to buy up all the useless inefficiently made stuff that capitalism has produced and so avoid the catastrophic social consequences and unrest that would come from the inevitable clear out we would otherwise have to go through.
And this worked pretty well for a bit until we were just about surrounded by all the useless crap that had been made and we were running out of money to pay for more…
The basic idea is that the state cannot afford to pay to buy all the useless stuff that is being produced, since in theory the amount of useless stuff is limitless.
So the state is going to have to control what is being produced. But the state will try to keep this control to a minimum.
And this worked reasonably well until the turn of the century when the state found itself having to interfere more and more to try to control what was produced and what was done with the stuff once it had been produced.
And this took us finally to the Credit Crunch in 2008. And with Q.E. now the state is all in.
So contrary to what the Neo Con/Neo Liberal whatever say about the Neo Keynesian whatever, a return to Keynesianism would actually represent a step backward from the existing level of state interference in the economy!
Its Monetarism and Cultural Constituencies from here on.