Is there anything more to say on the austerity issue? Maybe so.

(Charles Krupa/AP)

The Keynesian left is celebrating what it believes now to be total vindication of its long-held belief that it was foolish — as they repeatedly warned — for governments to insist on, or agree to, reducing large budget deficits when economies were in the middle of a recession. Vindication of the Keynesian position is said to be found in the disappointing growth and high unemployment rates in Europe and, to a lesser extend, the United States. It has also come in the form of an embarrassing “correction” to the academic paper by Ken Rogoff and Carmen Rinehart often cited by austerity’s defenders.

The problem with this we-told-you-so interpretation is that it is based on what has always been a faulty framing of the issue that leads to wrong-headed policy conclusions.

To illustrate what I mean, let’s take the admittedly extreme example of Greece.

Does anyone really think that the correct policy for Greece over the last few years would have been to leave the structure of the economy in tact — the corruption and lack of private sector competitiveness, the lax tax collection, the inefficiency of the government, the extensive subsidies and monopolies and state ownership of firms, the regulatory strangulation — and simply lent the government whatever money was necessary to keep things as they are, including a sky high government deficit? Framed in that correct way, the obvious answer would be no, for two reasons.

The first reason is that nobody in his right mind would have lent money to an unreformed Greece because there would have been little prospect that the money would ever be repaid. In this case, “austerity” was not some policy choice inflicted by moralists and idealogues — it was the only way to avoid default and insolvency. The package, which included fiscal austerity, was imposed on them by public and private lenders who would only do so in conjunction with a program of fundamental structural reform. The let’s-keep-running-deficits approach was not an option.

Critics claim they have no problem with structural reform, only the consequences that flow from it—higher taxes and unemployment, lower incomes and profits. Because all of these would, in the short- and medium-term, cause macroeconomic drag, critics argue that all of them should be put off until the economy has recovered and full employment is restored.

The problem with that story is in places like Greece, the underlying structure of the economy and government finances are so bad that there will never be stimulus-induced recovery and full-employment, at least without another global credit bubble like we had a few years back. And even if, through some magic, the economy did recover, you can be sure that the political interests which for decades blocked structural reform, and which have now conveniently taken up the anti-austerity banner, would be the first to declare, “See, everything’s better. There is really no need for structural reform.”

In other words, the idea that countries like Greece, Italy and even France could be relied on to do structural reforms once a stimulus-induced, deficit-driven recovery had been achieved is simply a political fantasy. There is no historical support for such a belief, and everything we know about the politics of these countries suggests otherwise.

In fact, everything we know about politics in the United States would also support such a conclusion. Back around 2007, our economy was booming, unemployment was at a generational low. And did we run budget surpluses, as Keynes would have suggested. No, we were running record budget deficits.

The truth is there is never a “good time” to do painful structural reform. Whenever you do it, it will result for a time in lower wages, lost income, higher unemployment, higher taxes, etc. What that also means is that there is never a a bad time to do structural reforms. And again, this runs the gamut from regulations to privatizations to eliminating structural budget deficits (deficits that would exist even if the economy were operating at full capacity).

While it is always a good time to do structural reform, that doesn’t mean good policy should ignore the cyclical implications. If the economy is weak and unemployment is high, then the right policy is for government to borrow at reasonable levels to provide an income safety net for those are suffering most keenly from the consequences of the adjustment. That’s good politics, good economics and simply the just and fair thing to do. It is also the right policy to borrow money at reasonable rates to make one-time investments in infrastructure, education and other public and common goods.

Note the two caveats here: (1) Borrow at reasonable rates. Most of the time, the only way lenders will offer reasonable rates is if the additional borrowing is accompanied by credible structural reform—including, although not limited to, reducing structural government deficits to reasonable levels. And (2) The spending is, by its nature, temporary. The one-time investments are just that. And when the economy recovers, the need for the extra safety net spending automatically goes away.

Unfortunately, this is not how the anti-austerity crusaders talk about Greece or Italy or Portugal. They offer no reasonable alternative other than the rest of the world should line up to pour more money into a uncompetitive economies and profligate governments, under the theory that they can grow their way out of the hole they’ve dug. They can’t.

Obviously, the situations in Ireland, Britain, France, Spain and the United States are somewhat different. These economies are basically sound and competitive, as evidenced by the willingness of financial markets to continue financing government deficits at reasonable rates—at least as long as central banks are flooding the financial system with cheap credit. But each of these countries also has serious structural problems, whether they be inefficient labor markets or crony financial systems or large structural government deficits. It would be one thing if those railing against austerity in these countries were also pushing credible reform agendas. Unfortunately, most are also busy denouncing specific reforms that are proposed or denying that serious reform is even necessary.

The critics are right—austerity by itself won’t solve the problem of high employment and low growth in developed economies. But neither will fiscal stimulus by itself. Neither will work unless incorporated into a program of serious and credible structural reform.