For those of us trying to sort out the debate over economic “austerity,” there’s a limit to what can be learned by inspecting the credentials of the contending economists.
Yes, the fiscal-stimulus vanguard includes a couple of famous Nobel winners, but those pesky Swedes also gave their prize to the harshest postwar critic of Keynesian economics, a man whose signature policy proposal was the balanced-budget amendment.
I refer to the late James Buchanan, dean of the “Public Choice” school of economics and the 1986 Nobel recipient.
Now, you might say this contradiction discredits the Nobel. I prefer to see it as appropriate recognition that both Buchanan and such anti-austerian Nobel laureates as Paul Krugman and Joseph Stiglitz have their points.
Both sides actually agree that deficit spending or loose monetary policy, or both together, can goose the economy in the short run.
Their differences reflect not so much economic principles as deep-seated beliefs about how society should, and does, operate.
Krugman et al. place top priority on the short-term problem of alleviating unemployment. Although they often cast this as a moral issue, they also argue that avoidable idleness reduces the economy’s growth potential, as jobless workers tend to lose skills or quit the labor force altogether. Compared with these risks, possible future inflation and debt accumulation hardly matter, and wise politicians would proceed accordingly. “In the long run we are all dead,” quoth John Maynard Keynes.
Buchanan’s contribution was to remind everyone that, in a democracy, deficit spending is very easy to turn on and very hard to turn off. This one-way ratchet in favor of debt reflects not mistaken economic thinking but ordinary political thinking: Spending programs create dependent constituencies, which lobby for them long after the initial crisis has passed. And vote-seeking politicians oblige, usually neglecting to raise the corresponding, but unpopular, taxes.
Keynes argued that depression-fighting deficits should give way to boom-moderating surpluses. Buchanan said, in effect, “fat chance.” If you think he was wrong, consider the longevity of the mortgage interest deduction or such New Deal programs as farm supports and the Federal Housing Administration.
No doubt, persistent unemployment shrinks the economy’s capacity to grow, and to create jobs. Buchanan argued, though, that the same result comes from persistent mis-allocation of resources through outmoded but politically untouchable government programs.
In other words, Buchanan identifies the Achilles’ heel of Krugmanomics: that politicians simply cannot be trusted, over time, to manage the economy as Keynes prescribed. In the name of fighting unemployment today, they lay the basis for more of it tomorrow.
Buchanan foresaw the industrial world’s accumulation of structural inefficiencies — from U.S. entitlement programs to Italy’s rigid labor markets to Japan’s protectionism — none of which caused the Great Recession but all of which impede optimal use of resources.
Buchanan was, however, unrealistic in his own way. Not all spending is pandering; some of it, such as basic research funding, can boost the economy’s growth potential. And democratic politicians can hardly be expected not to respond to the short-term economic suffering of their peoples.
Buchanan wanted to constrain governments through constitutional rules. But the difficulties of this one-size-fits-all approach are on display in Europe, where Germany is unwisely trying to impose its balanced-budget orthodoxy on the entire euro zone.
It’s possible, in theory, to reconcile the Krugman and Buchanan worldviews. During crises, governments could use term-limited fiscal and monetary stimulus to prop up demand, buying time to reform accumulated structural impediments to growth.
Japan is trying a version of this approach under Prime Minister Shinzo Abe — though its actions during the previous two decades, when it used spending and debt to, in effect, avoid structural reforms, suggest this will be much easier said than done.
Krugman, Stiglitz and their German nemeses can argue endlessly, and probably will. The only thing I’m sure of is that neither side can achieve the kind of scientific victory that, say, Copernicus won over the Ptolemaic model of planetary motion.
This ostensibly economic debate is being conducted amid uncertainty over such basic parameters as the multiplier effect of taxes and spending; the long-term impact of zero interest rates; and even “full” employment. (Come to think of it, does “austerity” even have a technical definition?)
It is also essentially about value judgments and trade-offs. Nobelists may be better qualified to describe the issues than the average voter, but they are no better qualified to decide them.
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