Friday, March 20, 2015

Paul Krugman and the "Austerity" Con

Way back when, in 2011, the Congress and the president cooked up a deal we call "sequestration" in the big debt ceiling crisis. The result was that real, biting spending cuts and tax increases were scheduled to go into effect in 2013.

In April 2013, according to Ramesh Ponnuru in National Review, Paul Krugman argued that this "austerity" would hurt the economy. It turns out he was wrong. During the "sequester" US economic growth has been higher than before the sequester.

What does this all mean? It means that Keyneianism is faux science.

When Lord Keynes proposed his Keynesianism in The General Theory of Employment, Interest, and Money, he advanced the idea of the "multiplier." Additional government spending during an economic downturn, he argued, would stimulate spending in the private sector and thus one dollar of spending would create additional economic spending and thus pull the economy out of recession. Ever since, Keynesians and liberals have repeated "multiplier, multiplier, multiplier" like a mantra. They believe in it, they really do. The government should borrow more and spend more. Because multiplier.

But you and I are entitled to step back and wonder what really is going on here.

Let us first pull out the pony that really is in there at the bottom of the manure pile.

During a financial panic like the Crash of 2008 there is a danger that the credit system will collapse. The reason is quite simple. The credit system runs on two principles, one, that people can make their payments, and two, that the collateral offered against a loan is sufficient to pay off the loan if the borrower stops making payments.

In the Crash of 2008 both principles failed: one, people got laid off and couldn't make their mortgage payments and two, the collateral on their low or no down-payment loans could not liquidate the loan.

Ever since the 19th century this problem has been solved by a central bank acting as the "lender of last resort" acting on the Eisenhower principle that if you can't solve a problem, you make it bigger.

In a crisis, the government "saves" the financial system by bailing out the failing banks and GSEs and hedge funds by lending them money to tide them over and effectively pledging the entire productive capacity of the nation as collateral.

This "lender of last resort" thing works pretty well unless you are Greece or Argentina. In those cases the entire productive capacity of the nation isn't enough to serve as collateral for the bailout loans.

Once the financial system is saved, other factors come into play, among them "austerity." The obvious thing to do after a crash is for everyone to clean up their balance sheets. Corporations cancel projects that now appear to be malinvestments; governments cancel wasteful spending. The new lean corporations and governments will waste less and the economy then rebounds smartly. This much is obvious. A losing product is a weight on the corporation's profitability, and all government spending is a weight on the economy.

But spending does not appear "wasteful" to the politician. A politician is a man or woman that wins election and reelection by promising loot to his or her supporters. Cut Social Security? But granny will starve! Cut Medicare? But granny will die! Cut unemployment benefits? But workers will starve! Cut green energy subsidies? But the earth will fry! You can see why it makes complete sense for the bribed apologists of the ruling class to come up with the word "austerity" to cover all these horrific outcomes.

Anyway, we just had a real test of the "austerity" thesis, because eevil Republicans tricked the president and the Democrats into modest spending cuts during the "sequester." And the economy didn't tank.

This happens all the time, only the mainstream media doesn't like to talk about it. At the end of 2013 the eevil Republicans ended extended unemployment benefits. Result? About half of the gain in employment has been from people coming off extended unemployment benefits.

In 1996 eevil Republicans forced a welfare reform bill on President Clinton and the Democrats. Activists said that children would starve. Instead mothers got jobs. In the 1981 recession President Reagan cut domestic spending. Result? The biggest, fastest recovery ever.

This all makes sense if you accept my weight theory of government spending. If you remove the glacial ice sheet of government spending from the land then not only does the land bloom, but the very ground itself rises! Because science.

So we can see what the "austerity" game is all about. It is a cunning ploy by the ruling class to avoid the obvious truth. All government spending is a waste. It is a waste because it takes money out of the private sector and spends it on the little darlings of the politicians. And the little darlings respond to the benefits they get from the government by reducing their work effort. Talk about a multiplier!

The mantra of conservatives and conservative politicians ought to be "weight, weight, weight." If we want to increase growth, if we want to decrease inequality, if we want to live simply so that others may simply live then we must lift the weight of government off the brow of labor.

Every day in every way we should think: how could we reduce the weight of government on the people? Because granny. Because women. Because the poor. Because marginalized minorities. Because all government is a weight, all of it.

But don't tell Paul Krugman and the Democrats.

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