Friday, 22 March 2013

The Power of Austerity over Politicians

In an earlier post, I reported some speculation by Coen Teulings on why politicians seem to ignore the majority of economists when it comes to austerity. (On the minority of economists that do support austerity, see here.) Mark Thoma responded that it was because austerity gave politicians the chance to pursue ideological goals, and of course he is right for some. I had made the same point on my ‘final verdict’ on the UK Chancellor George Osborne, and the motivations of the many on the right in the US and Europe are even more transparent. Yet that original post began with a discussion of the Netherlands, where there appeared to be a political consensus in favour of austerity. Even where the strong austerity proposed by the right is opposed by the left, in both the UK and US for example, the opposition could be fairly described as tepid. Paul Krugman and others have often lamented the amount that Obama seems prepared to give in trying to compromise with Republicans, and the left in the UK hardly presents a united front on the issue. Borrowing continues to be something to avoid discussing in public.

So I think there is more to this than just an excuse for some to whittle down the size of the state. Or to put it another way, we need to explain the weakness of the opposition to austerity from those who do not have this ideological goal. This is not to underestimate the influence that those with an ulterior motive and lots of money can have. I used to think that the idea that the Great Depression was a liquidity trap that expansionary fiscal policy rescued us from was received wisdom both among economists and politicians. But I should have known better from my own experience. Duncan Weldon reminds us of how the disaster that was Margaret Thatcher’s adoption of monetarism in the early 1980s has been turned into a myth of her triumph over those foolish economists.

Politicians can be misled, or can allow themselves to be misled. It is natural for academic economists to focus on the dissention within their own ranks, either in the form of influential papers that were enthusiastically received by politicians eager to believe in expansionary austerity, or economists who appeared to leave their academic selves behind them when discussing this issue. And I guess if all economists could form a united front, with everyone singing the same tune, that might begin to alter political attitudes. But this is a pipe dream, and even the smallest deviation from unanimity allows a media that craves division to portray the profession as ‘divided’.

I also agree with Henry Farrell and Mark Blyth (the former reviewing the latter’s new book ‘Austerity: The History of a Dangerous Idea’ here) that its wrong to try and find a motive for everything in terms of interests groups. Ideas have a power of their own. But for ideas to have power they need to resonate. Let me try this out as to why austerity resonates with politicians even when there is no hidden agenda.

I start with human nature, and the constant debate within ourselves between current consumption and future wellbeing through saving. What for economics is just an intertemporal optimisation problem is for most people often a battle of wills between our schizophrenic selves. In this battle, spending now is often the temptation of the devil, and saving is the virtue. Now for politicians this becomes a battle over whether to succumb to deficit bias. Promising tax cuts or spending increases without spelling out the implications in terms of paying for any additional borrowing is what politicians do more often than not. 


Most of the time they can get away with it, but I suspect they either feel guilty about the implicit deception, or fear they will be found out. So when the market starts to punish fiscal profligacy, it is as if a parent has discovered the child’s guilty secret. (The market is seen by many as a mysterious deity.) The politician wants to repent (or at least be seen to repent), and atone for past sins. After eating too many pastries, we go on a crash diet. After deficit bias, we have austerity.

More cynically, when the market focuses on debt sustainability, it is much harder to pretend that tax or spending decisions financed by borrowing do not involve intertemporal trade-offs. Deficit bias becomes much more difficult, so political fortunes will be maximised by taking the path of apparent virtue. The electorate, many of whom are recovering from over indulging themselves, will empathise with political 'self restraint' and reward apparent virtue.

So here are we Keynesians, telling politicians that they don’t need to go on that diet just yet - they can put it off until times are good. Indeed, now is just the time to eat more pastries - it will make you feel better, they are very cheap at the moment, and you might even lose weight in the long run! It sounds too good to be true, and just the kind of tale the devil might spin. Give in, and the all seeing parent/god that is the market will find you out again. So the politician ignores these siren voices, and buckles down to austerity.

26 comments:

  1. I also think there is a loss of faith engendered by the downturn that some things are beyond us, government is not that effective, we will be left with the debt and taxes but the spending will be wasted and not lead to employment, along with some satisfaction of previous high flyers being laid low and justice prevailing. This is usually framed in terms of being structural and something which must be accepted like the weather.

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  2. No one in power actually gives a fig about deficits. Follow the money. It is all about transferring money to your own class. I know you will want to say this is just really too simplistic and cynical but I challenge you to put this theory next to the decisions actually made -- not talked about, made -- and see what the result is.

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    1. I don't disagree with the substance of your statement, I disagree with the spirit of it. You say that "it is all about transferring money to [their] own class." I think that is the result of the process, but the wording that you used makes it seem like there is some diabolical scheme. My apologies if I am reading too much into your wording.

      I think that the problem lies in the fact that the people who currently control the flow of money are only able to understand their own problems. They lack either the will or the ability to empathize with the problems that afflict other classes of Americans. So, when protecting their class, they end up further screwing other classes.

      I do not think they intend to subject the lower classes to crippling poverty. I believe that they honestly believe that they are creating a system where the cream is more able to rise to the top. But, because they aren't able to honestly examine other people's situation, they are incapable of recognizing the harm that they are doing.

      Again, it isn't intentional.

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    2. I don't even think that it is "transferring money to their own class." I think it is much more cynical and much more blatant. I think it is about transferring money to themselves. They are paid to preach austerity from those who are fearful.

      It is intentional. All of it.

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  3. Sometimes people state dichotomies where in fact both sides of the "choice" are really correct. It can perfectly well be that Osborne is using the deficit as an excuse to pursue ideological goals *and* that those goals are valid.

    I would say that Osborne's unspoken goal is to reduce the size of Government. Now before you insist that's a bad goal, it's worth noting that it's really a reversal of trend. From 1997 to 2010, the size of the NHS rose from a base of 100 to 135, and has now declined to 130. The "civil service" rose form a base of 100 to 110, and is now down to about 95. Local Government, education and police rose form 100 to 110 and is now a shade below 100 (all of these numbers are complicated by privatization and contracting out). So what the coalition have done is reverse a rise that took place under Labour.

    I think a good question to ask is what benefits we got from Labour's increases. An increase of 30% in NHS personnel puts the UK at 23rd in life expectancy, behind most EU countries, and roughly equal with Greece(!).

    I think a business person would look at that and say that increasing personnel wasn't very successful, and that different approaches to managing the system should be tried.

    I think Osborne looks at that and says if increasing funding - Labour "throwing money" at problems - doesn't work, then reducing funding probably won't hurt, especially if it motivates NHS managers and other civil servants to become more creative.

    So yes, probably the Coalition aren't being entirely honest about their motives, but that doesn't automatically mean that what they are doing is wrong.

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  4. Advocates of Modern Monetary Theory, which include me, have got this sorted. As MMTers keep making the point that the deficit and national debt are no reason whatever for austerity: the REAL CONSTRAINT is inflation.

    So my guess is that in the UK there is probably not much chance of a Keynsian spending spree. The US could probably cope with a significant amount of stimulus without inflation going thru the roof. As the EZ, that’s an entirely different set of problems.

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    1. Bravo for your first paragraph, but it seems to me that here in France, and in all the Club Med countries, there are enough under utilized resources to permit job guarantee programs without inciting inflation. If only internal EZ BofP problems could be overcome.

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  5. In the USA, ideology weighs heavily as in "starve the beast". But I think the biggest problem for non-economists in all the G20 countries is confusion of family accounting with government accounting. Basic national income accounting should be an obligatory course in all secondary schools.

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    1. I never thought that national income accounting should be obligatory course, but you are completely correct. Although, if I were in charge of the curriculum, I would focus less on the actual accounting and more on all of the various pieces of how things fit together.

      Which brings me to what I think is the real problem of how non-economists think about national economies. They think that a basic common sense approach can solve economic problems. The problem with that is that national economies are entirely too complicated with too many moving parts to just intuitively arrive at solutions. You need to examine and analyze and question and tweak and... You can start from a common sense position, but you need to recognize that common sense is incredibly fallible.

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  6. "This is not to underestimate the influence that those with an ulterior motive and lots of money can have."

    While I understand your argument here, I do think it underestimates "the influence that those with an ulterior motive and lots of money can have".

    At its core, austeity-mania among politicians really can be explained more simply by looking at the mechanics of the rentier class and its influence on politicians.

    The recent Page-Bartels piece in the LATimes breaks things down nicely:

    "We recently conducted a survey of top wealth-holders (with an average net worth of $14 million) in the Chicago area, one of the first studies to systematically examine the political attitudes of wealthy Americans. Our research found that the biggest concern of this top 1% of wealth-holders was curbing budget deficits and government spending ... If the concerns of the wealthy carry special weight in government — as an increasing body of social scientific evidence suggests — such extreme differences between their views and those of other Americans could significantly skew policy away from what a majority of the country would prefer."

    (my bolding)

    The narrative you describe is a real narrative, but I think it pales next to a more straightforward mechanical explanation for The Power Of Austerity Over Politicians...

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  7. This is a response I received from the BBC May 2012 from 'the Editor of our Business and Economics unit' as to the question why the organisation has avoided the term 'liquidity trap':

    "The job of our economics team is to make sense of hugely complicated areas such as these for general audiences, and for that reason they would often choose not to deploy such difficult jargonistic terms as liquidity trap – especially in a short bulletins piece - if they felt such a term would not add to audience understanding. That in no way is intended to reduce the depth and the context they seek to bring to such issues and I would want to reassure you that they go to great pains to ensure their analysis is as detailed and accessible as it can be... The wider point, of course, is that the Bank of England and Fed in the US would not agree we are in such a trap, even if there are some economists who do."

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    1. I forgot to add that if you type 'liquidity trap' into the BBC website you get 14 results, which reveals that the BBC finds it very easy to use the term in relation to US and especially the Japanese economy, but not for the UK.

      Perhaps it's easier to have staff sacked if you feel it is inevitable, rather than a clueless government policy?

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  8. "the Great Depression was a liquidity trap that expansionary fiscal policy rescued us from". If economists think that, they are probably wrong, at least as regards the US. Recovery - at 10% GDP growth level - started in 1933 before the New Deal spent anything. The New Deal did not raise deficits above the 1932 (Hoover administration) level. Do GDP growth rates at 7% and above signify a liquidity trap? These were the growth rates except for the 1937 recession. Would you and Krugman be talking about a liquidity trap now if the recovery rate were as high as that? Of course it is obvious that WW II spending put a quick end to the remnants of the Depression - and the results of that falsify several claims that conservatives still make about government spending.

    What is much more obvious is the failure of austerity in 1929-1933 in the US and even earlier in the UK. How do austerians account for this? Why are they not made to face up to it? This is where the argument should be, not on non-existent fiscal stimulus during the years 1933-39.

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  9. I'd like to speculate that the moral austerians break into two camps: First are the many who feel that 'they' don't deserve government help. "They' being blacks latinos, rednecks or whoever the austerian happens to detest. Second is a group of latter day puritans who sincerely feel that we must as a people be punished for our lives of ease.
    In either case, austerity is horribly bad policy.

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  10. I am not a diet specialist but the metaphor of eating more pastries and losing weight – of course, I should mention, in the long run – seems somewhat twisted. Perhaps politicians are reluctant to follow economists with this kind of “recipes”. Understandably so.

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  11. Two thoughts:

    Most conservative and to some extent even moderate politicians in the U.S. are what a psychologist would call authoritarian (AU). This can be seen as either a personality trait or a social ideology. Amongst other things AU favor (1) adopting and maintaining conventional social norms and values and (2) punishing those who deviate from these. Certainly being profligate in the U.S. is not generally favored, so there might arguably be a tendency for an AU politician to self-punish when their actions are now seen as labeled as licentious.

    More importantly, during a period of stress these AU politicians will be especially likely to be punished by like-minded AU citizens, notably voters and funders, for continued violations of these social norms (in this case failing to save and conserve). In fact, there is some evidence that even non-authoritarian become a bit more AU during times of stress, so moderates might become more authoritarian during these moments. This would help explain the wavering we see in centrists such as Obama.

    I probably should give this more thought before I post but its timie to move on.

    Interesting article. Thanks.

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  12. (1) There seems to me no ability among elites as well as most non-elites to conceive of irresponsible economic behavior in any other fashion than a poor person spending too much money. (And indirectly, government policies which allow or encourage them to do so.)

    (2) People seem to be operating completely as if big things like national economies must be exactly like more familiar and tractable notions like a household's or small business' finances.

    (3) Political and economic elites and (in my experience) anyone who considers himself or herself a 'businessman' appear to believe or badly want to believe that they are nearly Platonic models of thrift, efficiency, hard work, planning, etc.

    In general, I hardly encounter anyone who can think of a terrible economic situation *other than* 'hyper-inflation'. Literally. It's like the only bad thing they can imagine. Someone summons a vision of Germans with wheelbarrows full of worthless money, and once summoned, presumably all discussion is over as the point has been made and no other thing need be thought.

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  13. Apologies for a first-timer leaping in, but I got here via Paul Krugman, and just want to commend your reflection on human nature as a cause for austerity. You raise two interesting questions. The first is the question of why, in the face of all evidence, does austerity continue to appeal to decision makers? The second question is the mystery of why the anti-Austerians are so tepid in their defense when all the evidence is on their side?

    I set aside for the moment the "greedy b***ds" hypothesis put forth by previous commentators. While I agree that that it accounts for some of the variance, it doesn't explain the many low-information voters in the US who are convinced that the reason we have such high unemployment is because of the national debt (ergo, "Fix the debt, get more jobs.") But Misinformation campaigns by billionaires can explain some of that variance. Furthermore, in the US, the conservative movement set out several decades ago to undermine Americans' confidence in their institutions of self-government, and their success in this assault on democracy explains another part of the variance, the popular reluctance to accept that the solution to our economic woes is more government spending.

    But once you get past the political explanations, there's still this stubborn irrational emotional core that you rightly suggest can best be understood as misdirected religious fervour. The idea that bad things are the consequence of sin ("we have done those things that we ought not to have done") and that we must be penitent ("Spare those, O God, who confess their faults. Restore those who are penitent")seems to be part of our human DNA. When fearful, people get cautious. They do not atone by being generous and expansive. What humans do to atone for sins is Fast, mortify the flesh, participate in ritual cleansing and purification ceremonies, abstain from sex and sacrifice lambs. And, indeed, those actions are directly analogous to what the Austerians recommend. Unfortunately, economics not being an actual religion, there is no High Priest who can come out of the Temple and absolve us of our sins with a cheery "go forth and sin no more!" Perhaps economists could nominate someone for this role?

    But this suggests answers to both questions you raise. When bad things happen, humans are wired to act austerely to atone for their sins. In this situation, the emotional brain trumps evidence (especially when primed by political ideology.) And the anti-austerians are tepid because they are going up against irrationality, and the future is uncertain. What if their models fail this time?



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  14. Austerity is the preferred policy of the wealthy elites. Money talks; Politicians Listen.
    Our wealthy elites care only about concentration of what wealth is created in the top incomes.
    Our wealthy elites do not care about expanding the economic pie, creating domestic jobs, &c.
    Our wealthy elites only care that they are BETTER than the rest of us. If that means kicking the ladder out from under the rest of us with austerity, that is what they will do. They use their wealth to launch misinformation campaigns that promote austerity and damage politicians who stand against their lies.
    Class warfare plain and simple.

    jonny bakho

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  15. Yes, I think the point is that the story that the state has to save money in a recession is "common sense" to many voters because it agrees with their own personal experience. Thus it is an easy story for austerians to tell and almost impossible to counter. The problem is that the majority of voters are never going to understand macroeconomics and anyone that tries to explain that increasing government spending is the right response is too easily portrayed as obviously lunatic (because it conflicts with "common sense").

    To put it bluntly, there is no easy story for the Keynesians to tell. The best that can be done is to change subject and talk about jobs, growth, investment, housing etc. Arguing about the best debt trajectory to voters just isn't going to work.

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  16. I see the support for austerity being a dichotomy, between those with an ideological purpose, and those with a special interest purpose--at least here in the States. Remember how Sarah Palin was able to ride a wave of rhetoric devoid of any real substance into a VP nomination? That would be the ideological side of the issue where politicians blow the dog whistle, and a certain demographic of the population comes running.

    On the flip side, we have the, as I refer to them, investor class that uses its power influence to get favorable legislation all under the guise of an ideological purpose--no, really, the Koch brothers are not interested in money, they are interested in the ideological tenants of the U.S. Constitution which stands for small government, unregulated markets, low taxes and other things that just so happen to incidentally improve their profit margins.

    It's a bit of the tail wagging the dog--the majority are suppose to be the driving force of policy, legislation, etc. through the polls, but they are being led astray by special interest groups, as I noted, all under the guise of some ideology.

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  17. "Austerity" covers both intellectual incompetence and moral corruption, and has the further dubious virtue of being the default way in which most nice people deal with their own difficulties. Most people simply do not understand the economic situation. I drew a picture of a Keynesian explanation at the following link. Some people say it even makes sense. It contains a picture of the liquidity trap:
    http://www.youtube.com/watch?v=wHoRYAv1wg8

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  18. "...here are we Keynesians, telling politicians that they don’t need to go on that diet just yet - they can put it off until times are good"

    And when will "times be good"? Can't say? That is why we can no longer put off austerity, whether it be by raising taxes or cutting expenditure.

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  19. One major problem with austerity as the part of a morality play is that the people who do penance and suffer austerity are not the people who are guilty, even if the policy makers thinks that they themselves are to blame. (OC, that does not apply to the Eurozone, where austerity is imposed by some countries upon others. But it does apply within countries. The sinners get bonuses while the innocent suffer.)

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  20. You and your colleagues are simply the worst salesman immaginable.
    You simply cannot sell your product (economic theory) that is the problem you are bumping in time and time again.
    You do hardly anything right in that respect.
    Politicians sell however the product the market wants. If that is longer term a better one is doubtful of course.
    So face the truth and adjust or are used as academic cover for policies the relevant politician wanted to implement anyway.

    You are eg even worse in that respect than Krugman. At least he writes in a more easy readable and amusing way. The rest is completely crap as well btw.

    Some points:
    1. You missed that the market has changed it has moved from knowledgable politicians to moronic voters. In a nutshell that is. The same ones that solve crime with deathpenalties or immigration by not allowing people in the country or a foreign conflict in the country they donot even know the capital off, by sending the army.
    2. Your product for that market sucks, it is way too complicated. You need to simplify it before expaining. It has to be sold via politicians of course but they cannot come up with the appropriate salesarguments. You have to deliver those.
    3. Normal people react on logic but in general more on emotions. A Tn coin simply sucks and big time in that respect. Emotionally the vast majority will never accept such a solution.
    4. And what is worse they put most likely the messenger in the weirdo category (for everything else he says, your brand is completely rubbished at least for the right part of the spectrum and most of the middlemarket as well).
    5. Economist have moved to political fractions so per definition in heavy polarised today you become unacceptable for roughly half the population. That is if you 'join' or are seen as part of one of those fractions.
    6. The 'target market' should be the undecided middlegroup often also more logically thinking. But also more in 'compromise' which might be bad if you would have to mix 2 opposing theories (and end up with nothing).
    7. Look at your own statements. It simply makes macro very politicised. Simply as it has a view on political issues. Macro is macro, but as long as it affects people in their wallets (or groups of people) they donot give a damm that GDP rises if they get less themselves.
    Cut that stuff out as much as possible.
    8. Take your own views on say immigration. Simply rather stupid if you want to convince somebody that is in the target group (middle) to come up with pov that could reasonably be not similar to the ones of person you want to convince. Keep them out unless you absolutely have to. You have to sell things not win an academic discussion.
    9. No proper downside risk analysis. You need to bring the basic message simple but should have convincing answers ready when necessary.
    10. No explanation why things with overspending went wrong in the first place.
    11. Assume that everybody knows that you are not a banker or politicians. Which is clearly not that way. A huge part of the population put you in the same group.
    12. Appearance is of an urban academic lefty. Hardly the most popular group at the moment with a lot of people. Basically the reason why populism is on the rise.
    And I could go on and on. But in a nutshell you simply are totally unable to sell your product to the market that matters.

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  21. It is particularly sad when politicians can find out only after the fact that their policy had been ill-suited to the economic condition of their time. More sad still is when those politicians continue on, in denial,even as the verdict is coming in. For more analysis, pls see my essay at http://www.thewordenreport.blogspot.com/2013/04/does-austerity-work.html at the Worden Report.

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