Victorian historian Thomas Carlyle famously called economics the “dismal science.” It wasn’t hard to see why this week (even while important economic news was understandably overshadowed by the horrible events surrounding the Boston Marathon), as politics is getting in the way of some of the serious and substantive policy questions raised by some significant new academic findings.
In research that has been featured prominently in the press and the blogosphere, three economists from the University of Massachusetts at Amherst have cast significant doubt on widely cited findings by Reinhart and Rogoff (RR) which seemed to demonstrate that countries which run up big debts (generally in excess of 90 percent of GDP) suffer a major penalty in terms of economic growth. As RR has argued, “The sooner politicians reconcile themselves to accepting [fiscal] adjustment, the lower the risks of truly paralysing debt problems down the road.”
Conservative politicians have routinely cited RR in support of their calls for much greater fiscal austerity. For example, Paul Ryan: “Economists who have studied sovereign debt tell us that letting total debt rise above 90 percent of GDP creates a drag on economic growth and intensifies the risk of a debt-fueled economic crisis.” That case, and thus the case for fiscal austerity, is much harder to make today, even though the data remains clear that higher debt levels and economic difficulty do indeed correlate.
The progressive approach to ongoing economic weakness has been and remains that the federal government should simply spend more, probably a lot more, to increase aggregate economic demand. Only after the economy is humming again, they argue, should we impose anything like austerity to deal with debt and deficits. In other words, for them the key risk is attacking the deficit too soon. In Krugman’s words, “we need to fix our long-run budget problems — but not by refusing to help our economy in its hour of need.” This argument has been and remains difficult to refute, at least conceptually, and the news this week makes it even harder to do so.
RR responded (rather weakly) to the criticism of their work here. In contrast to what RR appeared to claim, the evidence now seems to suggest that poor GDP numbers cause high debt and not the other way around. Thus the new research is causing considerable difficulty for those who have been advocating governmental fiscal austerity.
Liberal stalwart Paul Krugman and his ilk are thrilled (naturally) since they have insisted all along that a poor economy drives high debt (not vice versa) and since this news can so readily be used to support their political goal of much higher governmental spending. Not surprisingly, those opposed to fiscal austerity are wielding this news like a club.
But, unfortunately for the progressive cause, there is not a lick of evidence that our political “leaders” in Washington — of both major parties — would have the discipline to do what would be necessary to reduce the debt and the deficit once the economy is strong again. Indeed, all the evidence we have suggests that it won’t happen (see here, for example). Moreover, cutbacks in a time of relative prosperity are a really tough sell not just to politicians, but to the general public as well. We seem to need crisis to accomplish anything that’s remotely tough, and withstanding the urge to spend somebody else’s money when the opportunity presents itself is incredibly tough.
Increased revenues due to a healthy economy would help to reduce the deficit a lot. But they wouldn’t be nearly enough to solve the problem. So would the increased spending levels sought by austerity’s opponents now remain temporary? Would the ongoing budgetary problem be fixed? I highly doubt it. Indeed, there is every reason to believe that Congress would use good economic news as an excuse to spend even more.
Essentially everyone acknowledges that we have a major budget problem. The issue is whether we deal with it now (which will hurt) or whether we deal with the economy first and then deal with a (bigger) debt and deficit problem once the economy is stronger. The stark political reality is that the gleeful “Death to Austerity” calls, even in light of RR’s apparent demise, profoundly miss the point. The “fix it later” crowd provides no reason whatsoever to think that later would ever arrive.