Keynes, Krugman, and Austerity

By William Voegeli
Tuesday, January 03, 2012

‘The boom, not the slump, is the right time for austerity at the Treasury.” Paul Krugman quoted this assertion, made by John Maynard Keynes in 1937, to frame “Keynes Was Right,” his final New York Times column for 2011. The master’s adage, reworked by Krugman, is, “Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.”

This is not a fresh theme for Krugman. He has filled too many columns to remember with complaints that President Obama’s 2009 stimulus bill wasn’t nearly big enough to catalyze a true economic recovery. In October 2010, for example, Krugman lamented that the “key problem” with the Obama economic policy was that “we never had the kind of fiscal expansion that might have created the millions of jobs we need.”

Any column in this continuing series could be titled, “If Only They’d Listened to Me.” In the most recent, Krugman writes that “those of us who did the math” knew all along that the Obama stimulus was “much too small given the depth of the slump.” They also foresaw that it would engender a political backlash in favor of reducing federal deficits, even as continuing economic frailty signaled to those who did the math the necessity of increasing them.

The more intriguing part of the latest column is Krugman’s broad hint that there is a “right time” for austerity, and maybe even for “slashing government spending.” As it happens, the late 1990s saw not only an economic boom but the beginning of Professor Krugman’s moonlighting career as a Times columnist. The economy is “flourishing,” he wrote for the paper in 1999, with “unemployment at a 25-year low” while inflation is “quiescent.” A year later he stated the economy “has been practically wallowing in good news for the last few years: productivity has been soaring, allowing the economy to grow far faster than seemed possible without running out of labor”

One might expect that Krugman’s columns during those years of economic exuberance were as relentlessly single-minded in demanding counter-cyclical government austerity as the ones since 2008 have been in demanding counter-cyclical government spending. Manifestations of that principled symmetry, however, are somewhere between slight and negligible. In August 2000, for example, he proclaimed the truth, apparently inviolable, “that demands for government services grow with the economy: more air traffic to control, more homes to protect from forest fires.” Later, in a column just before the 2000 election, Krugman argued that because the future might bring unhappy surprises, the “responsible, sensible thing for the U.S. government to do is to run very big surpluses right now.” Without explicitly endorsing their view, he noted that “budget analysts who take the long view” believe that “if anything we should be raising taxes and cutting spending.”

That oblique reference to reducing outlays was as close as the boom-year Krugman columns got to endorsing austerity that entails reducing government spending, widely understood to be its defining feature. The more common tone, voiced by many Democrats during the Clinton years, was dour resignation to the political infeasibility of launching the next New Deal. Krugman numbered Vice President Al Gore among those New Democrats who have “clearly renounced the party’s old big-government, big-spending tendencies” in favor of the “penny-ante activism” of “handing out a few baby carrots here and there.” These timorous Democrats were opposed by Reagan revolutionaries who “didn’t want a scaled-back welfare state, they wanted a repudiation of the whole idea of a social safety net.”

At one point after the 2000 election Krugman labeled Larry Summers, President Clinton’s Secretary of the Treasury, “austerity-minded,” which meant only that Summers was, like Krugman, opposed to what the latter called the “big, irresponsible tax cuts” George W. Bush had campaigned on all that year. When Dick Cheney urged the enactment of those tax cuts as a way to stimulate an economy that was slowing down at the end of 2000, Krugman dismissed him as a “vulgar Keynesian,” peddling the “now-discredited doctrine that taxes and spending should be routinely twiddled in an attempt to ‘fine-tune’ the economy.”

Refined Keynesians, by contrast, understand that “when governments try to fight garden-variety recessions by cutting taxes or increasing spending they almost always get it wrong. By the time Congress has finished negotiating who gets what, and puts the new law into effect, the recession is usually past — and the fiscal stimulus arrives just when it is least needed.” Stimulus spending is “appropriate in the face of deep and persistent slumps. But otherwise we should make budgets for the long run, and let the Fed deal with short-run problems by adjusting interest rates.”

Awkwardly, a Keynesian more vulgar than even Dick Cheney turns out to be John Maynard Keynes. The sentence Krugman recently quoted about booms, slumps, and austerity appeared in a series of three articles Keynes wrote for the Times of London on “How to Avoid a Slump.” It’s full of advice on fine-tuning an economy. Anticipating 1937 to be a year of economic vigor, for example, Keynes urges authorities to postpone planned infrastructure projects so that they’ll be “available for quick release at the right moment.”

Discerning that right moment is tricky. It’s “much easier to check a recession if we intervene at its earliest stages,” but Keynes never makes clear who constitutes this “we.” It does not appear to be a democratically representative or accountable group: “If we are to be successful we must intervene with moderate measures of expansion before the decline has become visible to the general public.”

Keynes does envision two constellations of experts collaborating to stabilize and widen prosperity in order to attain “a decent level of consumption for every one.” The first would be a “board of public investment to prepare sound schemes against the times when they are needed,” compiling and sifting “acts of constructive imagination by our administrators, engineers, and architects” so that “large and useful projects” can be “launched at a few months notice.” Once this inventory of stimulative infrastructure projects is on the shelf, waiting to be green-lighted at the first signs of a recession, the second group, consisting of financial authorities, can exercise “the discreet handling of the market of which they have shown themselves to be masters,” to adjust long-term interest rates to the level “required to make profitable a flow of new projects at the proper pace.”

Does the idea of academic experts and civil servants coordinating disparate endeavors while perceiving, promptly and subtly, inflection points in the business cycle sound far-fetched? If you think so, then you and Keynes have something in common, since he concludes his call to arms by asking plaintively, “Is there the slightest chance of a constructive or forethoughtful policy in contemporary England?” Probably not, since he introduced his plan by acknowledging that it might be “absurd to expect Englishmen to think things out beforehand.”

Krugman acquitted himself as a good Keynesian, then, when he ruefully observed how widely divergent are the paths of economic wisdom and political necessity. In the late 1990s our nation “actually started to have an almost responsible fiscal policy,” he wrote in 2000, “but it was mainly an accident, the result both of an unexpected surge in revenues and of a deadlock that prevented either party from dissipating those revenues.” That both parties treated this happy accident as a windfall to be exploited instead of the basis for a new era of deliberate fiscal sobriety argues that America “just wasn’t ready for the hard thinking that would have let us act responsibly. Maybe better politicians could have made a better case for the right policies. Or maybe the fault is not in our politicians but in ourselves.”

But maybe some of the fault also lies with our Keynesian economists. The guidebook they’ve compiled is highly useful — for telling philosopher-kings how to use their limitless wisdom and power to continuously recalibrate public policy. While writing that manual may have been an intellectually stimulating exercise, what we really need is advice that gives self-government the best chance to succeed, rather than a pretext for disparaging the citizens’ inability to grasp esoteric economic theory. Hectoring politicians who favor what Krugman calls “premature austerity” is not an instance of such advice, especially coming from a columnist for whom austerity is always premature, not to mention “savage,” “truly cruel,” an “outrage,” and an exercise in “penny-pinching, future-killing absurdity.”