Monday, June 21, 2010

The Argument against Austerity

I’m no economist, but everything Paul Krugman says below about present inadvisability of instituting fiscal austerity programs makes sense to me (my emphasis):
“Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand? . . .

“Penny-pinching at a time like this isn’t just cruel; it endangers the nation’s future. And it doesn’t even do much to reduce our future debt burden, because stinting on spending now threatens the economic recovery, and with it the hope for rising revenues.

“So now is not the time for fiscal austerity. How will we know when that time has come? The answer is that the budget deficit should become a priority when, and only when, the Federal Reserve has regained some traction over the economy, so that it can offset the negative effects of tax increases and spending cuts by reducing interest rates.
I understand why Krugman thinks that the best policy would be to defer painful austerity measures until the economy recovers, and interest rates increase enough so that the Fed can juice the economy by lowering them when spending cuts and tax increases kick in. Let’s stipulate that he’s right, even though there are reasonable grounds for thinking that he might be wrong (see, e.g., those laid out by Greg Mankiw). The trouble is that Krugman seems strangely unaware that, as a polity, we’re incapable of following his advice; we can’t collectively decide to “spend now and save later.”

That incapacity isn’t just a matter of the regrettable weakness of our collective will. A lot of people, contemplating our sorry fiscal record hesitate to follow Krugman’s prescription because they fear that we’ll lack the fortitude to put ourselves back on a fiscally sustainable path in the future. If anything, the fact that we’re contemplating cutting ourselves even more budgetary slack when we’re already carrying levels of debt that are unprecedented in peacetime, makes them less inclined to believe that we’ll put ourselves back on a fiscally sustainable path in the future. That’s an unreasonable fear if Krugman's macro-economics are sound, however, because fiscal stimulus applied now will make it easier, not harder, for us to repay our debts down the road.

Our incapacity to follow Krugman’s advice is more radical than that. It’s somewhat akin to the metaphysical impossibility of our being in two different places at one time. Individuals can undertake a commitment now to perform a future act. Nobody could borrow money now in exchange for a promise to pay it back with interest later if they couldn’t. But creditors are willing to loan debtors money only because, in exchange for the loan, the debtor is now undertaking an enforceable legal obligation to the creditor that’s dischargeable in the future. That’s just as true when the debtor is the United States and the creditor is the purchaser of a Treasury bill.

But neither an individual nor a polity can impose a binding obligation on him or itself to him or itself. We sometimes speak of a person’s making a promise to himself—Ben might, for instance, promise himself today to stop drinking next Monday. But when we say that we’re speaking metaphorically.  To promise is to undertake an obligation, and Ben hasn’t really done that.  If he finds himself wanting a drink next Monday, he can always (in his capacity as the promisee) rescind the commitment he made to himself (in his capacity as a promisor). Ben's likely to experience regret about it, however, since there’s a sense in which he's betraying himself out of weakness of will.

A polity can’t even feel that regret and shouldn't even if it could. When a sitting congress and president enact a stimulus bill on the promise that austerity will follow more than two years into the future, they’re pretending to an authority that they plainly don’t have. When future presidents/congresses decide not to honor that "commitment," they’ll probably do it self-righteously because they’re honoring an electoral mandate by changing course.  The prior administration's and congress' promises about the future are nothing but hot air.

None of this means that Krugman isn’t right that we need more deficit spending right away—maybe people will keep lending to us at acceptable interest rates anyway because they have no better place to put their money. But it does point to an important constraint on public policy in general and fiscal policy in particular. Democratic politics happens in an eternal present in which solemn promises about the future don't make current policy any more defensible.

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