Denying the Failure of Austerity Policies by Claiming That They Were Never Enacted: Understanding the Last-Ditch Effort to Save a Disastrous Ideological Agenda

Posted in: Politics

The Great Recession and its painful aftermath have seen the curious re-emergence of a completely discredited—indeed, even laughable—idea: that the proper response to an economic disaster is for governments everywhere to cut spending and reduce deficits.  This is an idea that most economists thought had been firmly banished from informed thought by the experience of the Great Depression—and, especially, that of World War II, when the United States finally started to spend at levels sufficient to bring the economy to full employment (and beyond).

But no bad idea ever truly dies, it seems.  Some economists are committed to an anti-government ideology, and they advise like-minded politicians.  Therefore, seizing on the current economic crisis, leaders in the major economies across the world have perversely engaged in the economic equivalent of bleeding a patient with leeches, by draining the lifeblood of spending from economies that had only recently endured near-death experiences.  Government spending has been cut, some taxes have been increased, and we were supposed to see the happy results as businesses and consumers increased their spending, putting unemployed workers back on the job.

Predictably, that is not at all what happened.  The Euro Zone still has an average unemployment rate that is above ten percent, and rising.  The British economy staggers under severe spending cuts, and layoffs of public workers.  The United States, where spending cuts have been less severe, continues to struggle, with unemployment still above eight percent, four years after the low point of the Great Recession.

Is this the end of the cult of austerity?  One would hope so, but the true believers simply will not let go.  In this column, I explain the increasingly tenuous defenses of the austerity doctrine, including a new and bizarre claim: that we never really gave austerity a fair try!  This contention is sheer nonsense, and explaining why that is so will require untangling some sophistry from the political and economic right.

The Economy, Confidence, and Austerity: The Big (and Wrong) Idea Behind Spending Cuts Was That Governments Were Getting in the Way of the Private Sector

Last December, I wrote a Verdict column in which I explored the extremely weak theoretical argument—and the even weaker empirical evidence—supporting the doctrine of “expansionary austerity.”  The idea was that businesses and consumers would see their governments cutting spending, which would then inspire confidence that governments were getting their fiscal affairs under control, clearing the way for the private sector to rebound and allowing the economy to expand.

Economists like Joseph Stiglitz and Paul Krugman sardonically described this theory as “believing in the Confidence Fairy.”  Even on its own terms, the theory made no sense, because we know that confidence in the economy, as felt by businesspeople and families alike, is based on their assessment of whether they will have money coming to them in the future.  Especially during a deep recession like this one, businesses lack customers, and people who have not yet lost their jobs are worried that they soon will join the ranks of the unemployed.  What everyone fears is that things will get worse before they get better.

Under those circumstances, why would any business spend money to build a new factory, or to upgrade its equipment, or to hire more workers, especially when it does not have enough customers to buy what it is already producing?  And if the government reduces its spending, then the businesses that sell to the government will be forced to lay off more employees, reinforcing the downward spiral.  Other businesses see this dynamic occurring, and everyone braces themselves for worse times to come.  Private-sector spending goes down, not up, reinforcing the harmful effects of the government’s program of austerity.

Of course, if we could magically get everyone to believe that things would get better, they actually would get better.  Confidence matters, but we cannot force people to be optimistic.  The supposed boost in confidence that austerity proponents tout is always more than offset by the confidence-killing knowledge that sales and employment will be harmed by reductions in government spending.

Again, most economists knew (or should have known) this to be true all along—that is, they knew full well that austerity is damaging to an economy, especially a weak one—but some were willing to pretend otherwise, apparently in the service of a larger ideological agenda.  Even so, the evidence continued to accumulate that austerity had never worked as advertised, while the day-to-day experience under this new round of austerity measures showed that matters were not only failing to get better, but becoming increasingly dire.

If Spending Goes Up, Is That Evidence That Austerity Never Happened?  Understanding How Failing to Expand, in a Weak Economy, Amounts to a Decision to Contract the Economy Further

One line of defense against this accumulating anti-austerity evidence was to trumpet the supposed success stories, with Ireland being held out (not once, but twice) as an example of a country that had swallowed the harsh medicine of austerity, and had seen positive results.  It turned out, however, that the Irish economy continued to struggle, and the attempts to claim otherwise collapsed quickly under the weight of the evidence.

If the promised effects of austerity fail to materialize, and the evidence becomes increasingly difficult to explain away, then what is a committed ideologue to do?  The answer is simple: Claim that we never saw the good effects of austerity, because we never properly followed the austerity cure in the first place.

How is it possible for anyone seriously to make such a claim, when the United States has passed budgets containing trillions of dollars in spending cuts that will kick in over the next decade, including large immediate cuts at the federal level, and even larger cuts at the state and local level?  In Europe, the German government has pushed hard to force even the weakest countries on the Continent to cut their spending.  In Britain, the Cameron government has bragged about its success at shrinking the government sector, to make way for the promised confidence-inspired economic expansion that still fails to materialize.

The answer from austerity’s advocates, as other analysts have noted critically, is now to point out that government spending in all of the major economies has gone up in the last several years, not down.  How can that be?  At least as a prima facie matter, this would seem to suggest that, somehow, the much-ballyhooed spending cuts were never truly enacted.  Up means up, and not down.  Right?

As appealing as that simplistic argument might be, it is wrong, for two related reasons.

No one claims that the original downturn in the world’s economies was caused by austerity measures.  The global financial collapse caused the Great Recession, and only later did governments foolishly respond with spending cuts.  Even so, the economic collapse put many people in need of relief from the effects of joblessness, bankruptcy, and despair.  In that context, then, we would expect that spending would rise significantly in the face of an economic catastrophe.

What even the revisionist story shows, however, is that aggregate government spending in most countries either stayed flat or went up by a very small amount, from 2008 through last year.  (Importantly, however, both Spain and Greece actually did reduce their spending, even in the face of accumulating need on the part of their populations.)  The government in the U.K., for example, saw spending rise by a few percent in 2009 and 2010, before the new Cameron government’s austerity policies flattened the curve in 2011.

Of course, these data are being presented by austerity’s defenders in a way that fails to account even for such basic factors as inflation and population growth.  Properly measured, therefore, even the supposed growth of spending in austerity regimes is nowhere to be seen.

Even without those adjustments, however, the defense of austerity still does not add up.  Think of it this way: If a government is faced with millions of people who suddenly need help, but the government refuses to help those people, then that government is being austere by simply holding spending constant.  Relative to what that government would have done had it not believed in the Confidence Fairy, it is refusing to pump life back into the economy, a decision that makes the economy grow weaker still.

The Spending Cuts Made Matters So Much Worse That Spending Elsewhere Had to Rise: Why the Defense of Expansionary Austerity Confuses Cause and Effect

The second reason that the “austerity never really happened” defense is unavailing can be understood only by separating (1) government spending that causes economic changes from (2) government spending that is the effect of economic changes.

Consider an analogy.  Suppose that a family has experienced a run of bad luck, with many members of the family needing medical care at roughly the same time.  Shocked by the resulting medical bills, the family decides that it is spending too much money on medical care.  In response, members of the family stop buying medications that they need to control the various ailments for which they recently sought treatment; stop seeing their doctors on a regular basis; and try to “tough it out” when new health problems arise.  They are being austere, by cutting their health care spending.

Fairly quickly, things will go awry.  Some members of the family might become so ill that they need to go to the hospital.  Specialists must be hired to deal with the worsening of various health problems, increasing the costs to the family.  More exotic and expensive medications must be purchased, in response to diseases that have become more difficult to control.

Now, it would be possible for the family to double down on austerity, by simply refusing even to deal with the extreme illnesses that their earlier false-economizing caused.  In that case, it would be possible to prevent spending on medical care from rising, even in the midst of the increasingly frightening decline in the family’s health.

Happily, that kind of “doubling down” is not the course that even the austerity-inspired governments have taken (so far).  Those governments did respond to the Great Recession by cutting spending, causing matters to become worse rather than better.  The effect of those spending cuts, however, was to harm people and the economy, with the resulting support from the government (unemployment insurance, Medicaid coverage, and so on) pushing the overall amount of government spending back up somewhat.

To return to the example of Ireland, the evidence (see the graphs available here) clearly shows that the overall level of government spending has dropped there in the past year, after rising from 2009 to 2010.  Even so, the Irish government’s affirmative policy choices caused it to cut spending on government consumption and investment every year from 2008 onward.  This means that Ireland really did choose the austerity path.  The resulting pain, however, saw the government spending as much on social benefits in 2011 as it had in 2009.  Given the increasing needs of the growing army of unemployed Irish citizens, however, this amounted to a decision to reduce support for each citizen who needed it.

Therefore, observing that spending did not go down, or did not go down by as much as one might have expected, is simply not—as some claim—evidence that austerity policies were never truly adopted, in Ireland, in the United States, or anywhere else.  It is evidence that we still have not entirely lost our humanity, because we are still willing to deal with the consequences of a weak economy by at least trying to ease suffering somewhat, rather than seeing it continue.

This means that calls for even greater austerity measures—or, as its advocates would have it, truly committing to austerity for the first time—add up to the decision to cause the economy to get worse, and then to refuse to respond to the entirely predictable pain and suffering that those cuts in spending will cause.

In the United States, the cuts contained in the Republican-passed budget in the House of Representatives represent exactly such an immoral choice: Medicaid, unemployment insurance, and so on, would all be cut deeply, and those programs would be redesigned so that their benefits would not increase, even in the face of growing needs.

Sadly, even some of the Democrats’ response to the Republicans’ cuts amount to an unnecessary austerity plan.  At least, however, the Democrats would not kick people when they are down.  This is not the ideal approach, but it is better than the Republicans’.  If we cannot bring ourselves to enact policies to expand the economy, at least we must mitigate the resulting pain.