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 it’s 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.
This column was first published on Mainly Macro