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Krugman Weeps!

Why Austerian Economic Policies are not “mistaken.” They are strategic!


Contemporary Keynesian economists are beside themselves. I have an image of Paul Krugman and Dean Baker et al. trying to cover the bald spots from where they’ve pulled the hair out of their heads. They just can’t understand why, despite overwhelming evidence to the contrary, austerity measures and debt reduction are the dominant paradigms of the day as opposed to public investment and stimulus (or, as Krugman argues, Economics 101). Krugman astutely refers to austerity and deficit hawkishness as “Zombie ideas,” or theories that are constantly being shot down by the evidence, but refuse to die. He and his popular contemporaries inundate us with clear data and sensible explanations of otherwise complex theory proving what our experience already demonstrates. Austerity is the wrong approach to our current economic crisis, and the “Confidence Fairy” is never going to come.

Their economic thinking is, of course, sound. The Keynesians are right. We are in a liquidity trap in which central banks, in our case the Fed, can’t decrease interest rates any more to encourage investment and spending. Families that are lucky enough to have semi-stable jobs are overleveraged or unwilling to spend in uncertain times. Business owners, without a demand base, are unwilling to invest in product or hire employees. No amount of tax breaks or deregulation, or spending cuts for that matter, will change this fact. It is clear that the Lesser Depression is driven by stagnant demand, and if consumers are unwilling to spend, then the government must. Period.

Yes, this would mean deficit spending, but with record low interest now is the time to invest in needed projects and programs. This is not new age radical thought. It is well established and confirmed theory straight out the standard text. We know what caused the Great Recession and we know how to fix it. Now!

“Well that’s great!”

“So why aren’t we doing it?”

Ah, that is the question.

This is one question that Keynesians are ill prepared to answer. They shake their heads and bemoan the fact that we are repeating the “mistakes” of the Hoover Administration. They point out that the austerity paradigm has failed everywhere it’s been tried, from Japan to England, to Ireland (the poster child for austerity). The policies are definitively wrong-headed.

From an economic perspective they are right to be flummoxed. It defies scientific logic to single-mindedly pursue patently inadequate policies if the goal is to turn the economy around. That is where the impeccable logic of the economists leads them astray. To understand the irrational magic that keeps the Zombies stumbling along, one needs a bit of the madness that is the sociological imagination.

The economists, and many others, make three incorrect assumptions in their analysis.

First, economists assume that the so-called Austerians are making a mistake and the government, in following along, is promoting bad policy. Those in authority are not blind to history. They know the consequences of their small government, Hayak/Rand inspired dogma. They are not stupid or ill informed. So why are they pursuing these obviously failed policies? They promote them because they effectively achieve the goals of the corporate elite whom they serve. Their thinking is not mistaken—it’s strategic.

In a strategic sense, austerity policies make perfect sense on the part of the elite. Pounding the drum of fiscal “responsibility” and deficit reduction during a time of economic contraction is advocating freedom from regulation, consolidation of power, and the disempowerment of working people. For the economic elite, taxes, regulations and social safety nets are costs from which they derive no benefit. They are, in other words, bad investments. Especially when the truth is that the corporate elite can get everything that they want and more without these impediments.

The existence of a social safety net rankles the elite. Their own social safety is, of course, assured. They don’t need any stinking laws or programs. They just need to make obnoxious profits, collapse the economy of the entire world, and wait for the taxpayer bailout—from which they will give themselves huge bonuses in the name of quality retention. They don’t need Social Security, or Medicare, or the like, so these things are not only bad investments, they are counterproductive.

Social safety nets, by providing security for working people, are empowering and freeing, decreasing their dependence on employers (arguably increasing dependence on the government, but that’s another matter). A working man who can quit his job without worrying about losing his health care, or who knows he will be able to retire at a certain age, or has an economic cushion in the event that he loses his job, is a liability. On the other hand, an employer who fears for his future if he should step out of line at the workplace is nice and docile, a great investment. People who are free to make use of public investments to improve their social standing are potential competitors. Strategically, it makes no sense for the powerful to empower others. The key is to keep working people as low, as pathetic, as dependent as possible.

Um…without them killing you.

That’s where the government comes in. The only social safety net of value to the corporate elite is a strong police force, a powerful military and an expansive prison system. All the better if they can get working men and women to pay for these things. After all, corporations profit from the expenditures in the form of military defense contracts, weapons and body armor sales to the state, and privately run prisons. It’s quite the set-up.

Currently, only about eight percent of people born in the lowest wealth quintile will work their way up to the top quintile. For the power elite, who reside within the top percentile…or even the top percentile of the top percentile, this minimal social mobility is too close for comfort. They must defend their social position.

The next misconception that economists assume is that the economy is a monolithic whole. Granted, I’m not an economist, so I’m sure I can be taken to task for this statement. Surely, economists in their studies may break the economy down into component parts, but they still refer to “the economy” in the singular when they address a lay audience. We rely on popular intellectuals like Krugman etal. to educate us. For the most part, they do a fantastic job. Presenting the economy as a unified whole may be an effective way of breaking down otherwise complex economic theory, but it neglects a big part of the story. In fact, the market structure can be best described as having at least two distinct “economies” if not more.

The most influential economy is that within which the wealthy live and do business and move their respective politicians around the economic chessboard. This economy is doing just fine. In fact, it’s thriving in this recession. The stock market continues to grow. Profits are up, many at record levels. Effective tax rates remain low for the Koch class. Workers are nice and desperate for jobs and are less inclined to rock the boat with their pesky unions and demands for higher wages and benefits. They are willing to work for less so long as they have jobs. Unions, the only check against corporate abuse, are going the way of the dodo. All corporate misdeeds are federally guaranteed. Yes, the government has sworn upside down and backwards that they will not give any more bailouts, but we know how robust political promises are. Corporate elites and their lobbyists laugh at the unassembled erector set known to us as Dodd-Frank. The government has demonstrated time and again that they will bail out the 1% and pass the costs down to working people, school children and pre-schoolers without asking a single dime from the wealthy.

Why on Earth would the elite and those “very serious people” who work for the elite want to change the status quo? It works so well for them.

The second “economy” is the productive sector of the economy—working men and women. This is the sector that bears the brunt and ultimately pays for the inevitable economic calamities caused by the elite. The dirty little secret that the elite do not want known, however, is that they are entirely dependent upon the labors of the productive economy. The wealthy do not drive the economy, they respond to it. It’s the labors of every day men and women that drives the economy. Instead, the productive class is held hostage to the so called “job destroyers creators” in both body and mind. The resulting alienation, hopelessness and irrational divisiveness among common people plays into the hands of the elite.

Finally, economists assume that it is the government’s function to promote the general welfare of all of its citizens. After all, it is in the job description. From this perspective, the government is blatantly derelict in its duty in pursuing contractionary polices when they know full well that expansionary policies are necessary. It is malpractice most cruel.

The function of government, however, is never to promote the general welfare, certainly not to consider the needs of its common citizens. The function of government is, rather, to promote the interests of the elite and to protect them from the consequences of their own avarice. Occasionally, it becomes contingent upon the government to negotiate between the two economic sectors. This happens when the productive sector takes arms against the elite sector and determines to tear it down. Sometimes the government uses force against such trespass, as in 1877; sometimes when the common man becomes too extensive for slaughter, the government institutes equalizing reforms, such as during the New Deal.

Regardless, the government is always the representative of the elite. Government of the people is a useful fiction pulled out for inaugural addresses and parades. Austerity is the American economic policy, with few minor adjustments made for the sake of campaign cosmetics, because the corporate elite want austerity. Their representatives, bought and paid for, will do as they’re told. What’s more, they will make sure that nothing even close to the New Deal ever happens again. It took them sixty years to tear down the hard fought reforms of the thirties. They are not about to go back now.

Austerity has little to do with economics outside of the devastating effects it has on most Americans. Those promoting austerity are not just pushing a wrong-headed agenda based on an almost religious faith in Randian dogma. They are pursuing an agenda in which the economic elite have invested a great deal and for which they reward their spokespeople handsomely. It is not an economic policy. If it were, austerity zombies would remain in the grave where they were buried with the publication of the General Theory. Austerity is a power strategy…and, so far, a successful one at that.


Note: Just as I was about to publish this blog I noticed a couple of posts from Paul Krugman. Since I used his name in the title and referenced his work quite often it’s only fair that I point out that he has recently offered some institutional analysis of austerity, here and here. Damn you, Krugman, for stealing my thunder! Well, to a certain extent. His analysis is not quite so radical as mine.

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