Austerity: Krugman's False Message

Austerity is failing, crowed Paul Krugman last week in "The Chutzpah Caucus." By austerity, he means the policy of "slashing" government spending. The case is clear, he writes.

Claims that spending cuts would actually boost employment by promoting confidence have fallen apart. Claims that there is some kind of red line of debt that countries dare not cross have turned out to rest on fuzzy and to some extent just plain erroneous math. Predictions of fiscal crisis keep not coming true; predictions of disaster from harsh austerity policies have proved all too accurate.

Actually, most of the austerity over in Europe and here in the U.S. has featured tax increases. But we'll let that pass. Krugman then goes on to unearth the dusty remains of the 1937 recession-within-a-depression.

In the United States, government spending programs designed to boost the economy are in fact rare -- F.D.R.'s New Deal and President Obama's much smaller Recovery Act are the only big examples. And neither program became permanent -- in fact, both were scaled back much too soon. F.D.R. cut back sharply in 1937, plunging America back into recession; the Recovery Act had its peak effect in 2010, and has since faded away, a fade that has been a major reason for our slow recovery.

You can see the damage of this sort of talk. It is economic rubbish. Let's take a look.

In the first place, the First New Deal was not a Keynesian stimulus program; it was a program of cartelization called the Nation Industrial Recovery Act, keeping prices and wages high with price and wage controls. Settled science says that's a good way to throttle the economy. Then in 1935 the New Dealers passed a raft of vote-buying schemes to juice the voters in 1936 that ran out in 1937. But Krugman doesn't mention the contribution in 1937 of the newly-minted FICA tax and the big union wage increases resulting from the Wagner Act of 1935.

Settled science says that big tax increases and monopoly wage increases will smother a recovery in its cradle.

The real problem with Keynesianism is not its hair-of-the-dog pick-me-ups. It is that it involves a misdirection on the whole meaning of a recession. A recession, according to the Austrian economists, is a period of adjustment in which the malinvestments of the previous boom get liquidated.

In other words, the sooner that people give up on their failed projects, the better. In the case of the 2000s boom, we are talking about failed construction firms, underwater mortgages, and insolvent banks. Writes Ludwig von Mises in Human Action:

It is this process of liquidation of faults committed in the boom and of readjustment to the wishes of the consumers which is called the depression.

Go ahead; check it out yourself.

What we call "stimulus" is almost always an attempt by the government to shovel money at its supporters so that they don't have to readjust their economic behavior to the new conditions. What's needed instead is for underwater homeowners to give up on their mortgages and stop pumping money into them. What's needed is for laid-off workers to get a job, any job, as soon as possible. What's needed is getting new businesses started right now.

But what have the Obamis done? They have pushed green energy, investing billions in loans to Solyndras and Fiskers and Telsas, and billions of subsidies for wind and solar. Get a clue! If these cronies need loans and subsidies it means that their projects can't make money on their own; they are a drag on the economy, not a boost. It stands to reason that anyone trying to get money from the government is pushing a loser. If it were such a great idea, the venture capitalists would be happy to fund it without government money.

The fact is that millions of businessmen and tens of millions of consumers are much smarter, in aggregate, than a team of politicos and fixers ginning up a stimulus program. This is settled science from another Austrian economist, F.A. Hayek. The politician and the activist can never equal the businessman's hard-won knowledge of the needs of the consumers.

Now, of course, in a recession the government spends a ton of money on unemployment and food stamps to help people thrown out of work. But recession aid is not stimulus; it is a more like a dead loss to the economy, because it isn't producing a product.

In 1981, Ronald Reagan cut tax rates and domestic spending: businesses boomed and prosperity returned. In 2009 Barack Obama shoveled money at cronies and supporters and dissed businessmen as millionaires and billionaires. Is it any wonder, Dr. Krugman, that the results are so different?

Christopher Chantrill ( is a frequent contributor to American Thinker. See his and also At he is blogging and writing An American Manifesto: Life After Liberalism. Get his Road to the Middle Class.

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