Krugman and Karl Smith on the Fine Print in the Recent Growth-Through-Austerity Reports

Hey! Even I was tricked by the three-card monte of the recent GOP/AEI research on growth-through-austerity, and I’m trying to watch the red Ace very closely as these conservatives spin the cards around. Where I thought they were actually putting their markers down on the full “growth through austerity” case, where cutting the deficit is the most important thing to do for the economy right now, they each had an escape hatch where they can say “umm, we actually just said growth would be boosted a bit from ‘Non-Keynesian’ elements like confidence. Not that the economy would expand.” Palming the expansionary card, everything left on the table is higher unemployment, lower GDP, and a transfer from necessary services towards corporate tax cuts. Well played.

We discussed the conservative economic argument of why the Republicans are trying to cut government spending ASAP (cuts that the Democrats are becoming part-owners of), and the mousetrap contraption that is necessary to work in order to have this leave us with a stronger economy, and how these arguments come from a JEC report and an AEI report.

Krugman caught this language from the AEI report:

One thing Mike fails to note is that the recent AEI paper on deficit reduction, which is cited by that JEC study in a way that might make you think that it supports the case for expansionary austerity, actually never provides any evidence to that effect; it focuses only on deficit reduction as an end in itself. In fact, it comes close to conceding defeat on the issue:

While the tendency for spending cuts to be more effective at driving down debt levels is widely accepted, there is a great deal more controversy concerning the impact of successful consolidation on GDP growth. Although empirical studies have found many consolidations coupled with expansion, the degree to which consolidation drives rather than merely accompanies expansion is disputed. Various mechanisms have been proposed through which consolidation may spur growth, including credibility effects on interest rates and the effects outlined under the expectational view. However, the literature has identified endogeneity issues in many of these studies that may cause them to overstate expansionary effects.

Not that this will make any difference to the GOP position, of course. It’s notable that the JEC report blithely cites Canada and Sweden in the 1990s as demonstrations of its case, even though both have in fact been extensively debunked.

And Karl Smith goes over the JEC report:

Actually the JEC report doesn’t even say that cutting spending is expansionary. It lays out a mechanism through which it might not be contractionary and the layers on a bunch of asterisks. The baseline conclusion of someone reading the report is that all the asterisks are there because they don’t really believe what they are saying is likely. However, someone asked them to put together a report showing that its possible….Let me go into more detail quickly about the art of the “possible.” From the GOP staff report

Consequently, fiscal consolidation programs that reduce government spending decrease short-term uncertainty about taxes and diminish the specter of large tax increases in the future for both households and businesses. These “non-Keynesian” factors can boost GDP growth in the short term as well as the  long term because:

You might be inclined to read this as if the authors are saying GDP could grow as a result of the fiscal consolidation because of factors they are about to list. [edit: I did! – Konczal]

Yet, that’s not what those sentences actually say. They say the non-Keynesian factors can boost GDP.

That is, after the you account for the loss in employment due to government consolidation that you shouldn’t stop there. It is conceivable that GDP will be higher than the depressed level that Keynesian analysis would predict because of non-Keynesian factors….

tellingly they also say

In some cases, these “non-Keynesian” effects may be strong enough to make fiscal consolidation programs expansionary in the short term as well the long term.   A number of developed countries have successfully reduced  government spending,  government budget deficits, and stabilized the level of government debt.  Fiscal consolidation programs in Canada, Sweden, and New Zealand, among others, achieved their goals for government deficit reduction and government debt stabilization and  boosted their real GDP growth rates by reducing government spending

Again you might be tempted to read this as: I am giving you some examples in which austerity caused short term growth. Again, that is not what this says.

I love the crowdsourcing elements of the econoblogosphere. I shouldn’t have been surprised, as conservatives been honest all along that they want excuses to cut the government budget, not actually close the deficit or get the economy working again. “Fiscal conservative” just means “I want to achieve conservative priorities and values through fiscal means”, not anything really having to do with credibility or solvency. Ezra Klein had this really eye-opening interview with Grover Norquist earlier in the month, where Norquist flatly stated that the mission of the GOP is to reduce spending, not reduce the deficit:

Ezra Klein: Let me start by making sure I have your position right: We can and should balance the budget without increasing any taxes from the current levels, and perhaps while cutting them further.

Grover Norquist: Yes and no. We should reduce total government spending as a percentage of the economy. The left wants to focus on the deficit so they can take us away from the focus on spending as a percentage of the economy…The goal is to reduce the size and scope of government spending, not to focus on the deficit. The deficit is the symptom of the disease.

Yup.

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2 Responses to Krugman and Karl Smith on the Fine Print in the Recent Growth-Through-Austerity Reports

  1. JCD says:

    It makes sense in a fashion, if you think about it. For some bizarre reason, the public sector theoretically gives everyone an equal say in deciding how to utilize resources. The private sector doesn’t have this annoying feature. Instead, those who are smart enough to earn, loot, or inherit resources control their utilization.

  2. ovaut says:

    Do you every worry you’re wasting time trying to understand them?

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