How Austerity Could Fail Its Way Into US Hearts and Minds
Marshall Auerback compares the job numbers in the US to those in Europe and asks why the US is doing so much better (or failing less miserably). One of the differences he highlights is the zealous dedication to fiscal austerity in Europe, compared to the relatively half-hearted, passive observance of doctrine in the US.
For people operating on the basis of loose stereotypes about the differences between the US and Europe, this has perhaps turned out to be surprising. You might have assumed that Europe’s more expansive social welfare systems would be accompanied by more progressive approaches to fiscal or monetary policy. But as Matt Yglesias observes, Europe is awash in some pretty conservative ideas about macroeconomic policy:
… the American right has lately fallen out of love with both J.M. Keynes’ fiscal stimulus ideas and Milton Friedman’s monetary stimulus ideas. Tussle between these two has dominated practical policymaking for decades in the United States, but if conservatives were to cast their eyes toward Europe they’ll find a continent where these ideas about demand-side management get short shrift.
(To muddy the waters a bit, due in part to the strength of the aforementioned social welfare supports the default fiscal policy stance in Europe is actually more expansionary than in the US. More robust automatic stabilizers in Europe make a “do nothing” policy more fiscally expansionary, even while official or discretionary European policy is dedicated to deficit reduction and tight money. In the US you have almost the reverse: automatic stabilizers play less of a role in counteracting recessions, while official policy—in the White House, if not Congress—continues to feature calls for more discretionary stimulus.)
To add a cute little twist to this tale, the dismal failure of these contractionary policies in Europe could, perversely, help entrench the American right and its ideas for some time. If Europe collapses outright or even continues to limp along, the US recovery is likely to get bogged down, which in turn makes the election of a Republican President in 2012 more likely. And as Ezra Klein points out, if more robust catch-up growth emerges in the US some time in the next five years, the person sitting in the Oval Office, and his policy message, will get most of the credit. So the abysmal practical failure of a set of policy ideas in Europe could actually end up entrenching those same ideas on this side of the pond.
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Martin Feldstein wrote a post on this topic yesterday, in which he laments the ECB’s lack of understanding of the need for cyclical deficits brought about by automatic stabilizers. The post is titled “How to create a depression.”
We have benefited from the American right’s ignorance of Keynesianism. They think tax cuts do not qualify as Keynesian stimulus.
Nixon was right. We’ve all been Keynesians for 50 years now. It’s just the right hasn’t realized it yet.
Tyler, I don’t know if mine is a more optimistic take, or more pessimistic. I suppose it depends on whether you think cynical opportunism is a better vice than ignorance. But I don’t think the right, or at least the “establishment” slice of the right (the part that will be running policy in a GOP White House), is either ignorant or unsupportive of Keynesian ideas.
The R’s passed a stimulus bill in 2008 (it was called “The Economic Stimulus Act”—and even contained a spending element. Cantor, Boehner, and McConnell voted for it), candidate Jon McCain proposed stimulus, Mitt Romney spoke in favor of fiscal stimulus as late as 2009, and back in the early W. Bush years you could hear spokescritters name-check Keynes as a way of justifying the tax cuts. In fact, even Paul Ryan can be found (pre-Obama) making distinctly Keynesian arguments. Lately, however, they’re skeptical even of tax cuts (see payroll tax cut extension fight).
Now, some portion of the Tea Party wing may in fact be truly dedicated to Real Business Cycles or whatnot, but I would expect that if there is a Republican in the White House in 2013 and the economy is still dragging, we will, as you have Nixon saying, all be Keynesians again.