Austerity: Who Loves Ya Baby?

Since the onset of the great recession, there has been a pitched battle among economists and policy makers over the proper governmental response. Austerity has been championed by economists of the freshwater school and those Paul Krugman calls the Very Serious People (VSP) of Europe and the American Right. Krugman and Brad DeLong have been fairly lonely voices shouting that those who don’t remember Keynes are doomed to repeat the worst of the past.

In practice, austerity has bitten deepest in a few countries in Europe that depended too much on the kindness of strangers – or at least on Germans - and in the US, because States mostly have to run balanced budgets, and in Britain (because the Brits are nuts). A new paper by Larry Summers and Brad DeLong demonstrates what Krugman has been saying – Austerity has been a miserable failure as economic policy, impoverishing millions and reducing economic output almost everywhere.

Krugman is astounded at the pigheadedness of the Lucasian economists and VSP who can’t bring themselves to acknowledge what the data show so clearly – that austerity is a miserable, and misery creating, failure. He attributes it to intellectual stubbornness and fear of admitting that one is wrong.

I have a more devious theory. If an obviously faulty theory is fiercely championed in the teeth of facts, I think, the size of somebody’s paycheck probably depends on it. But whose? Who benefits from a depressed economy and deflation? Not entrepreneurs. Not manufacturing. Not most service industries. And certainly not workers of any sort. Bankers? The rentier class? Well, maybe.

Those last two groups fear inflation like death, and have the money and power to control debate even when most of the facts aren’t on their side. They also really hate low interest rates. That’s my guess for the moment anyway. And my advice for Krugman is – don’t look for your explanation only in human vanity – look at whose pocketbook is in play.