It's Airborne
by digby
This fiscal fetish disease is now a global pandemic:
New Japanese Prime Minister Naoto Kan has picked fiscal conservative Yoshihiko Noda to be his finance minister, opting for someone with a zeal similar to his own for fixing the country's tattered finances...
Noda, who sees Greece's debt crisis as a warning for Japan to get serious about curbing its huge public debt, will need to help the government craft a strategy on fiscal reform which the government has promised to deliver by the end of this month.
This is getting very serious.
But speculating about the psychological/sociological/ideological reasons as to why these people are hellbent on telling the ghost of John Maynard Keynes to go fuck himself can't really tell us anything unless we figure out what they are telling themselves that's so compelling they are prepared to fly in the face of common sense and put people through the kind of suffering they seem to be intent upon putting them through.
Ryan Avent at the Economist tackled the question in this post, in which he discusses Krugman's recent posts about the fact that the markets are not telling us what these fiscal hawks are saying they're telling us. Indeed, they are saying the opposite. He then quotes Tyler Cowan:
Yields on debt in America, Britain, and Japan are behaving extremely well. Mr Cowen says:
In the blogosphere, discussions of market constraints are too heavily influenced by interest rates, which also "measure" an ongoing flight to safety. (U.S. rates have fallen of late, but does that mean our fiscal position has improved? Hardly.) All of these austerity-promoting leaders are in constant communication with their finance ministers and departments and many of them are hearing glum, on the ground reports from relatively competent bureaucracies. Furthermore many of these politicians seem to have the discipline to engage in a bit of worst-case thinking, rather than just looking at modal outcomes.
[ Now they decide to engage in worst-case thinking? How convenient.]
It's true that the low cost of borrowing for America and Britain is in no small part a result of the flight to safety from Europe, but does that matter? It remains the case that markets aren't pushing Britain and America for austerity, and the fact that those countries can currently borrow very cheaply makes it easier for them to avoid crisis. Meanwhile, one wonders whether finance ministers are as engaged with unemployed segments of the population as they are with bankers, and of course there are tail outcomes related to high unemployment, as well.
Yes, one does wonder that. And tail outcomes related to high unemployment should be of huge concern to anyone who understands the need for a stable society for future prosperity.
Doctors have determined that patients heal much faster if they are given strong pain medication after surgery because the stress of extreme pain causes the body to react unpredictably. For years, however, hospitals were run by religious organizations which adhere to dogma that says suffering is good for the soul and it was hard to convince them that giving large amounts of drugs to control the pain was the right thing to do. Now I thought that the economic corollary had been settled in the Great Depression, but evidently the economic medicine men have decided that we need to go back to biting the bullet rather than inject money into the system to make it heal faster and better. Why that's happened in going to a be a subject of great speculation for a long time to come, I would guess. But the passages I highlighted in Avent's piece do offer a glimpse into why that may have happened.
He further examines the facts and they don't add up to this global move to make people suffer in the name of needed austerity:
We can say with some certainty that markets are worried about European debt levels, but even there it's not clear whether it's the debt that bothers markets or the fact that the debt has been accumulated in slow-growth states in a fragile currency union with an inflation-hawk central bank. There might not be an immediate debt problem at all. It might merely be a European problem.
The distinction is important. If markets are scared about debt generally, then perhaps America and Britain should be embracing immediate austerity. If markets are simply spooked about Europe, then America and Britain should be doing the opposite—boosting demand to make up for the hole in the economy created by European fiscal adjustment... I don't know exactly how to read this situation, to be honest. I tend to think that it's wise to prepare for tail risks, and so it would certainly be very wise for heavily indebted nations to be preparing concrete and credible paths to fiscal sustainability. At the same time, I am increasingly concerned that leaders are reading a European political crisis as a generalised sovereign debt crisis, and that as a result countries who can afford to continue boosting aggregate demand are instead withdrawing support.
Given the continued weakness in developed economies, this could be a huge and costly miscalculation.
And a huge problem for the people. Moreover, the very fact that they are saying it's because the markets are requiring this, even though they clearly aren't, tells us that this is as Krugman pointed out earlier:
[T]he conventional wisdom now is that these countries must nonetheless cut — not because the markets are currently demanding it, not because it will make any noticeable difference to their long-run fiscal prospects, but because we think that the markets might demand it (even though they shouldn’t) sometime in the future.
Utter folly posing as wisdom. Incredible.
That's the story they are telling anyway. I'm not convinced that it isn't really a case of the financial elites seeing the opportunity to drastically cut --- excuse me "reform" --- the welfare state and going for it. Unfortunately, as we know, people and economies don't always heal properly when in terrible pain, so while they may cut out the hated safety net they could end up killing the patient.
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