Paul Krugman’s newest work a piece simply entitled: “Keynes Was Right.” I want to focus on only one thing Krugman says in the article, since taking apart his defense of the Stimulus as not being significant or big enough has been thoroughly debunked elsewhere. Krugman opens up his piece with this paragraph:
“’The boom, not the slump, is the right time for austerity at the Treasury.’ So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.”
For an economist that is essentially a politician at this point (or maybe a community organizer), Krugman’s choice of a quote is notable for its naïveté and it shows just how disconnected someone can be who studies and bases his argument only on theories of politics and not on practices in politics. I would liken Krugman to a theoretical physicist who, when confronted by contradictory results from experimental physicists argues the reality must be wrong because the theory is right. In this case, the assumption which bears no relation to reality is that governments (at least in Western societies today) are rational (and Keynesian) economic actors who implement austerity during boom times.
In Washington and elsewhere, the logic by those in power (presidents, congress, members of parliament, prime ministers) inevitably goes something like this when the world is moving along: “Times are good. We are collecting a lot of tax revenue. Let’s spend that money and make wonderful improvements (in infrastructure, public works, etc.) with all this “excess” money. There will be roads for Bob, a new airport for Jim, guaranteed free access to healthcare for Sue, more teachers per pupil for Cathy and a high speed train for Tim. We can afford all of this now and in the future we may not be able to, so spend while we have the money. And, if we don’t have all of the money, we’ll borrow what we need based on these great projections of continuing prosperity that makes credit cheap. Besides, we will all get reelected by grateful constituencies that get their priorities funded.”
When the world is suffering, the logic goes like this: “Times are bad. We have very little money but we have made promises to Jim, Sue, Cathy and Tim. Some of those promises are even guaranteed by law. The ones that aren’t we dare not keep for fear of angering the constituencies. What do we do? We borrow lots of money. We burnt through our cash in good times, but we can always promise to pay in the future, when we are sure times will be good again and we will have so much productivity that it will be easy to pay down our debt. Also, Keynes said we should increase government spending in a recession. We don’t think his advice during the good years is particularly relevant – he was writing in a much different time – but his advice on spending during recessions is every bit as poignant now as it was the day he put pen to paper. Besides, we will all get thrown out by angry constituencies that don’t get the money we promised them.”
In short, it is very simple. Politicians make decisions for many different reasons and, usually, for their own political interests. Even if we assume Keynesian theory is right, politicians do not study Keynes – they only borrow those principles that conform to the choices they are already going to make and use the theory as a fig leaf. You cannot make a serious argument as an observer of the political process that assumes, as Krugman does, that economic theory will win over political reality. When empirical data contradicts theoretical formulas, you need to rethink your formulas.