Today’s Priority Cannot Be Austerity

September 11th, 2011 at 9:16 am

Re economics professor Robert Barro’s oped in the NYT this AM: yuk, double yuk…yuk squared and yuk factorial.

Essentially, what we have here is a visit to the NYT from the deeply misguided editorial pages of the Wall St. Journal, where Barro is a frequent contributor.

The assertions are all wrong and the politics are too.  Start with the assertions.

“Today’s priority has to be austerity, not stimulus…”  I keep hearing this argument that somehow immediate cutting, slashing, and burning will generate growth and jobs, by how?  Usually, it’s “confidence” and “certainty.”

Obviously, such psychological states of mind matter a lot in an economy, but at a time like this, they simply can’t matter as much as customers.  And at 16% underemployment, with very low borrowing rates, high savings rates, and excess factory capacity, people and investors simply won’t engage in much economic activity.

The private sector won’t improve on its own in the near term, and Barro’s austerity prescription will only drag out that near term.  It’s very much analogous to medieval medicine—bleeding the patient to make them better.   See the UK case, where growth has slowed to about zero, but also see our own case, where the premature fading of stimulus measures has clearly been associated with slower growth to the point where job growth was zero last month.

Barro and others ignore the very different economics that prevail in recession, an area where Keynes’ insights still dominate (well…they should!).  Barro asserts that business investment will lead the recovery and that such investment is driven by:

“[s]table expectations of a sound economic environment, including the long-run path of tax rates, regulations and so on. And employment is akin to investment in that hiring decisions take into account the long-run economic climate.”

Again, this conflates the near term with the long term, recovery with recession.  Right now, firms face historically low capital costs and they’re sitting on lots of cash reserves.  What’s missing, as Keynes pointed out, is demand.  Right now, investment and jobs would follow stronger domestic consumption, not the other way around.

Globalization amplifies these dynamics.  American firms can sell into emerging markets, where demand is strong and growing.  They can invest, and have been doing so—fixed business investment contributed 1% to last quarter’s real GDP growth, which was…1%–and they’ve been highly profitable along the way.  But their investments and profitability are demonstrably not creating jobs here.

Barro solutions include a consumption tax—which he oddly argues is something liberals hate (that’s certainly not been my experience—liberal tax reformers typically like a progressive VAT)—and getting rid of the corporate tax.

More on these later if I have time to get back to them…one thing I can tell you for sure though:  they’re not on the table and they won’t be on the table for a while, and when they are it will take a very long time to adjudicate them.

What is on the table is a robust jobs plan that could actually help put some money in people’s pockets, fix some schools and some productive infrastructure, and get some folks back on the job.   If we can make those things happen, and perhaps get some monetary stimulus behind them as well, business investment is likely to follow.


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18 comments in reply to "Today’s Priority Cannot Be Austerity"

  1. azlib says:

    Austerity it seems is a virtue. But it is only a virtue for the “little people” – the wealthy need not apply. I really grow tired of people who obviously have never felt the sting of being laid off or the prospect of long term unemployment followed by financial catastrophe telling people there will be some economic nirvana just around the bend if we follow their advise.

  2. Jeff H says:

    The most amazing part of this, and most other “confidence” related articles, is that they seem to look at a problem, let’s say a flat tire. Then knowing there is a spare tire in the trunk, refuse to actually change the tire believing in a whole series of half assed measure to fix the problem.

    Some see the flat tire a simply an unbalancing of the core, claiming, if we just put everyone in the car on the side away from the flat, we will drive straight and eventually the tire will re inflate.

    While others believe that the tire is sign from god that we really shouldn’t be driving at all. I mean come on, how much does god have to do before you listen to the walking Americans.

    While the occupants of the car argue, Obama and company pull up and change the tire. As he leaves you can hear someone from the car call out, “Socialist!”…

  3. AndrewBW says:

    I like that you use the word “customers” and wish people used it more often. I think talking about “demand” sometimes obscures the matter. If you ask people what is the one thing every business needs, they’ll often say money. But while money is helpful there are many successful businesses which run on little more than a shoestring. The one thing every business must have to survive is customers. I would like to see everyone emphasize that more.

    • urban legend says:

      And you highlight the difficulty highly educated progressives have in thinking about how persuasive their arguments are. Too often, the technical word, usually more impressive to similarly-situated colleagues, is used where a simple word, like customers, would draw a clearer picture for more people.

  4. StreetEYE (@StreetEYE) says:

    If you limit conversation to what can be done politically right now, it’s a short conversation.

    Maybe you want to think beyond 2012, like Barro… long term, how do you reconcile Federal spending well in excess of 20% of GDP and demographically rising, with currently less than 15% of GDP tax collection (historically ~18%)?

    And how do you increase tax revenue while making it reasonably efficient and not choking the economy?

    Most economists would agree that major tax reform will be needed, and would agree with Barro that a VAT is relatively efficient, and the corporate income tax is severely distorting for a small revenue raise.

  5. Vicki says:

    Thank you so much! I was stunned to read this column in today’s NY Times…Amazing that people like this are treated as serious…and he teaches at Harvard?


  6. David says:

    I truly admire your continued optimism about the possibility of Congress passing any job-creating measures. We need people with a positive outlook, its the best way to achieve a positive outcome. But I fear that, no matter how I try, I cannot find a way to share this optimism.

  7. urban legend says:

    Don’t be such a punctilious nerd and diminish the impact by calling it “underemployment.” Under circumstances where the right wing has mounted well-funded, massive and relentless propaganda for over 30 years, with substantial capture of the national media, politics necessarily cannot be separated from legitimate policy. In material intended to persuade, as this is, it’s either “16% unemployment,” period — let the other side whine that the figure includes low-wage, no-benefits part-time employment — or if you simply cannot take the professor out of the blogger, “real unemployment” or at minimum, “effective unemployment.”

    • David L says:

      Well said. Over the years I have never grasped how the Democrats seem so eager to fight with their hands tied behind their backs. GOP as the fiscally responsible party? Really? Did no one else notice the Clinton surpluses and the massive “deficits don’t matter” debts accumulated from Reagan to W.?

      On this and so many other topics, I guess I just can’t decide if its fear, incompetence or simply playing a role as the “opposition party” that has led to this…

  8. Jim says:

    Truly a disgusting piece by Barro as I wrote in my blog today.


  9. Tom Cammarata says:

    If one is looking for evidence to support or deny a policy, why do conservatives ignore FDR’s adoption of austerity measures in 1937, of cutting spending and balancing the budget, which drove the economy right back into recession?

    Not to mention his organizing jobs and public works programs in 1932-33 that put much of the 25% unemployed back to work with money they could spend immediately and stimulate demand?

    Was nothing learned by conservatives in the Great Depression, other than how to ignore the obvious?

  10. Fred Donaldson says:

    The backroom corporate bigwig elite plan is simple – increase taxes on the poor and middle class with sales tax equivalent, cut middle class tax deductions like mortgage interest, r.e. taxes, medical expenses, and then lower middle class govt. benefits like Medicare, Medicaid and SS.

    In return they get earnings repatriation, reduced corporate and upper rate income tax, reduced estate tax, no dividend or capital gains taxes, and an award for being austere (to everyone, but themselves).

  11. JJ says:

    I’m curious about this: “What drives investment? Stable expectations of a sound economic environment, including the long-run path of tax rates, regulations and so on.” The Repubs are brandishing this argument—that regulations are slowing the economy—ahead of the fight with Dems over the jobs acts. In reality, the argument has always been there from the Right, even during good times: “over-regulation is slowing the economy.” If one narrowly focuses on short-term gains, then there is truth to it; just as it is true that safety equipment slows down a car. But now that the car is stalled, neo-liberals are suggesting that removing the brakes will help jump start the car. The analogy makes the idea seem foolish, but it is just an analogy (and like every analogy, flawed).

    I want to hear a persuasive “head-shot” argument that puts down this zombie economic idea. I’ve seen many progressive economists argue around it by focusing on the lack of demand in the economy (and hence the need for stimulus), but I have yet to see someone address this supply-side argument directly. Is it so patently false that it’s not even worth addressing or is it something difficult to disprove?

    Mind you, I’m only concerned with economic efficiency here; I’m setting aside the question of whether we would want deregulation even if it were to produce robust growth. That is, we could grow the beef industry by removing all safety inspections, but only the craziest neo-liberals would think this a good idea.

  12. Ken Houghton says:

    “liberal tax reformers typically like a progressive VAT”

    You deal with really stupid liberals, apparently. The costs of a “progressive VAT” (“I was driving a two-seater in the desert and saw a blonde, Santa Claus, and a Progressive VAT at the side of the road. I picked up the blonde because the other two were figments of my imagination.”) in management and reporting is significantly higher than just raising the corporate tax rate. If you assume corporate taxes will be passed on, then you effectively have a VAT at a lower enforcement and reporting cost (and, therefore, need a lower marginal rate).

    Of course, if you know those taxes aren’t passed on, you might prefer a VAT because you can pretend it’s “equivalent.” But that’s a different argument, and one most “Jared liberals” aren’t making. At least not out loud.

  13. genauer says:

    The first priority has to be Ordnung.
    The US has a gigantic private debt problem, produced by way too low interest rates and the lack of order, like lax credits, senseless tax reductions.

    Many People had seen this coming, like Warren Brussee: The Second Great Depression, Starting 2007, ending 2020

    All this socialist nonsense of piling up higher and higher amounts of debt, fueled by lower and lower interest rates, is like treating a criminal heroine addict with higher and higher doses insteatd of detox, if neccessary in jail.

    Northern European countries including Germany have gone successful through tough transition periods, we know how to do that, just learn and copy, and it includes austerity, always.

    • Chigliakus says:

      Debt moralizing, nice. Your criminal heroine addict analogy is flawed because you don’t understand the difference between private and public debt. Yes there was a run up in private debt in the US prior to the crisis, most of it in housing. (And in public debt due to “senseless tax reductions”, wars, etc. but that can be dealt with later when the economy is growing again and unemployment is at an acceptable level.) Now the private sector is saving and paying down debt, this deleveraging decreases demand. The Norther European countries that you reference fared well in their austerity periods via trade surplus and export booms. Not a realistic expectation in the current global slump.

      Economics is not a morality play. The current level of unemployment is destroying lives, real people’s lives. When the private sector won’t spend, the public sector needs to step in and borrow at the historic low interest rates it currently enjoys, so that it can spend and create jobs. Once demand is up, then we can and should talk about austerity in the public sector to get the national debt paid down.

      • Rodger Malcolm Mitchell says:

        If by “the public sector” you mean the federal government, additional borrowing isn’t even necessary. Since August 1971, the federal government has had the unlimited ability to spend without taxing or borrowing.

        Our Monetarily Sovereign government ( does not use taxes or borrowing to support spending. To pay its bills, it merely sends instructions to creditors’ banks, telling those banks to mark up creditors’ checking accounts. It can send those instructions endlessly, without issuing T-securities.

        Those who do not understand Monetary Sovereignty do not understand economics.

        Rodger Malcolm Mitchell

  14. Rodger Malcolm Mitchell says:

    Robert Barro’s “Today’s priority has to be austerity, not stimulus,” — the belief that somehow pain later will be rewarded with economic growth — is outrageous.

    First, we already are experiencing pain and plenty of it. If today’s massive unemployment and home loss is not sufficient austerity, I wonder what Professor Barro wants: The black plague?

    Second, there is no mechanism by which increasing taxes or reduced federal spending, i.e. reduced deficits, can stimulate economic growth. None.

    Those who do not understand Monetary Sovereignty ( do not understand economics. Reducing the federal deficit is like applying leeches to cure anemia.

    Rodger Malcolm Mitchell