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Franklin Delano Roosevelt's First Inaugural Address diagnosed the essential weirdness of recessions: "our distress comes from no failure of substance," he noted. "Plenty is at our doorstop, but a generous use of it languishes in the very sight of the supply." The reason for this? "Primarily this is because the rulers of the exchange of mankind's goods have failed...they have tried, but their efforts have been cast in the pattern of an outworn tradition."

This last factor, that in the grip of a massive decline in production, employment, and consumption, the world's leaders decided to maintain the gold standard and free exchange of currency by balancing budgets, cutting spending, and raising taxes and then to do it over and over again, despite the failure of that policy to show any positive result, is to my mind an absolutely critical one. For all that the critiques of John Maynard Keynes and other dissident economists were eloquent and correct, the reality was that they had been making their arguments for over a decade to no avail.

Today, we seem to be stuck in a similar pattern, where the conventional wisdom on economic policy fails to produce results, but retrenches even more strongly despite this.

Why is this?

A Common Madness:

Here in the U.S, we have seen a sudden lapse into irrational political behavior. Despite the manifest reality that:

* the stimulus did, in fact, have a significant, positive (but insufficient) effect on employment and economic growth

* due to the recession, we have forgone $2.8 trillion in production, and stand to lose another $2.3 trillion before full recovery takes hold

* spending cuts mandated by the debt ceiling deal will reduce growth by 17% and cost over 300,000 jobs

Not only have we turned away from any further stimulus well before the 2010 midterms and adopted a national obsession with debts and deficits. We've had deficit commissions, ratings agencies, and now a Super Congress pushing and pushing the same line that we must choose austerity or the bond market will retaliate against us. And yet, at no point has the economy responded in the way they have predicted: interest rates on government debt have fallen into the negative for 5 and 7 year Treasuries, and 10 year Treasuries are virtually zero-interest. To the extent that the markets have reacted at all to almost two years of Chicken Littleism on public debts, they have acted out of fear that austerity will lower economic growth.

Normally, when reality does not merely fail to match with theory but runs completely contrary to it, one adjusts theory. Instead, we seem to hold in our minds at the same time that austerity will depress economic growth but that it is necessary for growth to continue.

The same is true across the Atlantic. Despite an increase in unemployment to 2.5 million and a slump in growth to a negligible .2% a quarter, the U.K's Chancellor George Osborne continues to insist that there is no "Plan B." In the face of zero growth or near-zero growth in both France and Germany, the two pillars of the Eurozone have called for cuts at home and a balanced budget amendment for the E.U while the European Central Bank still persists in its course of refusing further monetary stimulus.

At every turn, economic downturn has brought calls for austerity for Ireland, Spain, Portugal, Greece, and Italy, austerity depresses expectations for growth, which makes the bond markets demand higher interest rates and lower ratings, which brings renewed calls for austerity. Never has the definition of insanity as "doing the same thing over and over again and expecting a different result" seemed more apt.

The Etiology of Magical Austerity Thinking and "Demand Denialism"

Describing the current wave of "magical austerity thinking" is not hard - and the way is made even more smooth by the yeoman work being done by Paul Krugman, Brad DeLong, Dean Baker, and other public intellectuals in documenting the rise in irrational economic logic. Their work is especially useful in pointing to another key feature of "magical austerity thinking" - not only does it include a belief that austerity must be right no matter what actually happens, but it also includes a flat rejection of the position that deficient demand is the reason for economic stagnation.

The more difficult thing is to explain why this is the case without taking the easy way out of simply asserting stupidity or simple corruption. I think the condition is more complex than that; my own attempt at a diagnosis suggests instead a confluence of four factors: solicitude of the have-muches, distaste for redistribution, fear of state capacity, and fear for the rights of the managing classes, which I'll discuss in pairs.

Solicitude of the Haves/Distaste for Redistribution:

Part of the problem with a "vulgar Marxist" interpretation of magical austerity thinking is its vulnerability to the counter-argument that, while austerity protects the short-term interests of bond-holders, by depressing economic growth, it damages the interests of stock-holders, corporations, and ultimately bond-holders themselves. If pundits, economists, elected officials and civil servants, and other members of the conventional-wisdom-forming classes are driven by their allegiance to the wealthy, why are they acting in a way that will cause long-term harm to the fortunes of the well-to-do?

I think the explanation is that wealth is not merely material, but contains its own ideology as well - a belief in property rights as well as property itself, even when the defense of the right might hurt the property itself. Part of this ideology includes a distaste for redistribution to the non-wealthy, even when redistribution is in the long-term interest of the wealthy, because the wealthy see their wealth as making them morally or personally superior to the poor - who they see as unworthy, lazy, and dangerous.


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World of Class Warfare - The Poor's Free Ride Is Over
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In the Great Depression, enlightened businessmen like Edward Filene, who supported the minimum wage, Social Security, and other New Deal programs because he wanted to ensure that consumers had money to spend in his stores, were few and far between. Far more common was the attitude of Andrew Mellon, who called for the liquidation of farmers and workers along with stocks, bonds, and real estate in order to "restore business confidence."

Today, we see the same dog in the manger attitude - wealthy people bitterly opposed to economic stimulus, foreclosure reform, the extension of unemployment insurance, and so forth, not because it wouldn't benefit them, but because they are both afraid and outraged that it would benefit the poor.  This has to be understood not merely as class sadism, but as emerging from a world view that combines the Calvinist obsession on the parable of the talents and economic success as a market of the Elect (or the modern fundamentalist "prosperity gospel") with a Social Darwinist conception of the marketplace. The result of this concoction - as you can see in the video clip above - is an inversion of the classic labor republican ideology of producerism, whereby the wealthy become the producing classes and workers and consumers are turned into parasites.

Fear of State Capacity/Defense of the Rights of the Managing Classes

While distaste for redistribution stems more from an individual distaste for taxes and government benefits, there is also a systemic component. Just as above, part of "magical austerity thinking" comes from an unspoken fear that Keynesian demand management might work - which would greatly expand state capacity for states that have been on the retreat on economic matters for thirty or more years. In this view, socialism follows the Keynesian flag - if people come to expect that governments can and should provide steady economic growth and low unemployment, they might demand state provision of health care, housing, or employment itself.

This anti-statist attitude also has to be understood as more than just abstract theory. Behind the rhetoric of the wealthy as the "producing classes" lies some unspoken approval of the Schumpeterian centering of the entrepreur as the "world-historical individual" of modern capitalism. If the market is self-regulating and the acme of efficiency, then the businessman is elevated as the savior of the world, the font of prosperity, both a rugged striver and a paternalist provider of work and civilization to the passive masses. What the "demand denialists" want, therefore, isn't just profits, but the unfettered power to determine prices, wages, working conditions, economic development, and public policy - to direct the course of the world's development.

If the government is needed and capable of providing economic prosperity, if business is ultimately dependent on the power of the exchequer and the purse, then the wealthy aren't the heroic Atlases they want to be. And when one's self-image is threatened, one will believe anything that wards off that threat.

Conclusion: the "Respectability Complex"

Theoretically, the "magical austerity thinking" of the center-right shouldn't matter - the left should be able to win victory on a straightforward agenda of Keynesian stimulus, regulation of the financial sector, direct job creation, and an expansion of social protections more generally. The problem is that, following the right-ward retrenchment of "Third Way" movements in center-left parties in the 1990s, a significant fraction of center-left political parties believe in "magical austerity thinking."

An even larger chunk don't, but act as if they do because of an inherited belief that in order to win elections, they must pander rightward to be accepted as a "respectable" political party. This is the larger victory of the "Third Way" - because even outside of the ranks of the DLC in the United States or the arch-Blairites in the Labour Party in the U.K and their continental counterparts, there is a quiet conviction that the electorate is hostile to a forthrightly social-democratic economic program.

This might have been true in the 1990s, so close to the fall of the Soviet Union and a bubble-fueled economic boom. In the era of the Great Recession, it no longer describes reality. The problem is now that the center-left has nothing to differentiate itself from the right; neoliberalism with a human face requires economic growth to spread around, and that isn't available now. The rising far right in Europe isn't economically conservative; voters in the U.S approve enthusiastically of taxing the rich and direct job creation.

What's needed is a center-left party willing to gamble on dis-reputability.

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Comment Preferences

    •  Google [ richard koo economics ] (0+ / 0-)

      What works and when and when not.

      Differentiates Keynes and Friedman, plus a lot more.

      I did a few diaries here.....................

      Angry White Males + Crooks + Personality Disorder psychos + KKKwannabes + "Unborn Child" church folk =EQ= The Republicans

      by vets74 on Sun Aug 28, 2011 at 05:55:41 PM PDT

      [ Parent ]

  •  Great point (4+ / 0-)
    What the "demand denialists" want, therefore, isn't just profits, but the unfettered power to determine prices, wages, working conditions, economic development, and public policy - to direct the course of the world's development.

    They feel entitled to this. They need to be reminded of this whenever they complain about anyone else's "entitlements".

  •  Conservatives, or the old guard, if you will, (2+ / 0-)
    Recommended by:
    DBunn, Marie

    have an over-riding interest in power.  That is their ulterior motive.  Thus, the management of the country's assets isn't directed towards the general welfare, but the subjugation of the masses by, in effect, making them beg for their supper.  It's not that there's not enough supper, just as it's not a lack of food-stuffs that keeps sending Africa to the edge of starvation.  It's that power, to be felt, has to hurt.  People have to be deprived for the deprivators to perceive that they are powerful.  But, since it won't do to impose a constant level of deprivation, lest people revolt or take revenge, the deprivation has to be cyclical.  This accounts for the supposedly "natural" fluctuations in the market.  Periodic recoveries also enable the deprivators to claim clean hands.  "See, it's not our fault."  Which, of we think about it, is exactly what Pontius Pilate said.  
    Obviously the obsession with power and the strategies used to gain and retain it are not new.

    Why don't we learn?  Well, people who are into being productive, are creative and sure of themselves have no interest in exercising power over others and simply assume that others have no interest in subjugating them.  Also, creative people are generous and don't really object to having some of their surplus taken by freeloaders who aren't capable of pulling their weight. Where the problem comes from is the lust for power, which develops into an obsession that is never satisfied.  No matter how much they requisition and accumulate, deprivators (as we see in the Libyan ruler) can't be satisfied.  They have to inflict hurt and can't help themselves.  Which is why there has to be an intervention.

    We should pay close attention when Republicans start yammering about the power they claim as theirs.  In a democracy such as ours, the power rests with the people.  So, those who want to claim it for themselves, are the enemies of the people.

    by hannah on Sun Aug 28, 2011 at 10:52:48 AM PDT

    •  Eh (1+ / 0-)
      Recommended by:

      I'm less convinced by theories that require conscious sadism to work. Even villains tend to think of themselves as the good guy of their own dramas.

      •  Debt does matter when extreme. (0+ / 0-)

        Look to Japan and America.

        Also, consider the comparison of this recent Bush admin debt-splurge with Adjustable Rate Mortgage scams.

        -- Raise the T-Bill rate a couple points and the burden becomes backbreaking.

        None of this is simple.

        Btw: there is one simple change available. That is, clear out the mortgage/housing overhang. The overhang refers to 1,000,000 houses that are off market -- a poison on new home construction.

        Clear the overhang ASAP and you get to 6% or 7% unemployment with a rush.

        Angry White Males + Crooks + Personality Disorder psychos + KKKwannabes + "Unborn Child" church folk =EQ= The Republicans

        by vets74 on Sun Aug 28, 2011 at 06:01:09 PM PDT

        [ Parent ]

  •  Deutsche Welle critique recently of EU (4+ / 0-)
    Recommended by:
    Delirium, tardis10, Marie, vets74

    points out that austerity measures promoted by Germany and France will drive the weaker members under financially which will in turn destabilize those two economies or in one analyst's term, an economic  mutual suicide pact

  •  A Singular (2+ / 0-)
    Recommended by:
    Delirium, Marie

    failure of Neo-Classical Economics, in it's popular version, is its inability to distinguish between the real, micro-economic, consequences  of one person making a billion dollars a year and 22,222 people making $45,000 a year.  

    To be fair, some Neo-Classical economists, Krugman being the poster child, do 'get' this.  however, they are being ignored at the Decision Making level while Bernacke,  et. al., go their merry way instituting policies favoring the one over the twenty-two thousand two hundred and twenty-two.

    How an economy based on mass consumption of mass produced goods and services can continue when the mass of consumers ain't got no money escapes me ... but then I don't believe in Invisible Pixies (Market Forces) spreading (Hidden Hand of the Market) Fairy Dust (lowering micro-economic inputs increases consumer activity) from Magic Ponies (as stated, above .)

    I'm silly that way.

    "...[one] must still have Chaos in oneself to be able to give birth to a dancing star." Nietzsche

    by ATinNM on Sun Aug 28, 2011 at 11:01:10 AM PDT

    •  Krugman is "Neo-Classical" ??? (0+ / 0-)

      What ?

      Since when is he a Fresh Water guy ?

      Did I miss something ?

      Angry White Males + Crooks + Personality Disorder psychos + KKKwannabes + "Unborn Child" church folk =EQ= The Republicans

      by vets74 on Sun Aug 28, 2011 at 06:03:50 PM PDT

      [ Parent ]

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