Friday, December 30, 2011

2011 Was The Year Of Expansionary Austerity That Was Proven Wrong

Krugman sums up 2011 by listing all of the ways in which expansionary austerity was proven to be wrong. He believes that this vindicates Keynes who made the case for austerity during booms and deficits during recessions.

The case for expansionary austerity does make sense to those who observe governments providing benefits to "undeserving citizens" by borrowing money instead of collecting taxes to pay for the benefits. Greece is often given as an example, and some conservatives compared the US to Greece after Obama made an effort to stimulate the economy during recession. This enabled the GOP to revive its slogan about "tax and spend democrats" that has always appealed to its base. They even argued that America was facing bankruptcy if it did not cut spending immediately and make cuts to entitlements. The GOP represented itself as the fiscally responsible party in opposition to the spendthrift democrats. That has been their historical role as the minority party and they have pursued it with vigor.

The electorate has a short memory and stereotypes have a long half life. America had a government that raised entitlement benefits, and paid for them by borrowing so that it could also cut taxes. One might say that it looked much like Greece in doing so. That "borrow and spend" government was the GOP government under George Bush. An expensive drug benefit was added to Medicare just prior to the 2004 election, and it was paid for by running budget deficits. This is a good way to win elections. You cut taxes which makes everyone happy, and you give senior citizens an expensive benefit just before an election. That is how the "fiscally responsible" GOP operates when it is in office. The deficit hawks were silent while government ran up huge deficits during the Bush administration. They were also silent when Ronald Reagan also ran huge budget deficits by giving the electorate tax cuts and increasing spending on defense. Deficit hawks are a strange breed. They go into hibernation when the GOP runs the government, and they awaken with ferocity when government is turned over to democrats. The last government that ran budget surpluses in America was the Clinton administration. He raised taxes and benefited from a booming economy and he controlled spending. The stereotypes of the Democratic party, and the image of the GOP as the fiscally responsible party, are hard to kill. They are firmly held by Washington pundits, and the GOP has its own TV and "news" outlets which are devoted to their preservation.

While there are many differences between the US and Europe, it is not surprising that expansionary austerity has prevailed in Europe. There are conservative governments in Germany, France and the UK.

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