Recession: What Is It Good For?

Jeremy Warner, who is the Assistant Editor of The Telegraph in England, told us what recessions are good for in his editorial which is cited by Simon Wren-Lewis:

“In the end, you are either a big-state person, or a small-state person, and what big-state people hate about austerity is that its primary purpose is to shrink the size of government spending.”

And the final paragraph starts:

“The bottom line is that you can only really make serious inroads into the size of the state during an economic crisis. This may be pro-cyclical, but there is never any appetite for it in the good times; it can only be done in the bad.

Warner's argument doesn't make sense to Lewis for several reasons.  In the first place, it is foolish to make an effort to achieve a small state during a recession when interest rates are at the zero lower bound. (Unless one believes that high unemployment is a good thing). Economists who argued against austerity were not necessarily advocates for a larger state.  In the second place, the public's appetite for a large or small state is not dependent upon the state of the economy.  The government did not use the small state argument to justify spending cuts.  It told the public that cuts in spending were necessary to deal with a public debt crisis even though the UK and the US had no problems funding their debt. The government should do what households do when they take on too much debt.  Spending cuts are the solution for high household debt and for high public debt. In other words the debt crisis argument was a ruse.  The public was not interested in achieving a smaller state because of bad economy.  The conservative government in England used the debt crisis argument as the means to achieve a smaller social welfare state. The cuts in spending advocated by the government were not directed towards reducing subsidies to business interests. 

Lewis does not discuss why the public might be less interested in cutting the size of government in good times.  Politicians, however, can be less interested in cutting the size of government in good times.  If they were concerned about reducing the public debt, they could use budget surpluses to pay down the public debt.  The Bush administration had an opportunity to do that, but it chose to cut taxes instead of paying down the public debt. Cutting taxes, primarily for the wealthy, is the goal of conservative governments in good times.  In bad times, spending cuts are preferred to making the tax system more progressive in order to pay for public services.

The real question is not small state versus large state.  It is a question about whose interests are served by government fiscal policy.  Austerity in the US has kept unemployment high during the recovery from the recession.  Corporate profits, however, are at an all time high, and those in the upper income brackets have seen their incomes rise back to where they were before the Great Recession.  The GOP House just passed a bill which provides subsidies to agribusiness at the same time that it passed a bill that substantially reduced access to food stamps.  It is not interested in a smaller state or in reducing government deficits.  It is all about shifting government spending away from those who vote for the "wrong party" and rewarding those who support their party.

Paul Krugman claims that few economists are making the argument for "expansionary austerity".  He wonders why politicians and many in the media are still advocating for policies that are no longer supported by prominent economists.  The economists who argued for austerity have already done their damage.  They are now trying to restore their academic reputations.  The public, however, is largely ignorant about economics, and it is still being misled by the media which does a poor job of informing the public and a good job of misinforming the public.  Fox News in the US,  and The Telegraph in the UK, do their job much better than the mainstream media which still pretends that those who argue that the world is flat deserve the same consideration as those who argue the earth is round.  The "flat earth society" is alive and well in most parts of the world.  Economists have ended the debate about austerity but they are no longer relevant.  Politicians and the media no longer need academic support for their positions on fiscal policy.