Power, This Time for the Keynesians
Speaking of power, the Austerians have lost one of their most powerful corroborations. At least for political purposes, the oft-cited and rather particular relationship between sovereign debt and growth has been sundered by a graduate student’s homework assignment. Never has so much of consequence turned on a spreadsheet error.
The Keynesians are euphoric. From their vantage point, the case against borrowing has collapsed like a house of cards. The headline facts are compelling. Austerity in Europe has deepened the Continent’s economic malaise, affording unfavorable comparisons to the Great Depression. Just in time for the sequester, the American economy is repeating its own pattern of springtime stumbling. The risks of expansionary monetary policy seem misplaced. Inflationary pressures are ebbing on both sides of the Atlantic. At the Bank of Japan, all vestiges of reserve in monetary policy have been cast aside.
From his bully pulpit at the Gray Lady, Professor Paul Krugman this weekend declared victory over the Austerians and a puritan worldview of economic inequality. It seems that proponents of restraint during downturns are not only misguided in their thinking. At least a few of them fit conveniently into the larger narrative of class conflict. How consistent that we cannot disagree without our respective motives being questioned. There is a difference between fiscal expansion and structurally unsustainable deficits, but such nuance is tedious. So is the idea that we can have different solutions for different circumstances.
Instead, some advocates of fiscal expansion are revealing themselves as ideologues to rival fiscal conservatives. Maybe that brings things into balance. On the political right, there seems no willingness to trade long-term structural solutions for short-term policies that will help lift employment.
In other parts of the world, positions are not always as intractable as they are in the United States. In the countries where austerity has been pursued with the greatest zeal by external agents and where it may be proving most self-defeating, that flexibility is fortuitous. This could prove another decisive week in Europe’s coquetry with fiscal discipline. At long last and after rejecting severe budget cuts, Italy will have a prime minister less inclined to see unemployment rise unchecked. Germany’s finance minister will visit with his counterpart in Spain, where the official unemployment rate has surpassed 27 percent, to discuss an investment program that may signal a softening stance in Berlin.
There are holdouts who remain skeptical about the consequences of deficits, even if they are only incurred in the toughest of times. In Canada, the Tory government is poised to balance the federal budget in 2015. To get there, spending growth has been limited to 1 percent. Canadian conservatives, who are not conservative by American standards, see it as targeted investment. Their even more liberal counterparts, mindful of inflation, point to a drop in real spending and rather severe cuts to direct expenditures.
If there is a country that can afford stimulus, it is Canada. The economy is slowing and household debt levels are elevated. There is a good argument that stimulus will lift the economy while delaying the return to surpluses only temporarily.
Of course, there is an election scheduled for 2015. And for all their liberalism, the Canadians are far more budget-conscious than their southerly cousins.
Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.