Thursday, August 30, 2012

The Myth of Profligacy and the Confidence Ogre

Paul Krugman devotes a considerable segment of his book, End This Depression Now!, to the Eurozone situation as a means of explaining how not to address economic problems. He claims that Europe is under the sway of a "Big Delusion" which asserts that the nations with debt problems fell into trouble because of excessive spending and fiscal irresponsibility. Let us refer to this delusion as the myth of profligacy. The countries in question are Greece, Ireland, Portugal, Spain, and Italy (the GIPSIs). Krugman recognizes Greece as a country that had committed fiscal sins, but not the others. He provides this chart:

The average debt to GDP ratio was steadily declining until the economic crisis struck. How does one arrive at the conclusion of profligate behavior?

"Yet many Europeans in key positions—especially politicians and officials in Germany, but also the leadership of the European Central Bank and opinion leaders throughout the world of finance and banking—are deeply committed to the Big Delusion, and no amount of contrary evidence will shake them. As a result, the problem of dealing with the crisis is often couched in moral terms: nations are in trouble because they have sinned, and they must redeem themselves through suffering."

As is often the case in his book, Krugman turns to Keynes for illumination. He quotes Keynes to explain the allure of a belief in a pure, free-market approach to society.

"That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the free individual capitalist, attracted to it the support of the dominant social force behind authority."

What Krugman implies by summoning this quotation is that the myth of profligacy took hold because it is what many in power wished to believe. They wished to believe it because it would justify taking actions that they would have wanted to take no matter the circumstances.

Abraham Newman pondered the same questions as Krugman and arrived at a more pointed implication. His article appeared in Foreign Affairs under the title: Austerity and the End of the European Model. Perhaps even more pertinent is his lede:

"How Neoliberals Captured the Continent"

Newman agrees with Krugman about the profligacy myth, but adds further insight into its popularity.

"What is clear is that austerity will transform Europe’s political economy in the long term, lending credence to neoliberal ideas of limited government and loosely regulated markets. The irony of this transformation is that it reinvigorates the very ideas that helped cause the financial crisis in the first place; after all, it was the unyielding faith in markets and weak regulation that allowed the financial bubble to swell. At the same time, a response to the sovereign debt crisis based on austerity precludes any alternative social-democratic framework that would emphasize growth and protect citizens from the vagaries of the market."

Newman sees the economic crisis as opportunity for the conservative-minded to recast the nature of European society.

"Given the need to conserve public sector resources, proponents of austerity argue, firms and individuals are required to step in to provide core services, as is the case with the Big Society initiative in the United Kingdom. At the same time, governments are increasingly forced to privatize segments of their economies; Spain and Ireland have put everything from electricity to airports up for auction. What’s more, in the name of labor productivity, workers are asked to bear the burden of economic recovery through cuts to wages, pensions, and other benefits."

"Austerity politics in Europe is not simply a short-term fight between the surplus countries in the center and the deficit countries on the periphery. It is a long-term political agenda that privileges lenders over debtors and capital over labor and, as such, should be seen through the lens of partisan politics. Center-right governments in Germany, the Netherlands, and Spain have been among the most vocal proponents of austerity."

Right wing politicians are claiming that social support policies in Europe are too expensive; too much has been promised; they must be scaled back if economies are to thrive. The exact same scenario is playing out in the United States. Republicans blame the financial crisis not on greed and market abuses, but on a misguided attempt by the government to encourage home ownership for low-income families. This lie is told over and over in order to hinder any attempt by the government to reign in financial recklessness. Profligacy on the part of the federal government is the cause of the deficit. Again, we are told that too much has been promised.

The term "confidence" is used often on both sides of the ocean to justify fiscal austerity—and by association—free market solutions. It has often been stated that cutting spending in order to lower government deficits will instill "confidence" and induce investors to commit more funds to the economy. In this way, austerity and economic contraction will lead to economic expansion. Krugman coined a catchy phrase when he described such notions as belief in the "confidence fairy."

Catchy as that phrase may be, it relegates those who would believe in austerity-driven growth to the status of the merely befuddled. Confidence is not an illusion apparent only to the terminally incoherent; it is also a weapon to be wielded by those who are not befuddled, but rather, completely focused and purpose-driven.

Krugman tells us how "confidence" can become a weapon in a free-market society.

"As long as there are no routes back to full employment except that of somehow restoring business lobbies in effect have veto power over government actions: propose doing anything they dislike....and they can issue dire warnings that this will reduce confidence and plunge the nation into depression."

This issue of investor’s confidence is trotted out over and over again to explain why corporations are sitting on huge sums of capital rather than investing, why we need to trash attempts to regulate business in any way, why we need to elect a Republican president, why we need to cut back on anything that redistributes income..... No real activity is required to win over the faint of heart, merely the issuance of comments and campaign contributions. These are easily recognized as the threats they are intended to be.

Krugman would have better served us by coining a more startling phrase. It is misleading to think of the world being driven by those awaiting a visit from a beneficent fairy spreading pixy dust. It might have been more appropriate to ponder a pen where a "confidence ogre" is held at bay until needed. When released, its aim is not beneficence; its mission is to tear up turf and demolish structures.

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