22 February 2012

Keynesian Tautologies

Watching Europe sink into recession – and Greece plunge into the abyss – I found myself wondering what it would take to convince the chattering classes that austerity in the face of an already depressed economy is a terrible idea.
After all, all it took was the predictable and predicted failure of an inadequate stimulus plan to convince our political elite that stimulus never works, and that we should pivot immediately to austerity, never mind three generations’ worth of economic research telling us that this was exactly the wrong thing to do. Why isn’t the overwhelming, and much more decisive, failure of austerity in Europe producing a similar reaction?

Let’s lay out some definitions first:  GDP, by definition, includes government spending; success, according to Keynesians, is some amount of economic growth (measured over arbitrary time periods and in the aggregate); austerity, by definition, will generally require cutting government spending.  Now, Keynesians generally don’t care where increases in GDP come, so long as increases occur.  Austerity, though, very much emphasizes balancing government budgets, which generally means cutting spending since it is rare for a government to a) be running only a minor deficit and b) raise tax rates enough to cover the current deficits.  Thus, austerity usually requires a significant cut in government spending, and thus a cut in GDP (since government spending is a component of GDP).  Thus, complaining that austerity doesn’t immediately lead to economic growth is like complaining that water is wet, in that we’re only really dealing with definitions.

Furthermore, austerity does not directly concern itself with growth.  As was mentioned before, austerity is mostly about balancing a government’s budget (to put it crudely).  Trying to evaluate austerity in Keynesian terms, then, is somewhat disingenuous as austerity does not have Keynesian goals, nor does it concern itself with the Keynesian analytical framework.  Rather, austerity focuses on paying back government creditors, and that is thus the framework by which it should be analyzed.  To use Keynesian metrics and goals to measure the success of austerity measures is akin to analyzing quarterbacks by their OBP.  In both cases, the analytical framework simply is not suited for the thing being analyzed.  Therefore, it is safe to say that only a fool, an ignoramus, or a liar would judge austerity by the economic growth it provides.

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