Defeatism: Martin Wolf is getting frantic, as well he should. The austerians have brought us to the brink of a vast disaster. A recession in Europe looks more likely than not; and the question for the United States is not whether a lost decade is possible, but whether there is any plausible way to avoid one. Wolf directs us to a recent speech by Adam Posen (pdf), which opens with a passage that very much mirrors my own thoughts:
Both the UK and the global economy are facing a familiar foe at present: policy defeatism. Throughout modern economic history, whether in Western Europe in the 1920s, in the US and elsewhere in the 1930s, or in Japan in the 1990s, every major financial crisis-driven downturn has been followed by premature abandonment—if not reversal—of the macroeconomic stimulus policies that are necessary to sustained recovery. Every time, this was due to unduly influential voices claiming some combination of the destructiveness of further policy stimulus, the ineffectiveness of further policy stimulus, or the political corruption from further policy stimulus. Every time those voices were wrong on each and every count. Those voices are being heard again today, much too loudly. It is the duty of economic policymakers including central bankers to rebut these false claims head on. It is even more important that we do the right thing for the economy rather than be slowed, confused, or intimidated by such false claims. Indeed. Posen’s “unduly influential voices” are my Very Serious People. And it has been an awesome spectacle watching the VSPs search, obsessively, for reasons not to fight mass unemployment. Fiscal policy must tighten to appease the invisible bond vigilantes and please the confidence fairy. Interest rates must rise because, well, um, inflation, well, no, low rates cause moral hazard — yes, that must be it.
And we’re not (just) talking about ignorant politicians. This stuff has been coming from the European Central Bank, the Organization for Economic Cooperation and Development, the Bank for International Settlements. I don’t fully understand it. But a large part of it, it seems obvious, is the intense desire to see economics as a morality play of sin and punishment, where the sinners are, of course, workers and governments, not the bankers. Pain is not an unfortunate consequence of policies, it’s what is supposed to happen. How obsessive are these people? So obsessive that when the financial doom they predict fails to materialize, they consider this a bad thing: punishment must be administered, so what are the markets waiting for? Here’s Alan Greenspan a while back:
Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.
Gosh, it’s regrettable that the markets aren’t confirming my warnings! And today Ronald McKinnon laments, yes, laments the failure of the invisible bond vigilantes to show themselves — they’re supposed to be “disciplining the government”, so why aren’t they here? Just to reiterate a point I’ve made before, none of this reflects actual economic theory. Throughout this crisis, people like Adam Posen and yours truly have been basing our arguments on standard textbook macroeconomics, whereas the Very Serious People have been making up stories on the fly to justify their calls for pain. As Wolf, who really seems to have eaten his Wheetabix, puts it,
The waste is more than unnecessary; it is cruel. Sadists seem to revel in that cruelty. Sane people should reject it. It is wrong, intellectually and morally.
And this cruelty rules our world.