Krugman and the Austerians

Paul Krugman, Keynesian extraordinaire, is crowing over the failure of "austerity" in Europe to reverse the economic decline.  He writes of "austerity" policies:

According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.

He means, of course, the Keynesian textbooks preferred by chaps like him.  The basic idea is to keep borrowing to maintain government handouts and to print money to accommodate the borrowing.  Sooner or later the resulting inflation lifts all asset values and the credit system starts to work again.

In the alternative universe, the recession is the natural result of an inflationary boom; it is the period of adjustment after the failures of the malinvestments of the previous boom.  You can do your adjustment any way you want, by liquidating malinvestments or by printing money.  But the underwater debt has to be cleared one way or another.

The problem is that, in the European Union, the single currency has prevented the bad actors, Greece, Spain, and Ireland, from devaluing their currencies and refloating the credit system and its underwater debt.  So they have cut their budgets a little and raised taxes a little, but not enough to make it look as if they can start to lower their government debt to GDP ratio.  Markets are not stupid; they know that a rising national debt leads to default, sooner or later.

Keynesianism is not, and never has been, an economic doctrine.  It is a political doctrine, a way for the government pitcher to get out of a jam when the bases are loaded with sovereign debt.  It rewards the recipients of government benefits and debtors with the money of creditors.  How?  Debt default and inflation hit the creditor class, people with money in government debt or securities denominated in government money like dollars.

It is important to realize what a financial crash and associated recession means.  It means that the bet that a lot of people made against the future has failed.  In the case of the Crash of 2008 the bet was made by homeowners that assumed they would have the money to service their loans and cash them out at higher home resale values.  They were wrong.  Another bet was made by politicians in expanding their budgets when the good times rolled.  Well, they were wrong, too.  So now politically connected people need to cinch their belts.

The whole point of being a politically connected person, whether you are a crony capitalist or a welfare beneficiary or a senior like me getting Social Security and Medicare benefits is that you "can't" cinch your belt.  You are a victim on a fixed income: it's heat or eat.  As for the crony capitalists, they are contributing to the future with vital services like green energy and they have paid to play.  How can they be asked to contribute?

But somebody has to pay.  That is what happens in a recession.  Profits go down, wages go down.  People turn to government to help them out and reduce their losses.  But government just takes money from other people, and usually government takes money from useful activities, where people pay for products and services and spends it on less useful activities, like cutting checks for people who do nothing in return.

The politicians don't care.  They have tame economists to justify whatever they do, whether it is "austerity" or inflation or "retrenchment" or "sound money."  People like Paul Krugman.