economists, we must understandthat it is as much a superstition asan economic theory. Like all super-stitions, its roots are deep in humannature. Sel-denial, rom the
to the Old Testament, has been atraditional reaction to difcult cir-cumstances. Sacrifce is the rallyingcry o war, just as asting is a centralpuriying practice o many religions.Sel-sacrifce is also, sad to say, deep-ly attractive as an answer to eco-nomic problems. It
right—aorm o penitence and machismo.Perhaps that’s why Spain andGreece have voted in austerity re-gimes, even at the cost o ruiningtheir economies and civic lie, andas vocierous anti-austerity minori-ties in those countries grow louderand more anguished.The problem is that although aus-terity may work or individuals, it sel-dom works or economies. To thecontrary, requently it makes mattersworse. I all individuals tighten theirbelts, demand or goods and serviceswill all, workers will be fred, anddemand will all even more. Businesswon’t invest without growing sales:this was Keynes’s message in a nut-shell. He argued that governmenthad to supply the spending or goodsand services that would restore in-centives to invest, while simultane-ously lowering interest rates. Ratherthan adjusting down, unemploymentcould stay high indefnitely.The depression o the 1930sshould have disabused economistso the belie in the sel-adjustingpropensities o ree-market econo-mies. Unortunately, the theory hasbeen resurrected in major Americanand British universities over thepast generation. Not only is stimu-lus not really necessary, these aca-demics assert; it won’t work. Theyargue that more government stimu-lus won’t lead to spending by con-sumers, who instead will save theirmoney because they realize taxeswill eventually be raised to fnancethe debt. They also argue that anincreased ederal defcit will crowdout private borrowing and produc-tive investment, and eventually jackup interest rates. In other words,government spending will have lit-tle or no bang or its buck.This theory is mostly baloney, es-pecially during economically weakperiods. I Americans are given mon-ey now, they will certainly spend it—or at least work down their debt. Asor interest rates, they are at recordlows today, despite highbudget defcits.
eedless to say, austerity econ-omists claim they have the evidenceto support their views. Yet their re-search is shoddy and transparentlymisleading. Most oten cited is astudy by Harvard proessors AlbertoAlesina and Silvia Ardagna, whogathered budget data or major na-tions over a generation and oundthat when deicits ell, periods o economic growth oten ollowed.But deicits oten all or reasonsthat have nothing to do with auster-ity—a sudden boost in tax revenuesrom a stock-market boom, or exam-ple. Economists rom the Interna-tional Monetary Fund, no hotbed o progressivism, switly challengedAlesina’s and Ardagna’s work. Theiranalysis o the historical data, ocus-ing on occasions when governmentsmade deliberate austerity decisionsto cut defcits, ound that in almostall such cases, unemployment roseand growth slowed—just as is hap-pening today.Another popular but dubiousfnding is that public debt o 90 per-cent o GDP or more seriously im-pedes economic growth. This wasthe argument made by Kenneth Ro-go and Carmen Reinhart, authorso the acclaimed book
This Time IsDifferent.
But their analysis is high-ly distorted by the soaring U.S. def-cit during World War II, which theylumped together with other data toprove that such high debt leads toslow growth or to recession. Whenthe war ended, the United Statesindeed ell into steep recession, butthe decline was due to the end o intensive war production, not thehigh defcit.Then there is John Taylor, a vet-eran economist rom Stanord and amember o George H. W. Bush’sCouncil o Economic Advisers, whowas among the most vocal critics o the Obama stimulus in 2009. Taylorbased his view on a simple paper hehad written in which he showedthat Bush’s 2008 tax rebate o about$100 billion was not spent by con-sumers. Flat consumer spending, heargued, means no growth. But
Romer, a Berkeley econo-mist and ormer chair o Obama’sCEA, pointed out that consumptionshould have allen at the same timebecause house prices were collaps-ing; that it held steady showed therebate had worked.The advocates o Keynesianstimulus have built a stronger, morecomprehensive empirical case intheir avor than have proponents o austerity. The economy had alleno a cli when Obama was electedin 2008: Americans were losingjobs by the hundreds o thousands,and GDP was plummeting. But bythe third quarter o 2009, a ewmonths ater the stimulus beganreaching Americans, the ree allhad stopped. More detailed analysisbacks up this conclusion. For exam-ple, measuring the impact o thestimulus on state spending showslocal improvements in growth. Rea-sonable estimates are that the stim-ulus created 3 million jobs in itsfrst year.Why, then, didn’t the economycontinue to grow rapidly? Austerityadvocates have claimed that persis-tent high unemployment is proo that the stimulus ailed. The stimu-lus, in act, was too small whenmeasured against the depth o therecession. A second stimulus wasnecessary, but by then even theDemocrats had been seduced byausterity economics and set out tochop away at the defcit.There is considerably more evi-dence o the benefts o fscal stimu-lus. Researchers have looked stateby state at how military spendinghas aected local growth and ounda close correlation between moregrowth and higher government ex-penditure. (In a classic example o hypocrisy, Republicans themselvesare now demanding that militaryspending not be cut because it willcost jobs.) Other researchers haveshown similar improvements ingrowth and employment in reactionto higher levels o local Medicaidspending. Still others fnd that the
12 HARPER’S MAGAZINE / OCTOBER 2012