Thursday, August 21, 2014

Krugman's other forays into public choice

David Henderson rightly praises a recent post by Paul Krugman on the motivations to go to war, and notes the use of public choice logic in the post. Really it's just good old fashioned political economy. "Public choice" is more a name for a particular group of political economists and the literature they produce, but the approach of explaining the incentives of "the sovereign" is long-standing. I agree with David it was a great piece on war, but I have a different favorite Krugman foray into public choice - one that I think is in woeful need of elaboration by other economists: his discussion of public choice explanations of austerity.

Public choice dealings with fiscal policy I think have had a lot more success as micro explanations - explaining why certain spending decisions get made or not - than as macro explanations of the broader fiscal stance. My favorite illustration of this is Democracy in Deficit, published by Buchanan and Wagner in 1977 to explain oh how awful Keynes was for fiscal responsibility. Publication of the book came after several decades of declining federal debt as a share of GDP, right before debt as a share of GDP would reach its lowest point in the post-war period in 1981 (and right after a very-close-to-lowest-point in 1974). After the late 1970s when Keynes was tossed as a guide for fiscal policy, monetary policy ruled the macro-stabilization roost, and tax and spending decisions were made on a non-Keynesian basis of course the debt began to climb rapidly. I'm not claiming the debt burden will never climb under Keynesian principles. It ought to sometimes! But the entire public choice framework for thinking about fiscal policy from a macro perspective was completely out of sync with what was going on in the real world, outside their office windows.

Enter Paul Krugman.

A year ago (almost exactly a year ago, as it happens), Paul Krugman was blogging about an issue that has bugged me for a while now - what is a good economic explanation for why politicians are embracing austerity? Why has federal spending flat-lined in the midst of a depression? Why have we been flirting with and actually imposing shut-downs. Why the sequestration? And why have comparable policies been put in place in Europe? It is perhaps the most important public choice/political economy problems of our time but we aren't making nearly as much progress on the answer as we are on more standard macro questions (like how monetary and fiscal policy work in a liquidity trap). Krugman decided to reach back to Kalecki (1943) for insights, following Mike Konczal's lead (as well as Naomi Klein, but I think Kalecki is the more fertile route for academics). A sampling:

"Noah Smith recently offered an interesting take on the real reasons austerity garners so much support from elites, no matter hw badly it fails in practice. Elites, he argues, see economic distress as an opportunity to push through “reforms” — which basically means changes they want, which may or may not actually serve the interest of promoting economic growth — and oppose any policies that might mitigate crisis without the need for these changes... And the lineage goes back even further. Two and a half years ago Mike Konczal reminded us of a classic 1943 (!) essay by Michal Kalecki, who suggested that business interests hate Keynesian economics because they fear that it might work — and in so doing mean that politicians would no longer have to abase themselves before businessmen in the name of preserving confidence."

I think this explanation has potential merit in particular cases. A simpler, general explanation is of course that voters have an antipathy to deficits and often analogize governments to households and perhaps the political system is responding to those demands accordingly. It's a little unsatisfying for an economist because the argument is based on preferences and ignorance, but "unsatisfying for economists" is not always the same thing as "wrong". In that case, the answer is perhaps stronger economics education.

I am not sure we have a great answer yet - it needs more work (perhaps Econlib can spearhead something, David?). But I do believe that getting a grip on the political economy of austerity is one of the more important questions that economists are going to have to grapple with. I can muse but my day to day work is in empirical labor stuff and I am getting less scope to be creative lately (hopefully once a few obligations have passed that might change a little). What we need is someone with expertise in public choice and political economy to tackle it. Any takers?


  1. In what way are politicians embracing austerity? The answer probably depends on what austerity means to you obviously. I'd say the data suggests that politicians have neither embraced austerity or significant growth in government expenditures. Government expenditures as a % of GDP in the EU for most nations are just slightly above by a couple of % what they were in 2007 (there are exceptions - Greece being one). I'd say that politicians are embracing the status quo. That's not that surprising; the machinery of government is never terribly nimble (thankfully) and in most democratic polities is linked to the sort of hindrances we would expect in a democratic government.

    1. We do like the sand in the gears in democratic government, but it still leaves the question of this policy choice as opposed to others The sand in the gears situation refocuses our attention on where to potentially find the answer, of course.

    2. If things we were really terrible (they aren't) you might see some movement either way, but they aren't really terrible (life looks nothing like say the early years of the Depression for example) so the normal give and take of things continues apace. If the situation were the opposite you'd see political entrepreneurs coming out of the woodwork looking to plant their flag and draw attention to themselves. Most of the action for political entrepreneurs lies well outside the realm of fiscal policy and that has been the case since 2009 or so.

    3. That's a long way of saying that if people wanted either austerity or not austerity (sorry, not quite sure what you would call austerity's opposite) they needed to strike while the iron was hot some years ago.

  2. Daniel Kuehn: I believe I've said this to you before, but perhaps Dr. Lars P. Feld might be interested in your idea.


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