inequality and the politics of austerity

Paul Krugman and Robin Wells, in a recent essay, expand on their thesis that rising income inequality can explain why governments in general – and the US government in particular – chose to respond to the current financial crisis with policies of austerity rather than stimulus.

In 2008 we suddenly found ourselves living in a Keynesian world …. By that we mean that we found ourselves in a world in which lack of sufficient demand had become the key economic problem, and in which narrow technocratic solutions, like cuts in the Federal Reserve’s interest rate target, were not adequate to that situation. To deal effectively with the crisis, we needed more activist government policies, in the form both of temporary spending to support employment and efforts to reduce the overhang of mortgage debt.

One might think that these solutions could still be considered technocratic …. Keynes himself described his theory as “moderately conservative in its implications,” consistent with an economy run on the principles of private enterprise. From the beginning, however, political conservatives — and especially those most concerned with defending the position of the wealthy — have fiercely opposed Keynesian ideas. ….

Why such animus against … a “moderately conservative” message? Part of the answer seems to be that even though the government intervention called for by Keynesian economics is modest and targeted, conservatives have always seen it as the thin edge of the wedge: concede that the government can play a useful role in fighting slumps, and the next thing you know we’ll be living under socialism. ….

What seems very clear to us … is that rising inequality played a central role in causing an ineffective response once crisis hit. Inequality bred a polarized political system, in which the right went all out to block any and all efforts by a modestly liberal president to do something about job creation.

Paul Krugman and Robin Wells, “Economy killers: Inequality and GOP ignorance“, Salon, 15 April 2012.

Excerpted from The Occupy Handbook edited by Janet Byrne (Little, Brown and Co., 2012).

Daron Acemoglu and James Robinson, co-authors of Why Nations Fail (2012), find this to be a ‘curious thesis’.

Krugman and Wells … [argue] that the “right” (the GOP) opposes any government intervention, and Keynesian fiscal policies and work programs that would have increased employment and combatted the recession are opposed by the right because, with increased inequality, they have become more beholden to the very wealthy.

Though intriguing, this idea is not backed up with direct evidence by Krugman and Wells. It may well be true, but it is also a curious thesis. Here are some of the things we find less than fully clear about this thesis.

First, the distinction between “right” and “left” (or perhaps pro-elite and anti-elite) is not a natural one when it comes to Keynesian economics and policies. Many conservative politicians, and not just Nixon and Reagan, have embraced Keynesian economics. Both Fascist Italy and Nazi Germany were big-time Keynesians. ….

Second, … in most societies, even in the supposedly laissez-faire 19th century Britain, elites work very hard to make the government intervene in the economy — of course, in a very specific way, to support them. ….

Third, … it is not clear why the wealthiest Americans should be opposed to Keynesian policies. After all, wealthy Americans are … strongly vested in the US corporate sector, which would also be one of the main beneficiaries of expanded aggregate demand. ….

Having said all of that, Krugman and Wells are probably right to some degree. Republicans prevented more aggressive Keynesian measures, and this has likely contributed to the persistence of very high unemployment …. All the same, the reasons for this hostility to Keynesian economics are still mysterious.

Daron Acemoglu and James Robinson, “Inequality and Keynesian Economics“, Why Nations Fail Blog, 18 April 2012.

I doubt that Krugman and Wells would disagree. Krugman and Wells, after all, never claim that conservatives are pursuing short-term self-interest when they oppose Keynesian ideas. In fact, they hint that conservative opposition might be ideological, an unjustified fear that Keynesian policies could lead to socialism and redistribution of wealth.

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