Austerity and stimulus

I wrote another one of these economics articles, because nobody reads them which gives me freedom.

Everything from pub chats through expert debate to government policy in western countries has been split roughly into two camps for the last several years – whether the fix for the atrocious state of public finances is austerity (reduction of government expenses to balance budgets) or stimulus (increased government expenses to stimulate the economy, hopefully eventually yielding more in taxes than it cost).

Opponents of austerity say that reducing government spending in already tough times further shrinks GDP, leads to a spiral of doom, and disproportionately hurts the neediest (this doesn’t need to be so, more on that later).

Opponents of stimulus say that since government expenses come from taxes and debt, they cannot really “stimulate” much of anything in the sense of creating new value, just move costs and benefits around in time and space, favoring highly visible but inefficient applications of capital to potentially superior but less immediately obvious ones, and that the government expense component of GDP (itself an imperfect indicator) is fairy gold due to opportunity costs.

Fine points all.

Furthermore, it is worth noting that moving value around in time was Keynes’ original point. He suggested counter-cyclical fiscal policy, running budget surpluses in good times (sic!) and deficits in recessions, broadly respecting conservation of energy. The entire point is to create safety buffers in times of economic growth, for use in recessions, effectively smoothing out the business cycle. Think the Pharaoh putting grain in storage in fat years to prevent famine in lean years, a zero sum redistribution of food in time. That’s precisely, and exclusively, what Keynes meant with regard to fiscal policy.

Later “Keynesian” economics imagining creation of value ex nihilo by the enlightened hand of bureaucracy are deliberate misinterpretations intended to justify government profligacy. Fun fact: “Keynesian multipliers” don’t appear in Keynes’ own works.

So much for the elegant theory. In rather messier practice, no government in history consistently ran a primary surplus in the best of times, because it would be politically unpopular. That’s the problem.

But politicians can’t just take the half of Keynesian economics they like. That’s the difference between Keynesian economics and base demagoguery and populism.

The debate is essentially a continuation of the century-old clash between supply side and demand side economics, and I’d like to think that were their main proponents – Keynes and Hayek – alive today, they’d both enthusiastically agree with what I’m about to say.

It is this: austerity versus stimulus is an insufficient framing of the issue, a framing that precludes the correct answer from even being formulated. It focuses on mere quantity while missing the most critical factor – the quality of spending. 

As is often the case in politics, it is an oversimplified, one-dimensional formulation of a complex multi-dimensional problem. It is also a red herring.

We’re debating how much sugar to put in tea that has bird poop in it. Not. The main. Problem.

The main problem of public finances is wastefulness and corruption. Everything else is secondary. 

It literally doesn’t matter one tenth of a rat’s ass how much we pour into a leaky vessel.

Public finances prefigured in myth. Daughters of Danaus, left to right: IMF, EU, ECB.

As I write this, the road outside is being re-paved for the second time in a year. As the contractors were paving it for the first time in the pouring rain, it was obvious it won’t last a year. Why did they do it anyway? Was it incompetence and inflexibility of schedules, or deliberate milking of the municipal budget? Hard to say. But shit like this is the norm. Depending on the country, it is plausible the greater part of public funds is either wasted or outright stolen, with the line often being unclear (as in the case of the roadworks).

This means the public debate about public finances, offering broadly the choice between outrageous taxes and images of underfunded schools and hospitals and senior citizens reduced to begging, is a false dilemma. With decent management, there’s enough money to fund everything important without resorting to extortionate tax rates. Switzerland is an example how far modest taxes can go when public administration is at least slightly competent and honest.

Without corruption (or, realistically, with less corruption), we can have balanced (or surplus!) budgets at present (or lower) tax rates.

I have to repeat this: quality of governance is absolutely crucial and when it’s bad, nothing else matters. There is no predictor of prosperity more reliable than good governance.

It doesn’t help that not all criticisms of austerity are intellectually honest. Many critics simply want to preserve and prolong unfair personal benefits at general expense, under a guise of concern for the economy. “Our problem is debt, therefore let’s get deeper into debt” is doublethink. But proponents of austerity are stricken by magical thinking when they imagine cuts in public spending will automatically improve its quality.

The thinking goes that smaller budgets will motivate politicians to spend more carefully, and with less pork to go around, there will be increased competition among the bad guys, thinning out their ranks. This is sometimes true. But what actually tends to happen in corrupt systems is, the “pigs at the through” sure as hell don’t tighten their belts – they make everybody else tightens theirs.

The idea of austerity, while economically self-evident, is too easy to discredit by deliberately slashing expenses where it hurts people the most – in healthcare, education and the like – while preserving waste and corruption. 

Result: corruption and waste persist, but now there’s a second problem with plunging standards of life and rising support for extremist parties.

This is what happened in Greece. The Troika fucked up, and fucked up bad by first giving away hundreds of billions of euros, then panicking when it turned out the money will never be repaid and insisting on brutal austerity to the tune of a quarter of Greece’s GDP while having no way to enforce substantial reform.

Pouring endless cash into a dysfunctional and corrupt system is making it worse, but brutal austerity without any way to enforce substantial reform will only (be deliberately used to) piss people off. The issue cannot be resolved by mucking about with the slider of public spending in either direction.

This framing of the issue plays the poor against the rich and vice versa, creating class resentments where the appropriate response is a joint effort to sack corrupt politicians and upgrade governance to 21st century standards.

Divide and conquer. When two are fighting, the third wins. “The third” here being the actual assholes.

And while taxation sounds like low hanging fruit to quickly patch budgets, there are long term disadvantages in hamstrung growth and brain drain – ideological animus towards “the rich” will only hit the remaining entrepreneurial spirit in the country, and ultimately kill or force to leave what talent there is. It won’t hit the guy who stole five entire factories in a murky deal with the government and never paid a penny in taxes. It will hit the naïve sucker who took his life savings and opened a bakery.

Sometimes, we can hear that”Austerity has failed”, or “the German model has failed”. That must be why Germany has the healthiest economy in Europe, while countries that took the opposite route are bankrupt and struggling with 50+ % youth unemployment.

It is wishful thinking. I remember playing chess against a really, really dumb guy once. He had just the king left, and was long ago in checkmate. He played anyway, moving from checkmate to checkmate every turn. He refused to admit defeat and instead boasted that the rules say I can’t take his king. He thought he was winning.

The “failure of austerity and the German model” are precisely that kind of “fuck the facts” argument. It’s Napoleon, champagne in hand, celebrating his historic victory at Waterloo.

Greece, or any other troubled economy, doesn’t have a choice between reform and not-reform. As The Economist’s editor in chief Zanny Minton put it : “Greece will only prosper if it frees up its still-rigid economy and overhauls its clientelist state, whether or not it is inside the Euro.”

This is exactly accurate. Grexit and devaluation aren’t alternatives to reform. Reform will have to happen anyway, sooner or later. The question is how much of a support structure Greece will have doing it.

As, again, The Economist put it in one of the best articles on the topic, Greece’s problems are “rampant clientelism, hopeless public administration, comically bad regulations, a lethargic and unreliable justice system, nationalised assets and oligopolies, and inflexible markets for goods and services and labour.”

These issues won’t go away with debt restructuring or reverting to a national currency. They won’t go away with austerity, and they won’t go away with any amount of stimulation.

In conclusion, the debate about public finances needs to be less adversarial, and everyone needs to realize that 99.9% of people (including most of the rich, and a good proportion of the ultrarich) have a shared interest in good governance and efficient use of public money.

We should get to work on that.

Bonus: enjoy a few choice excerpts from otherwise-really-bad-but-kinda-accurate-in-identifying-demagoguery Plato’s Republic:

“I meant to refer to the class of idle spendthrifts, of whom the more courageous are the-leaders and the more timid the followers, the same whom we were comparing to drones, some stingless, and others having stings.”

Sounds familiar.

But there are other kinds of people.

“They are the orderly class, which in a nation of traders are sure to be the richest.  They are the most squeezable persons and yield the largest amount of honey to the drones.
There is little to be squeezed out of people who have little.
And this is called the wealthy class, and the drones feed upon them. “

Mhm.

“Do not their leaders deprive the rich of their estates and distribute them among the people; at the same time taking care to reserve the larger part for themselves? “

Was this really written 2500 years ago?

“…at the same time hinting at the abolition of debts and partition of lands”

And as for he aspiring tyrant…

“At first, in the early days of his power, he is full of smiles, and he salutes every one whom he meets; –he to be called a tyrant, who is making promises in public and also in private! liberating debtors, and distributing land to the people and his followers”

But people will catch on.

“Therefore he must look about him and see who is valiant, who is high-minded, who is wise, who is wealthy; happy man, he is the enemy of them all, and must seek occasion against them whether he will or no, until he has made a purgation of the State. 
Yes, I said, not the sort of purgation which the physicians make of the body; for they take away the worse and leave the better part, but he does the reverse.”

There are two kinds of people in the world – one who read dystopian literature as cautionary tales, the others as handbooks.

The astonishing fact is that 2500 years after these lines were written in fucking Athens, Greeks have elected Syriza.

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