Thursday, July 11, 2013

The Counterintuitive Counterfactual...

Paul Krugman, in his July 8 article, Urp Versus Derp writes:

Jared Bernstein writes from Europe about the complete unwillingness of European policy makers to learn from their mistakes; call it Euroderp. And it is indeed a remarkable thing: despite overwhelming evidence that austerity doesn’t work as advertised, there has been essentially no relaxation of the orthodoxy, and no admission of error.

I'm not sure what the "advertised" work of austerity was, but this whole notion that austerity is some form of economic strategy continues to bewilder me.

If your teenager discovers drugs, you---desperate to save him from a life of hell---impose austere measures. While you'll forever wish your son happiness, the only thing you can guarantee, if you're diligent, is that while he resides under your roof he'll be sober. Not happy and sober, just sober. Of course you know that if you don't impose austerity, and your son becomes an addict, guaranteed, he will be miserable and addicted. The insane notion that enabling his addiction would somehow lead to his sobriety never enters your mind.

If you're a European policy maker and Greece (for example) has spent, entitled and cronied itself a disaster, do you fund its deficit, subsidize its debt and expect that, by some miracle, it will find its way to fiscal sobriety? Are you, thus, insane? Of course no one would be "happy" while Greece's economy---left to the markets---convulses, sweats, and becomes depressed.

The Keynesian notion that by increasing government spending Greece would somehow grow its way out of trouble is as nonsensical as the notion that saving an addict from the pain of withdrawal, by supporting his addiction, would somehow put him on a path to a productive life.

Of course the Krugmans and the Bernsteins of the world would blow my simple analogy out of the water with their Keynesian multipliers. That would be their politically convenient theory that survives, by my estimation, on little more than counterfactual reasoning. For example, applying their multipliers to the U.S.'s $800 billion stimulus special interests' dream package told Keynesian economists (J. Bernstein in fact), who told the President, who told us, that a 7% unemployment rate would be achieved by the end of 2010. Without the "stimulus", according to their formula, unemployment would shoot to a shocking 9%. Well, we got the "stimulus", and, lo and behold, the unemployment rate promptly shot up to a horrific 10% before the end of 2010. Now did that deter the Keynesians? Was there an "admission of error" by the Krugmans and the Bernsteins? Uh, nope. In fact, it emboldened them---as the counterfactuals began to fly. You see, they were right in concept, just wrong in quantity, or so they claim. They just didn't know how bad things actually were and, therefore, things would've been much worse without the "stimulus"---which means the $800 billion wasn't nearly enough.

Only proud Keynesians, special interests (which, btw, grow in number as the budget grows) and an unsuspecting public could buy such a counterintuitive (and dangerous [in terms of what it inspires]) counterfactual.



No comments:

Post a Comment