The Missing Fiscal Policy: Austerity Now?

By Big Tent Democrat, Section Economy
Posted on Tue Nov 29, 2011 at 11:31:45 AM EST
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Paul Krugman writes:

A few years ago Gauti Eggertsson published a a persuasive analysis (pdf) of the big economic recovery of 1933-37; he argued that it had a lot to do with changed expectations of future monetary policy. Specifically, by taking America off the gold standard — a shocking move at the time — and explicitly calling for a return to pre-Depression price levels, FDR created an expectation of rising prices that had a salutary effect on demand.

The paper explains that FDR did more than that:

What ended the Great Depression in the United States? This paper suggests that the recovery was driven by a shift in expectations. This shift was triggered by President Franklin Delano Roosevelt’s (FDR) policy actions. On the monetary policy side, Roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre-Depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending which helped make his policy objective credible. The key to the recovery was the successful management of expectations about future policy. [MORE . . .]

Roosevelt immediately implemented several radical policies which had a strong impact on expectations. As if mobilizing the nation for war, the government went on an aggressive spending campaign, nearly doubling government consumption and investment in one year. This spending spree was not financed by tax increases, but instead by some of the largest budget deficits in US history outside of wartime. On the monetary side Roosevelt announced that the value of the dollar was no longer tied to the price of gold, effectively giving the administration unlimited power to print money.

(Emphasis supplied.) Of course, Krugman has argued for fiscal stimulus, but even now, in the telling of what FDR did, the fiscal component - which is indeed the creation of demand - for jobs and goods - is overlooked.

I imagine across the world, central banks can do more, but just as importantly, so can governments regarding fiscal policy.

Austerity Now! is at least as damaging as central bank inaction.

Speaking for me only

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The Missing Fiscal Policy: Austerity Now? | 41 comments (41 topical)

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We have no FDR (5.00 / 5) (#1)
by Militarytracy on Tue Nov 29, 2011 at 12:12:05 PM EST

Can you imagine Larry Summers saying this?

But while they prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings.

And I'm told that I'm finally priced at my real market worth now. How about Larry Summers saying this?

Confidence... thrives on honesty, on honor, on the sacredness of obligations, on faithful protection and on unselfish performance. Without them it cannot live.

He'd choke to death trying to say unselfish performance.

Well, often FDR was less than "FDR" (none / 0) (#20)
by Addison on Tue Nov 29, 2011 at 03:03:27 PM EST

We shouldn't overly Reaganize him. Even as President Obama fails to mimic the ideas behind FDR's political and policy successes, it should be noted that a lot of FDR's missteps and failures vis-a-vis reform and economic policy, of which there were many, are being repeated by President Obama.


yes they are: (5.00 / 3) (#27)
by cpinva on Tue Nov 29, 2011 at 04:02:57 PM EST

a lot of FDR's missteps and failures vis-a-vis reform and economic policy, of which there were many, are being repeated by President Obama.

which, while annoying, would almost be acceptable, if he were also repeating FDR's reform and economic policy successes. he isn't, having bought into the whole "deficit/debt" non-issue, pushed pretty much exclusively by the very same crowd (can you say republicans boys and girls? i knew that you could>) that, with vp cheney as their spokesperson, proclaimed only a few years ago that "deficits don't matter".


Exactly. (5.00 / 2) (#28)
by Addison on Tue Nov 29, 2011 at 04:13:13 PM EST

I agree. Of course, FDR made many of the same mistakes even re: reform and economic policy as President Obama is making today. But, crucially, during the first half of his first term his policy seemed to orbit around lowering unemployment numbers, not saving the abstraction of the "economy". So in 1933 (2009, our timeline) you got massive work programs in addition to quantitative easing. When unemployment is actually and truly your metric, you might take a winding course, but you're sailing toward the right star politically and policy-wise. 2009 was ripe for all sorts of policies that didn't just fail, but were never tried. Political capital kept getting saved by this administration, until it finally went sour.


I think that the secret bailouts that (5.00 / 3) (#32)
by inclusiveheart on Tue Nov 29, 2011 at 04:59:21 PM EST

Bloomberg has been reporting on in the past two days play a big role in this "deficit" narrative. Not that they are making any sense in how they are thinking about lowering the deficit, but I do believe that the imperative to lower it has to do with that secret spending that the Bushies and the Obama crowd have been doing.

Honestly, I think that most of the political class has some idea of how deep in the hole most financial institutions and corporations are. I think that from the moment that this Administration moved into the White House, they were scared to death of trying to unwind the mess. They have, imo, taken the most cowardly route in trying to finesse the situation and spin the messaging to make Americans think that they are both doing the best they can and that they are working for them.

The thing is that all hell is going to break loose at some point and when that happens, the people who step up to the plate and cope with the realities are going to be the heros of the FDR ilk. But since we avoided the "appearance" of a total collapse in 2008 by propping up the financial sector, the mirage that there is stability in the foundation still exists - and that's how they can evade the pressure to change in the correct ways that would really set us back onto sound financial footing.

The GOP will either run with it and drive us further into the ground if they manage to re-take the White House in 2012 or 2016 - or they will use the crisis wisely to their political advantage and get people back to work - the jobs might suck - but they might be smart enough to create them. Don't forget that GWB sent us all $300 a piece when it was apparent that people weren't feeling good about the economy. That was smart politics for the masses. The Obama Administration has not been nearly as clever or bold or brave or even shown passion...


I have really missed you around here (5.00 / 2) (#42)
by Militarytracy on Wed Nov 30, 2011 at 10:14:03 AM EST

You are the only person I've ever found via the internet who knew that there was no magic that was going to save us from the balance sheet and stuck with that. You are the only commenter who never believed that somehow the banks were all magically solvent too. You also understand how the bailouts, secret and otherwise, are now causing a demand for Social Security and Medicare to be attacked. I miss you.

It also seems that you grasp how broke the corporations probably are as well at this point, or drained of any real tangible assets. Do you know, are their repos transparent or is that all in hiding too. From what I've learned of repos, the corporations have all presold their real assets long ago. They sell them to make their balance sheets read profit, and then they must buy them back the next day....but profits are shown doing that and then the board all takes their huge bonus. I suspect it has created corporations that are only a shell of what they claim to be since repos must be the first items paid and must be paid first in full when bankruptcy is declared. Bankruptcy doesn't even slow down the repayment of the repos.

After repos are paid it seems to me that creditors and stockholders are for lack of a better word screwed royally.


: Missed you too. (5.00 / 1) (#43)
by inclusiveheart on Wed Nov 30, 2011 at 02:01:47 PM EST

It has been a crazy time. Haven't had much to say, though. So much of what is going on seems so crazy that it is hard to think of anything worth posting in response. The big picture is really not great and the minutia seems to have little relevance since there isn't much of it that is going to change the big picture.

Well, it's a given ... (none / 0) (#35)
by Robot Porter on Tue Nov 29, 2011 at 05:32:23 PM EST

that Obama has been brilliant at mimicking economic failures.


"Austerity now, austerity tomorrow, and (5.00 / 1) (#2)
by Mr Natural on Tue Nov 29, 2011 at 12:12:18 PM EST

Austerity forever," drones America's teaparty cretinocracy

right up until the austerity is (5.00 / 2) (#3)
by ruffian on Tue Nov 29, 2011 at 12:30:57 PM EST

in the area of their own jobs, ie, defense. Then, the very survival of the nation depends on government spending.


Or their taxpayer mobile... (5.00 / 1) (#14)
by kdog on Tue Nov 29, 2011 at 02:26:45 PM EST

aka the Medicare Scooter.


Lol! Cynics R' Us? ;-) (none / 0) (#16)
by Edger on Tue Nov 29, 2011 at 02:45:38 PM EST

Ye of little faithe, etc, kdog.

You sound like me. Heh!


The funniest... (none / 0) (#22)
by kdog on Tue Nov 29, 2011 at 03:04:34 PM EST

part are the commercials on Fox News touting all this government assistance available to the people pissin' and moanin' about people on government assistance.

Well you know, funny in lieu of sad.

Between that sh*t and G. Gordon Liddy trying to sling gold every other 30 seconds, even the commercials are a laugh riot over at Fox.


: It is sad (none / 0) (#23)
by Edger on Tue Nov 29, 2011 at 03:10:18 PM EST

You have to wear a two thousand dollar suit, drive a Lexus or better, and be carrying billions worth of bad debts in your pocket, just to qualify for welfare these days.
What's the world comin' to?

Serenity Now!!! (5.00 / 2) (#4)
by Dadler on Tue Nov 29, 2011 at 12:37:36 PM EST

: Epiphanies Now!!!! (5.00 / 2) (#7)
by Edger on Tue Nov 29, 2011 at 01:10:50 PM EST

;-)

For reasons I will never, in a million (5.00 / 3) (#5)
by Anne on Tue Nov 29, 2011 at 12:40:43 PM EST

years, understand, the American geniuses who are running the economic show, and those with the power to legislate policy, must believe that America is so different, so exceptional, that what austerity has wrought in Europe can never happen here.

Or...they are willing to impose austerity on the vast majority of citizens for as long as there is any wealth at all that can be channeled upward.

What happens when they have wrung the last drop of "blood" out of the masses? I don't know, but I think those at the bottom 99% of the monied elite 1% had better look out, because I think they will be the next to be set upon.

Your second suggestion (5.00 / 3) (#9)
by Zorba on Tue Nov 29, 2011 at 01:25:09 PM EST

they are willing to impose austerity on the vast majority of citizens for as long as there is any wealth at all that can be channeled upward.

is the one that truly counts, Anne. The so-called "geniuses," however, have managed to persuade far too many Americans (much lower on the economic scale) of the former,

that America is so different, so exceptional, that what austerity has wrought in Europe can never happen here.

Gives new meaning to an older quote (none / 0) (#11)
by Edger on Tue Nov 29, 2011 at 01:42:24 PM EST

an older quote:

"
...when we act, we create our own reality. And while you're studying that reality--judiciously, as you will--we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors...and you, all of you, will be left to just study what we do.
"

: Isn't that what some wonky tonk thinkster (