The Missing Fiscal Policy: Austerity Now?

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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    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 (5.00 / 1) (#17)
    by Militarytracy on Tue Nov 29, 2011 at 02:49:52 PM EST
    that was part of team BushCo said about the Iraq War?

    It's a quote from a Bush adviser (none / 0) (#21)
    by Edger on Tue Nov 29, 2011 at 03:03:50 PM EST
    That Ron Suskind reported on in Faith, Certainty and the Presidency of George W. Bush, October 17, 2004

    The aide said that guys like me were ''in what we call the reality-based community,'' which he defined as people who ''believe that solutions emerge from your judicious study of discernible reality.'' I nodded and murmured something about enlightenment principles and empiricism. He cut me off. ''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality.... {etc...}

    I remember that... (5.00 / 1) (#24)
    by Mr Natural on Tue Nov 29, 2011 at 03:13:45 PM EST
    ... an epic display of hubris.

    Yeah (none / 0) (#25)
    by Edger on Tue Nov 29, 2011 at 03:15:14 PM EST
    A lot like the current white house that way...

    IMO this is what is happening (5.00 / 2) (#10)
    by MO Blue on Tue Nov 29, 2011 at 01:28:40 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.

    That's the only logical explanation for (5.00 / 2) (#33)
    by inclusiveheart on Tue Nov 29, 2011 at 05:02:26 PM EST
    the political malpractice we have witnessed over the past three years.

    Michael Hudson (5.00 / 2) (#6)
    by Edger on Tue Nov 29, 2011 at 12:44:54 PM EST
    Mr. Obama's intention is to reduce wages here by between 20 and 30 percent, and that requires a recession--or, actually, it requires much more than a recession; let's just say depression.

    So about three months ago, Mr. Obama negotiated with the Republicans to adopt the Republican program of cutting back government spending in order to shrink demand, lower employment. His objective is to create more unemployment, in the belief that if you cut back employment, wages are going to go down, and if wages go down, that will create higher profits. That's sort of a bizarre belief, and he's willing to bring on a recession in order to serve the neoliberal philosophy.
    So the result is that austerity is going to lead to more debt defaults, more foreclosures, and we're into a kind of escalating depression that is essentially wiping out the middle-class wealth but letting wealth flow to the top.

    -- November 23, 2011

    FDR got us out of the depression? (5.00 / 1) (#13)
    by redwolf on Tue Nov 29, 2011 at 02:14:21 PM EST
    That's news to me.  I was under the impression things were actually worse by 1938 than they where in 1933.  The end of the depression was in 1946-7 when Americans where finally able to pay off their debts and get back to work.

    Depressions are caused by debt and are cured by defaulting or paying off the debt. See Iceland for evidence.  What the nation and the Europe needs is an ordered manner where the Debtors are relieved of their debt burden and the creditors eat the losses.  Anything less will kick this great, great depression into high gear.

    Worse on what metrics? (none / 0) (#18)
    by Addison on Tue Nov 29, 2011 at 02:50:09 PM EST
    Defaulting on the toxic would help (none / 0) (#19)
    by Militarytracy on Tue Nov 29, 2011 at 02:53:08 PM EST
    They have a bunch of pensions wrapped up in that craptacular though.  Notice via Bloomberg and binks diary at DailyKos, it looks like at the start they made sure (Hank Paulson) that the Titans were saved and saved looking profitable even while they were insolvent as hell.  As for the rest of us, the ironing out will probably be scorching.

    i strongly urge you to read real history, (none / 0) (#29)
    by cpinva on Tue Nov 29, 2011 at 04:16:31 PM EST
    not the fantasy republican history.

    FDR got us out of the depression?That's news to me.  I was under the impression things were actually worse by 1938 than they where in 1933.

    your "impressions" are wrong. again, try doing some actual research, instead of relying on wholely unreliable sources. FDR, finally capitulating to the "austerity demagogues" in both parties, but particularly the republicans, scaled back spending in the 1937 budget.

    this had little effect on the national debt. however, it had a decidedly detrimental effect on unemployment, which had been slowly decreasing to that point. reduced federal spending during the 1937 fiscal year resulted in unemployment increasing, while demand concurrently decreased. he didn't make the same mistake again.

    while it is fair to say that FDR didn't "end the depression", his administration's economic policies were responsible for starting the long slog towards mitigating the effects of it. it took year's worth of disasterous federal policies, combined with rapacious business practices to create the depression, it wasn't going to get fixed overnight.


    If you're under the impression... (none / 0) (#37)
    by Romberry on Tue Nov 29, 2011 at 06:17:17 PM EST
    ...that the economy was in worse shape in 1938 than in 1933, your impression is wholly mistaken. Check it.

    1938 was in fact a downturn which occurred following FDR's pivot to "balancing the budget." (Austerity kills jobs. Who knew?) But it was nowhere near what happened earlier in the decade.


    Is this snark? (none / 0) (#39)
    by MKS on Wed Nov 30, 2011 at 12:41:40 AM EST
    Depressions are caused by debt??

     Not yet in our history....


    If Krugman was right (2.00 / 1) (#26)
    by Slado on Tue Nov 29, 2011 at 03:59:25 PM EST
    Greece would be the economic model of the world.

    For decades they did exactly what Krugman is suggesting we do but on a smaller scale.  ONce again for you to believe Krugman you have to believe that the multiplier effet only works when it's a whole bunch of money instead of a whole lot of money.

    See failed stimulus, failed stimulus, Europe as a whole.  You get the point.

    I admire BTD's devotion to the spend now collect later argument.  It just confuses me since it hasn't worked since the 1930's (even if you believe it worked then, which some don't).

    Ha (5.00 / 1) (#34)
    by Big Tent Democrat on Tue Nov 29, 2011 at 05:18:12 PM EST
    Yes, Greece spent its way out of a depression. As opposed to cutting spending in the face of the Lesser Depression.

    Way to studiously miss the point.


    Erotesis (5.00 / 1) (#36)
    by Addison on Tue Nov 29, 2011 at 05:38:07 PM EST
    How much power does Greece have to print Euros?

    How many countries are racing to finance Greek debt?

    What yield has Greece recently had to pay on its sovereign debt?

    Are there "Eurobonds" which the EC can use to finance "Eurodebt"?

    What are the corresponding answers to the above questions for the United States, the dollar, and Treasury bonds?

    These are important questions when comparing the situation in Greece to the United States in the context of deficit spending and monetary policy during an economic downturn.


    There you go again (none / 0) (#40)
    by MKS on Wed Nov 30, 2011 at 12:52:34 AM EST
    citing the Wall  Sreet Journal and the Hoover Institute......and they once again create their own reality.

    And there is no global warming either.


    Super Committee left-overs, what to do. (none / 0) (#8)
    by KeysDan on Tue Nov 29, 2011 at 01:24:35 PM EST
    (A) undo the triggers for the military and security while letting them go forward in cutting domestic spending including cuts to  Medicare and Medicaid to providers. The $900 billion first installment of the deficit deal, all in domestic cuts, way back in August of this year has probably been forgotten.

    (B)  adopt the trigger-happy austerity now programs: build on the fine work of the Super Committee, or better yet, adopt the mustachioed one, Tom Friedman's, brain eruption of returning to Bowles Simpson (NYT Nov 23). Tom opines that President Obama made a mistake in spurning his own deficit-reduction committee which already had Republican and Democratic support, neglecting to offer that he got it backwards, his committee spurned him.  The committee adjourned without even taking an official vote. But, as Tom says, Bowles Simpson should be Obama's "starting point" for negotiations for a new grand bargain.  That should do it.

    I think this is what the Repubs (none / 0) (#12)
    by jimakaPPJ on Tue Nov 29, 2011 at 01:56:15 PM EST
    have been saying.

    The key to the recovery was the successful management of expectations about future policy.

    Maybe they channeled FDR.

    Low blow Donald, low blow! (none / 0) (#38)
    by ruffian on Tue Nov 29, 2011 at 06:52:05 PM EST
    Yes, it is about the myths (none / 0) (#41)
    by MKS on Wed Nov 30, 2011 at 12:54:02 AM EST
    that Republicans tell each other to justify themselves--not about the facts on the ground.....

    The politics of upheaval (none / 0) (#15)
    by Addison on Tue Nov 29, 2011 at 02:32:04 PM EST
    Once upon a time:

    On December 16, 1935, the Republican National Committee, preparing for the presidential year, summed up the situation from the conservative viewpoint. "The United States," it declared, "is facing as grave a crisis as has arisen in its history. The coming election will determine whether we hold to the American system of government or whether we shall sit idly by and allow it to be replaced by a socialistic state honeycombed with waste and extravagance and ruled by a dictatorship that mocks at the right of the States and the liberty of the citizen."

    "Shadows Ahead" p. 502, The Politics of Upheavel, Arthur Schlesinger. 1960.

    At this point, Franklin D. Roosevelt had been inclined to "soft-pedal" further reform, with Morganthau hoping that after a year of recovery further reform could be attempted.

    There's still time for a "fighting speech" out of President Obama. Franklin D. Roosevelt gave one in early 1936 which was long on rhetoric and short on substance, and the substance which followed the fighting words mostly focused on esteem for balanced budgets, anticipated relief cuts, and the lack of additional taxes.

    I'll quote Schlesinger here:

    [FDR] faced a complex political problem: how to reawaken enthusiasm on his left without aggravating discontent on his right. His disposition, as he thought about the impending message to Congress, was not to abandon the policy of moderation but rather to conceal it in a garb of militancy. (p. 502)

    Sound familiar? Schlesinger continues:

    [FDR's] formula was to combine a radical State of the Union message with a conservative budget in the apparent hope that brave words would restore the faith of the left while lack of deeds might in time restore the hope of the right. (pp. 502-3)

    Sound even more familiar?

    An it mostly worked for FDR (politically). Of course his inclination to slow-walk further reform likely didn't help anyone (policy-wise). Events in the Spring of 1936 at least caused him to rethink his general "no new revenues" approach.

    But again it seems the real problem is that the president is personally not positioned politically to fight even rhetorically, nor seemingly disposed to, as FDR was on both counts. In terms of the 2012 campaign, it's a personal problem, not a political one. In terms of the policy needed in this political context, we've been here before.

    Read The Politics of Upheaval, Mr President, before it's too late!