Economics, lemon socialism, and surreal interpretations

by John MacBeath Watkins

I've run into an innovative argument on a forum I frequent: That the lessons of the European debt crisis are all about the dangers of Keynesian economics. Just to give a feel for how surreal this is, I dug up some graphs.

(From this source.)

Spain and Ireland, in terms of their government spending, were more fiscally responsible than Germany prior to the banking crisis. They were admired by conservatives for their low taxes and the freedom they gave their banks. The banks used that freedom to finance property booms that busted, bringing the banks to the edge of collapse.

To prevent the banks from collapsing, Ireland and Spain socialized the banks' losses, making the taxpayers responsible for the bankers' mistakes (this is known as "lemon socialism," where profits belong to private parties and losses are given to the public to pay off.) A lot of the capital their banks were loaning came from Germany, so a large part of their debt is caused by trying to protect the German banks from the consequences of their mistakes.

In 2008, before the financial crisis and subsequent recession, Finland, also admired by conservatives, had debt of only 44 per cent and a surplus of 4 per cent of GDP.

As for Greece, they were clearly the least responsible government in Europe. It's not clear to me that they can ever pay off their debt, I really think they'll have to default. And that means repricing their whole economy, which would be easy to do if they could devalue, but they can't because they are part of the Euro zone.

In their case, austerity isn't the worst idea, although they spent less of their GDP on government than Germany when they were flush. They just haven't been paying for it, running up big deficits when times were good. Although their spending is in line with European norms, they have been unwilling to pay for the government they demand. Greeks just don't like paying taxes. Their problem is more like passing a tax cut and a spending program during good times (Medicare Part D, anyone?) than like deficit spending as a deliberate policy for kickstarting a stalled economy. Can you think of any countries in North America that spend less than Germany as a percent of GDP but are unwilling to pay the taxes to support that?

(from here.)

And what did Keynes say about budgets when times were good? He said governments should run surpluses then, so that they could run the necessary deficits when the economy stalled. Because Greece didn't follow Keynes' advice when times were good, they've been forced into practicing the opposite of Keynes' advice now.

So, none of the countries we've been talking about have been practicing Keynesian economics. Incidentally, in addition to running budget surpluses prior to the banking crisis, Spain and Ireland are on the low end of government spending as a percent of GDP for Europe.

And as for the economics, conservatives seem to think that running a deficit when the economy is in good shape is something Keynes would urge. No, that's something Grover Norquist would urge, because Norquist and his allies are not fiscal hawks. Norquist famously quipped,  "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub."

In 1990, the U.S. government employed 12,571,000 people. That includes the civil service, military, contractors, those employed by federal grant, even the postal service. By 1999, it employed 11,028,000, according to this source. Most of the cuts were in the civil service and the military.

Both George H.W. Bush and Bill Clinton reduced the size of government and increased revenues. The result was predictable: The huge debt run up in the Reagan years started to become less of a problem. Unfortunately for Bush, his responsible moves were not popular with the Republican base, and he lost an election when too many of them sat on their hands.

The Onion's famous satire from Jan. 17, 2000, George W. Bush's inauguration day, imagined George W. Bush saying, "our long national nightmare of peace and prosperity is finally over."  Had those words actually been spoken, truer words would never have been spoken.

Of course, he had help ending the peace bit, though at least one of the wars he stated was not justified by the goals he claimed for it. And of course, his concern was not to shrink government while making it more effective.

By the end of 2005, employment by the U.S. government had gown again to 14,601,000, an increase, at almost 3.6 million, of about 30 percent from the size of government at the end of the Clinton Administration. Almost all of this was because of an increase in the use of contractors, according to this source. The military, for example, despite fighting two wars, had only about 50,000 more personnel than in 1999, but of course, many of their functions had been taken on by higher-paid contractors. One would think the Grover Norquists of the world would have been all over that, except for one word in this paragraph: Contractors. They are, after all, private industry, even if they are completely funded with government funds.

And how was this paid for? Well, it wasn't. Which, of course, is the other reason Grover Norquist and his chums had no problem with it. They think debt is wonderful, it justifies cutbacks in those things their opponents wish to spend money on.

So there's your pattern. Ramp up spending on conservative priorities, cut taxes, run up debts, declare the debts are a problem and are caused by spending on liberal priorities, cut spending on liberal priorities.

And if it all ends in tears, blame the debt on John Maynard Keynes.