Words matter. You can't have an intelligent discussion about fiscal policy if you use loaded and misleading words to describe fiscal policy.
Cancelling or postponing a government investment project might be a wise decision. Or it might be a foolish decision. But it is not "austerity".
Implementing or preponing a government investment project might be a wise decision. Or it might be a foolish decision. But it is not "profligacy".
Real economists talk about "tightening" or "loosening" fiscal policy. They don't talk about "austerity" or "profligacy". Not when they are talking among themselves. Or they shouldn't. They don't even talk about "fiscal stimulus", which is another loaded question-begging word.
"Austerity" and "profligacy" are perfectly good words to describe the consumption decisions of a household. But they are bad words to describe the consumption and investment and taxation decisions of a government. Because public finance is not like household finance.
Economists are supposed to understand the difference. So they shouldn't use words that obfuscate the difference.
There is one important exception, where economists should talk about "austerity". And it's an exception that proves the rule.
It would be perfectly correct for economists to say that the UK government in the Second World War had a policy of "austerity". Because the purpose of that policy was to drive down household consumption as low as it could reasonably go. So it would free up as many resources as possible for the war. Yet at the same time the government ran very large deficits. Fiscal policy was extremely "loose". "Austerity" does not mean "tight fiscal policy".
(They implemented austerity by a mixture of: rationing consumer goods; persuading people to save by buying war bonds; and directly controlling the supply-side, so that firms that used to produce consumer goods were told they had to produce weapons instead.)
Worthwhile Canadian Initiative 
“The point I was trying to make was that people can legitimately choose to do suboptimal policy and the sky doesn’t fall. France, despite it’s problems, is not so bad”
Yet.
“How do you separate fiscal austerity from restructuring when the public sector and state owned enterprises make-up a big chunk of the economy?”
Lay off civil servants, and take them money that you used to spend on civil servant salaries on providing transitional income/training/ early retirement, etc. Privatize state-owned industry (if you can find anyone to buy them) and use the public funds currently used to subsidize money-losing businesses to aid the transition for people who lose their job. Or maybe use that money to transfer to people who perhaps have greater need (i.e., why are civil servants special? Would accross the board wage cuts for civil servants and equal transfers to the unemployed result in a decrease or increase in AD? Not obvious). That’s the thing, if the argument is that we need to spend the money to prevent AD from collapsing, fine, keep G the same, but spend the money in a way that transitions to reform, not in a way that preserves the status quo.
The real difficulty with restructuring is not dealing with the public sector (because you can always spend the money you would otherwise have spent on employing civil servants on laying them off without affecting their incomes -indeed possibly improving their welfare if they don’t like working), rather it’s dealing with deregulation. Since regulations often props up the incomes of protected groups at no cost to the fisc (albeit at considerable cost to the public at large), it’s hard for the fisc to compensate the losers. In theory the winners can compensate the losers, but the fisc can’t without taxing the winners, and in practice the winners (who vastly outnumber the losers) doesn’t want to be taxed (if only because their “gains”, while real, are not apparent).
” Surely we don’t want paternalistic Government intervention to make people do things that prices won’t make them do.
Agreed, but if people don’t respond to prices as a result of government intervention (i.e., protected industries, barriers to entry, wage and price regulation, etc.), that is something we should want to address.
Or, at least, if that isn’t something we want to address, we should be open about the trade-off we’re making. Nothing is more infuriating than watching French youth protest – rightly – about youth unemployment, while also protesting against attempts to reform French labour policies, as if the former isn’t a direct result of the latter. But you can hardly blame them, their leaders and elders have been less than forthright about the implications of their policy choices.
Bob – you are unpacking and analyzing far more eloquently what I stated less elegantly.
The two issues – fiscal tightening and restructuring – are analytically and conceptually distinct.
My “contribution” was to suggest that some critics (opposition parties in Greece, Portugal, Italy and some unions in Canada) are – I argued – deliberately concatenating the two concepts by “rebranding” restructuring as “austerity” in order to discredit and undermine support for restructuring policies in order to maintain rents received due to protectionist policies.
It is important to separate the two. Yes “austerity” or fiscal tightening has a negative multiplier larger than anticipated per Mark Zandi and IMF and OECD. And yes, it was pushed too hard in Europe per Krugman et al.
But that does not invalidate the need for restructuring g policies. Indeed, it makes restructuring policies more urgent than ever.
“That’s the thing, if the argument is that we need to spend the money to prevent AD from collapsing, fine, keep G the same, but spend the money in a way that transitions to reform, not in a way that preserves the status quo.”
You hit on it: but what if the restructuring erodes AD anyway? Restructuring fixes the supply side, but if there is a glut, it’s not going to help AD. And I see no reason why supply side restructuring in a depression should boost AD. In fact, I can see it making your worse off by increasing productivity and making even more workers redundant. It probably makes you better off after you exit the depression, but that just bring us back to Keynes and economists setting themselves too useless a task.
FWIW, I think Greece and maybe a few other are already dead, so I don’t claim to have any better ideas other than the obvious options of a) return to drachma b) German taxpayers paying Greek unemployment. Neither of which seems very likely. Next stop, the stone age.
“And I see no reason why supply side restructuring in a depression should boost AD.”
Investment subsidies tend to boost AD, especially in an economy which has a pegged currency or is in a currency area. To the extent that structural reform incents investment and makes it easier, it’s just like an investment subsidy. Lower unit labor costs would also tend to attract capital and thus boost AD. The problem is that if the ECB has control of Eurozone AD as a whole, this ends up being a beggar-thy-neighbor effect – you can only redistribute AD among regions, but can’t really create more demand. (As it happens, this doesn’t currently matter very much, because Eurozone AD is so badly unbalanced to begin with.) On the contrary, if the ECB’s monetary policy instruments are constrained by institutional factors (say, they really don’t like going to negative interest rates), then these kinds of policies can help.
To the extent that structural reform incents investment and makes it easier, it’s just like an investment subsidy. Lower unit labor costs would also tend to attract capital and thus boost AD.
It is unclear whether the increase in AD due to investment exceeds the fall in AD due to falling wages and para-wage income like insurance benefits, unless the fall is due to a decrease in income or payroll taxes.
But the point is however that it is the weakness of AD that needs to be solved first to cure the investment problem; in a glut with excess production capacity, expanding AD by investment in additional productive capacity is a foolhardy exercise. What is needed is more consumptive capacity. The private sector is excellent at producing supply when presented with additional demand, it is the demand that is absent, not the ability to produce additional supply.
First and foremost we need to fix AD, then we can look to supply constraints.
But that does not invalidate the need for restructuring g policies. Indeed, it makes restructuring policies more urgent than ever.
Nick has posted a number of entries demonstrating that Say’s Law is false in a monetary economy. As supply does not create it own demand in a monetary economy, where are you getting the additional demand from?
“My “contribution” was to suggest that some critics (opposition parties in Greece, Portugal, Italy and some unions in Canada) are – I argued – deliberately concatenating the two concepts by “rebranding” restructuring as “austerity” in order to discredit and undermine support for restructuring policies in order to maintain rents received due to protectionist policies”
And I think that’s an important contribution, because the rebranding of “restructuring” as “austerity” allows those groups to disguise what is otherwise purely naked self-interest (protecting their own rents) as concern for the common good. Those groups are too often allowed to advance their own interest on the grounds of public good without being subject to the sort of critical scrutiny that their claims merit.
“And I see no reason why supply side restructuring in a depression should boost AD.”
Agreed (at least not in the short-run), but it doesn’t follow that it’ll supress it either. Ideally, you would implementing restructing, while using fiscal policy (or monetary policy, as in the US or Great Britain of the 1930s – Greece’s willingness to die on the hill of the Euro, while impressive, is seriously misguided) to expand AD.
” It probably makes you better off after you exit the depression”
Two points. First, that assumes that a country like Greece will be “exiting” their depression any time soon. But the reality is that Greece doesn’t have any freedom of action on either monetary or fiscal policy. The former has been delegated to the ECB and no one in their right mind will lend them money to fund the latter(at least not at anything less the usurious interest), so I think you’re right that neither of those options are likely to happen in the immediate future (and I think you’re right that Greece is not alone in the list of “dead” countries – I suspect large swathes of Europe are living on borrowed time). In that light, Greece’s only strategy is essentially the 19th century response to a recession – have wages plummet (more so than they already have) so that they return to competitiveness. That’s true regardless of whether you restructure inefficient sectors of your economy or not – restructuring to improve productivity just gets the process over with faster and returns you to competitiveness at a higher wage rate.
That might not be a compelling argument if we believe that this is just a short recession and growth will rapidly return (where a reasonable argument could be made that it would be less painful to let things pick up a bit before making those changes). On the other hand, if the alternative is a Japan-style 20-year recession with no end in sight, better to make those structural changes sooner rather than stumble along for a few decades and still have to make those changes later. We’re on, what, year 5 of the current down-turn? In fact, Japan I think is the example that we should be looking to – it’s spent 20 years engaging in every sort of fiscal or monetary stimulus imaginable (in the process running up otherwise unimaginable levels of government debt) without having seriously addressed its underlying structural problems.
Second, and I’ll admit this is a somewhat unsavoury argument but no less true because of that, once you exit the depression, the political impetus to deal with structural inefficiencies disappears (which is why, as Ian notes, opponents of restructuring are very keen to conflate it with fiscal tightening, becuase they believe that once the good times return (if they return) there won’t be the same appetite for reform) at least until the next crisis. While it’s admitedly opportunistic to use an economic crisis to break the rent-seeking of entrenched interest groups, if not now, when? I have no doubt, for example, that but for the current crisis, the Greek government would never have been able to start to crackdown on the rampant tax evasion that went on in that country. That crackdown surely supressed Greek AD (being a defacto tax increase for people who can no longer bribe the local tax collector), but does anyone suggest that it wasn’t self-evidently the right policy to pursue? (Curiously, the many opponents of “austerity” don’t seem too bothered by it when it comes in the form of taxing the “rich”)
“Second, and I’ll admit this is a somewhat unsavoury argument but no less true because of that, once you exit the depression, the political impetus to deal with structural inefficiencies disappears”
The best environment to deal with structural inefficiencies is a stable macroeconomic environment, where pretty much anyone can see that there’s no scope for AD expansion, so the supply side is king. See e.g. Canada and the US in the 1990s. It is very hard politically to argue for market-based reforms when the economy is so dysfunctional due to a deep lack of AD. This was very clear in the Eurozone peripheral countries, and France as well if the election of Mr. Hollande is any indicator.
Anon – you and Determinant seem to disagree that restructuring will affect AD.
You should read former Chancellor Gerhard Schroder’s speech last week. Schroder was the (liberal) Chancellor that restructured Germany that transformed it into the powerhouse it is today – notwithstanding weak AD in southern EU.
It was summarized in Financial Times, “France should copy Germany’s reforms to thrive”: http://www.ft.com/intl/cms/s/0/7254f576-cdca-11e2-a13e-00144feab7de.html#axzz2WYjgOfAy
The core argument was summarized by Schroder: “Today, many European countries, especially France, face similar challenges to the ones Germany did a decade ago. Structural reforms are necessary because of excessive debt, as well as demographic developments and international competition”.
“Staying ahead in competitiveness on a worldwide scale must be the priority for France and for Europe. From our experience with Agenda 2010, we learnt that it takes a few years for the effects to work through to producing visible success”.
The full speech with his arguments more fully developed is at: http://www.omfif.org/downloads/OMFIF-GBF%20Schroder%20Gala%20Dinner.pdf
“The best environment to deal with structural inefficiencies is a stable macroeconomic environment, where pretty much anyone can see that there’s no scope for AD expansion, so the supply side is king.”
Is that true? Considering the experiences of Canada in the 1990s, the UK in the 1980s, Germany following unification or Greece over the last 5 years, that’s far from obvious. If anything periods of economic dysfunction are when it’s easier to implement unpopular structural reform because political leaders can credibly claim that there is no alternative to those reforms. France’s problem is that it hasn’t bottomed out. Yet.
Noah Smith and Paul Krugman both have relevant posts rebutting the idea that “you can’t waste a good crisis”.
“Noah Smith and Paul Krugman both have relevant posts rebutting the idea that “you can’t waste a good crisis”.”
Links, or it didn’t happen.
In any event, Marx wrote a great book on the merits of exploiting a crisis to implement radical economic reform, so if I’m wrong, at least I’m in good company. (Naomi Klein thought she was all clever when she wrote the “Shock Doctrine”, oblivious to the fact that she was attributing to us damned Neo-Liberals the standard operating procedures of Marxists and the radical left for over a century and a half. And if you’re referring to the Krugman article I think you are, he’s equally oblivious to that fact and he hardly rebutts the idea that you can’t waste a good crisis, he merely suggests that you should).