Paul Krugman recently wrote an excellent article over at the New York Review of Books, How the Case for Austerity Has Crumbled. It is ostensibly a review of three books: The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin; Austerity: The History of a Dangerous Idea by Mark Blyth; and The Great Deformation: The Corruption of Capitalism in America by David A. Stockman. Mostly, however, it is a discussion of how economic austerity has been embraced by leaders the world over because it fits into the human desire for a morality narrative.
I don’t completely accept this, however. And to be fair, neither does Krugman, although he does more than I do. In the aftermath of the 2008 financial crisis, there were lots of people we could point fingers at. But the initial governmental response to the crisis was to save exactly those people who were most guilty. Then, once the crisis was over but we were in a recession, the moral judgments came. But they came in a bizarre way. Now the crisis and recession were a morality play. The bad guys (bankers, for lack of a better term) crashed the economy and someone had to pay. And who was that? People on the edges of the economy who lost their jobs. That’s not any episode I ever saw of Family Ties.
Krugman is right: we see this narrative (lacking the details that make it laughable) all the time. As “liberal” Michael Kinsley recently wrote:
What I think is so vile about such pronouncements is how they are proffered with a sagacious air. They always claim that we must share the pain, but if you look closely, you will see that it is never them or their friends who will be feeling the pain.
But even if the right people were being punished, would that make it right? Keynes famously said that a depression was like a car with a bad starter. I think that’s a good analogy. Imagine if you had an old car and the fuel pump was screwed up, causing the carburetor to get too much fuel. As a result, the car ran like hell. You would fix the car, right? You wouldn’t tell your mechanic to set the fuel system to get too little fuel to the carburetor because it had to pay a price for its past sins of getting too much fuel. That’s because you want your car to run well; your car’s fuel system is not a morality play.
The same thing is true of the economy. It is a system. When it is in a recession, it works badly. People who could be working to make everyone richer, sit idle. Lives are destroyed while people are not allowed to work. This isn’t like a farmer who ate too much of last year’s crop and so this year is working extra land to make up for it. Applying a moralistic narrative to our economy is as bad as applying it to the fuel system of your car. And it is about as effective.
This is not to say that bad actors in the economy shouldn’t be punished. However, most of the bad acts are not against the law because the people who make the laws and the people who take advantage of them are the same. It’s interesting that economists (especially conservative ones) are always talking about moral hazard: “A situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk.” But this is always applied to the little guy. For example, the moral hazard of allowing someone to not get health insurance until they are sick. But there is an enormous moral hazard in not punishing people for crashing the economy. As is often noted, we socialize risk and privatize profits. There can be no greater moral hazard, but apparently, we don’t have to worry about it, because bankers are “good” people who we can “trust.”