Krugman Reveals New, Flawed Definition of Austerity

For the fact is that you can’t just look at spending levels to ask what is happening to spending programs. Here in the United States spending on unemployment insurance and food stamps has risen sharply, not because the welfare state has expanded, but because a lot more people are unemployed and poor. Similar effects are at work in European countries, which have stronger safety nets than we do. Also, some spending represents banking bailouts, not exactly what people have in mind when they talk about big government.

Read it at The Conscience of a Liberal
Austerity, Safety Nets, and Spending
By Paul Krugman

Krugman continues to argue against austerity but this time makes his distinction of the term a bit clearer. Basically, in his perspective, government spending that counts is limited to funds used for consumption and investment. All that government spending on “capital transfers” (bank bailouts) and “social transfers” (e.g. unemployment benefits and food stamps) doesn’t count as an expansion of government. While I certainly don’t oppose some “social transfers”, this separation of government spending strikes me as odd.

As I understand the situation, the purpose of governments increasing spending (or the deficit) is to add income to the private sector, alleviating the deflationary effects of private sector deleveraging. Whether spending money on bank bailouts or investment, both sources add income in the current period to the private sector. This is not to suggest that the longer-term effects of the two policies is the same or that I don’t prefer the latter to the former. The point is that either form of spending is the choice of (generally) elected political leaders. If the Spanish government decides tomorrow to spend a few hundred billion euros to recapitalise its banks, then in my mind it is electing not to pursue austerity.

The real issue here seems to be that government spending is not being directed to the types of uses that are favored by proponents of Keynesian stimulus (presumably because those uses have a larger multiplier). This may very well be true (bank bailouts, as structured, were an awful idea) but that is an argument against the current political institutional framework by which those decisions are made. Arguing simply for more government spending in no way guarantees, or even implies, that governments will choose to direct funds towards consumption or investment and away from “capital transfers” or “social transfers”.

The discussion is moving in a positive direction, away from abstract claims of general spending and towards specific policy measures. This distinction of austerity, however, simply dismisses some aspects of government for the sake of trying to prove a point. In my view that is no better than the comments from the other side Krugman rails against. Yes there were spending cuts in some areas. Yes there were spending increases in others. Neither argument explicitly proves or disproves austerity (especially when we all mean different things.) Let’s focus on where the spending is going and then, if we decide it’s not ideal, figure out how to make politicians alter the composition.

(Note:  I definitely have in mind bank bailouts when I talk about “big government”.)