There were two posts yesterday. First up was “The Liquidationist Urge:”
I’m stayed out of the fracas over Mike Kinsley’s somewhat bizarre attack on my recent writings; Mark Thoma, Brad DeLong, and Dan Drezner have it covered. And I owe a debt to Kinsley, who hired me to write for Slate way back when, letting me establish a reputation as someone who could write short-form pieces about economics for a broad audience, which led down a path to, well, you know.
For some reason, however, none of the things I’ve read goes back directly to Kinsley’s original screed about inflation, which is in a way where all this started. It’s very worth reading, and not just because he was dead wrong (and learned nothing from the experience). For it is pure Schumpeter/Hayek/Mellon liquidationism:
In short, I can’t help feeling that the gold bugs are right. No, I’m not stashing gold bars under my bed. But that’s only because I lack the courage of my convictions.
My fear is not the result of economic analysis. It’s more from the realm of psychology. I mean mine.
But this cure has been one ice-cream sundae after another. It can’t be that easy, can it? The puritan in me says that there has to be some pain. That’s not to say that there hasn’t been plenty of economic pain. But that pain has come from the recession itself, not the cure.
Look, folks, when I write about the urge to see economics as a morality play, I am not just inventing this out of thin air. I read a lot; I also talk to a fair number of these people at things like Group of 30 meetings. Yes, there’s class interest; yes, there’s disaster capitalism at work. But the gut feeling that there must be pain (your pain, of course, not theirs) is very, very real too.
The second post of the day was “Old Fashioned Austerity:”
Matthew Yglesias piles on Michael Kinsley too, and makes a point I’ve also tried to make in the past: if the real problem is that we overspent and lived beyond our means, we should be working harder, not throwing millions of people into unemployment. Yglesias makes his point with the case of Iceland, which has indeed restored relatively full employment while continuing to suffer somewhat reduced real income.
But there’s an even better example from the historical record: Britain after World War II.
In fact, when people used to refer to Austerity Britain, they were referring to the half-dozen years after the war when Britain had very high public debt, much reduced overseas assets, and in general found its economic situation much straitened.
So what was the British economy like? Well, there was rationing, which people hated. There were exchange controls. There was financial repression. All very terrible things, unacceptable by modern standards, right? But there was full employment! Here’s a chart from here, mysteriously missing the year labels, but you can see the war clearly:
And here’s UK public debt as a percentage of GDP over the same period:
So, our grandfathers (or strictly speaking the grandfathers of the Brits — we never had austerity of any kind) — responded to high levels of debt with an economy in which life was pretty hard for investors, luxuries were hard to come by even for the middle class, and everyone worked hard — but, you know, everyone had a job. We’ve responded to much lower levels of debt by ensuring that the economy functions far below potential, millions of people who want to work can’t find jobs, and many people see all their hopes for the future slipping away.