Simon Wren-Lewis has an excellent new paper trying to explain the widespread resort to austerity in the face of a liquidity trap, which is exactly the moment when such policies do the most harm. His bottom line is that
austerity was the result of right-wing opportunism, exploiting instinctive popular concern about rising government debt in order to reduce the size of the state.
I think this is right; but I would emphasize more than he does the extent to which both the general public and Very Serious People always assume that reducing deficits is the responsible thing to do. We have some polling from the 1930s, showing a strong balanced-budget bias even then:
I think Simon would say that this is consistent with his view that large deficits grease the rails for deficit phobia, since FDR’s administration did run up deficits and debt that were unprecedented for peacetime. But has there ever been a time when the public favored bigger deficits?
Meanwhile, as someone who was in the trenches during the US austerity fights, I was struck by how readily mainstream figures who weren’t especially right-wing in general got sucked into the notion that debt reduction was THE central issue. Ezra Kleindocumented this phenomenon with respect to Bowles-Simpson:
For reasons I’ve never quite understood, the rules of reportorial neutrality don’t apply when it comes to the deficit. On this one issue, reporters are permitted to openly cheer a particular set of highly controversial policy solutions. At Tuesday’s Playbook breakfast, for instance, Mike Allen, as a straightforward and fair a reporter as you’ll find, asked Simpson and Bowles whether they believed Obama would do “the right thing” on entitlements — with “the right thing” clearly meaning “cut entitlements.”
Meanwhile, as Brad Setser points out, the IMF — whose research department has done heroic work puncturing austerity theories and supporting a broadly Keynesian view of macroeconomics — is, in practice, pushing for fiscal contraction almost everywhere.
Again, this doesn’t exactly contradict Simon’s argument, but maybe suggests that there is a bit more to it.
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