When Joseph Stiglitz and Paul Krugman talk economics, what we hear are two men lost in the euphoric fantasies of the demand-side creed. Pity them, scorn them, ignore them — but never, ever mistake their reveries for reality
Because I get few English language TV channels in my hotel in Avignon I was forced the other evening to tune into a BBC program called Talking Business with Linda Yueh. Her theme was that five years on from the worst crash in a century, the recovery is still slow in the West. She asked: what’s holding it back?
A reasonable question, but unfortunately she sought answers from only two economists, each a famous Nobel Prize-winning economic nincompoop. Too disparaging a description? Not if truth is a defence.
Joseph Stiglitz and Paul Krugman, in that order, disagreed about something. That was the extent of the deleterious effect that income inequality is having on demand. Why, by the way, would income inequality depress demand? Apparently, we were told, ‘because the poor consume more of their income than the rich’. And Jesus wept at such economic illiteracy.
Both think it is having a deleterious effect; however, Stiglitz thinks it is having a rather larger deleterious effect than does Krugman who, we learnt, would actually like to agree with Stiglitz because he hated inequality. But, as Krugman explained, there is little between the two of them in the whole scheme of things. You can say that again.
Ms Yueh had the annoying habit of starting numbers of her questions by contrasting austerity and growth. Like, should the UK government have gone for growth rather than austerity? I can only imagine she was coached beforehand on what penetrating questions to ask by the aforesaid economists.
Anyway, surprise, surprise, both Stiglitz and Krugman think that austerity was a mistake in the UK as it was in the United States and across Europe; and, for good measure, throw in Japan. In fact, you can pretty well bet that whatever the extent of reckless government expenditure, in almost any circumstances imaginable, Stiglitz and Krugman would think it insufficient.
Someone should suggest to Ms Yueh that getting two old leftie economists on her show, who are basically in complete agreement with each other, is not the best way to generate illuminating and interesting debate. Someone might also point out, as kindly as possible, because I assume she is not an economist, that only a complete fool would choose austerity over growth if the choice were that simple.
Clearly neither Stiglitz nor Krugman enlightened her. Because they, in fact, do believe that it is that simple. They smoked the mind-warping Keynesian hallucinogenic pipe long ago. Demand is everything to Stiglitz and Krugman and there is never enough of it in our world and, as Krugman pointed out (tongue in cheek), Mars demands few of our goods. Government therefore has to fill the gap.
Theirs is a binary economics world. In this world austerity, standing for less government expenditure, is bound to have growth-sapping effects. On the other side, more government expenditure means more growth. It is simple. So simple that it could be taught in elementary school if the objective were to mislead the young.
It was difficult to sit through the program. And I have to confess to nodding off through part of the Stiglitz interview so that I can’t personally vouchsafe that everything he said was nonsense; only the part I heard.
Let’s remove ourselves from the economics itself and give some thought to the motives of governments practising austerity. Just maybe they think that by reducing government expenditure (usually, incidentally, only the growth in expenditure) they will make room for the private sector to grow. They are clearly not choosing to pursue policies which will retard growth; that is not good for getting re-elected.
It’s funny when you think about it. Here are two Ivy League rich kids who actually think that out there in the world beyond their cloisters there is insufficient demand; in particular, consumer demand. They clearly don’t get out enough. The only thing preventing latent demand becoming effective is lack of income. I bet even Posh Spice would buy yet more pricey designer baubles and Jimmy Choo shoes with an extra million or so a month; not to mention those downtrodden in Detroit or destitute in Darfur. We don’t have to go to Mars to seek out demand.
What constrains consumer demand is lack of income; what constrains income is lack of investment and production. What constrains investment and production in different parts of the world is a whole host of things; ranging, as prime examples, from civil strife, lack of enforceable property rights, endemic corruption and cultural roadblocks, to price controls, minimum wage laws, elongated development approvals, masses of red tape, environmentalist vandalism dressed up as green tape, onerous taxation and wasteful government spending.
Demand is never, ever, a constraint. Demand is insatiable. If you doubt that do a bit of self-reflection. The constraint is all of those obstacles in the way of entrepreneurial and just ordinary businesses getting on with investing and producing. Policies should be directed to lessening and/or removing those obstacles. Demand will take care of itself.
Stiglitz and Krugman and so many so-called economists like them do a complete disservice to the legacy of Adam Smith and John Stuart Mill and other great (and genuine) economists of the past. It is beyond disgraceful, unless the hallucinatory and stupefying effects of learning and teaching Keynesian economics, to which many succumb, can be used as an excuse.
Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics