Ben Wittes: Pox on One of Their Houses: Noted
Trenz Pruca: Chronicles of the Parasites: Noted

Are Austerians so Slippery Because They Are Excessively Greeced?


Ignore the trolls. Stick to those Austerians whose public personas understand and acknowledge the numbers.

Conversations still have a very Alice-in-Wonderland quality:

Tortoise: The deficit and debt are out of control! We must cut spending now and in the future! Cameron-Osborne-Clegg were right to slash spending in Britain in 2010 and so raise unemployment! The Republicans are right to be slashing spending in the US now!

Akhilleus: But right now the debt-to-GDP ratio is falling, not rising. Right now more spending to reduce unemployment is a much higher priority than steepening the downward trajectory of the debt-to-GDP ratio. And with the shadow cast on the long run by a depressed economy, at current interest rates and at the interest rates priced into financial markets for the next thirty years spending cuts worsen the debt-to-GDP ratio as long as the economy remains depressed.

Tortoise: But the long-run deficit-and-debt outlook is dire! We need to assemble a coalition now to lock-in future spending cuts in the 2020s and 2030s! And we cannot get such a coalition unless we appease spending hawks by including spending cuts now!

Akhilleus: But the long-term budget forecasts you are looking at do not include the effects of two huge policy changes that start in the 2020s: the IPAB fast-track Medicare savings and the Cadillac insurance tax revenues. Why not count thos in the baseline?

Tortoise: Because future congresses will repeal them! We need to pass more policy changes today that I like that will take effect in the 2020s to reduce the deficit and debt!

Akhilleus: Why won't those policy changes you like that would take effect in the 2020s likewise be repealed by future congress before they can have significant effects?

Tortoise: [Silence]

Akhilleus: So your position is the policy changes that I like that have already commanded legislative majorities and that have already been enacted into law that reduce the deficit in the 2020s are so weak will be repealed by future congresses, and hence don't count? And your position is that policy changes that you like that have not yet been able to command legislative majorities and have not yet been enacted into law would, if enacted, be so strong that they would then not be repealed by future congresses, and hence would count? Is that what you're saying?

Tortoise: [More silence]

Akhilleus: Is there any doubt that once one takes the position that future congresses are going to do what future congresses are going to do that leaves us with no sensible option but the focus on the present? And there is no doubt at all that if we focus on the present what the economy needs right now is more spending?

Tortoise: Multiple equilibria! That's it! Multiple equilibria! "Greece"! A high-debt economy could instantly jump to a Greece-like equilibrium, and that would cause a depression. So we must reduce the debt! We must deepen the current depression by cutting spending now in order to reduce the chances that the economy jumps to a Greece-like equilibrium which would bring on a depression!

And by this point I have lost the thread of the Austerian argument completely. I fear a situation in which an economy has lots of hard-currency debt, in which case a loss of confidence can lead to a fall in the value of the exchange rate that amplifies the domestic value of debt and sets off a vicious spiral into deep depression. I fear a situation in which an economy with a hard-currency peg that sees the sudden collapse of a capital inflow finds that external balance requires a slow grinding deflation and deep depression. I can even fear a situation in which an economy without a hard-currency peg fears the expectational effects of an import-price surge and so acts as if it has a hard-currency peg, fighting inflation by defending the currency, and defending the currency by attacking the economy and sending it into a deep depression.

But I simply do not see how an economy with a well-functioning tax system, stable and well-anchored long-term inflation expectations, no hard-currency debt, very low current and expected future interest rates, and a degree of exorbitant privilege as a reserve currency provider--an economy like the UK or the US--could possibly instantly jump to another equilibrium that looks anything at all like "Greece"…

If markets stop buying government debt, then they are buying something else. By Walras's Law, excess supply of government debt is excess demand for currently-produced goods and services and labor. That is not continued deflation and depression, that is a boom--it may well be a destructive inflationary boom, and it may be a costly boom, but it is the opposite problem of an deflationary depression.

Yet the Austerians say--that with an output gap of between 5% and 10% of GDP, the most urgent task of the government is to hit the economy on the head with the hammer of austerity to raise unemployment. Why? To guard against the threat of the invisible bond-market vigilantes. Even though there is no sign of them--for they are not just invisible, they are noiseless and odorless as well. We must not try to infer expectations, probabilities, scenarios, and risks from market prices, but instead have faith as great as St. Paul's in the truth of Austerity, which is indeed "the evidence of things not seen". Even though cutting spending is--with interest rates and persistence coefficients at their current levels--going to worsen and not improve the debt-to-GDP ratio.

The only thing I can think of is Lewis Carroll's dialogues between Akhilleus and the Tortoise:

Achilles had overtaken the Tortoise, and had seated himself comfortably on its back.

"So you've got to the end of our race-course?" said the Tortoise. "Even though it does consist of an infinite series of distances? I thought some wiseacre or other had proved that the thing couldn't be done?"

"It can be done," said Achilles. "It has been done! Solvitur ambulando. You see the distances were constantly diminishing; and so --"

"But if they had been constantly increasing?" the Tortoise interrupted "How then?"

"Then I shouldn't be here," Achilles modestly replied; "and you would have got several times round the world, by this time!"

"You flatter me -- flatten, I mean" said the Tortoise; "for you are a heavy weight, and no mistake! Well now, would you like to hear of a race-course, that most people fancy they can get to the end of in two or three steps, while it really consists of an infinite number of distances, each one longer than the previous one?"

"Very much indeed!" said the Grecian warrior, as he drew from his helmet (few Grecian warriors possessed pockets in those days) an enormous note-book and a pencil. "Proceed! And speak slowly, please! Shorthand isn't invented yet!"

"That beautiful First Proposition of Euclid!" the Tortoise murmured dreamily. "You admire Euclid?"

"Passionately! So far, at least, as one can admire a treatise that won't he published for some centuries to come!"

"Well, now, let's take a little bit of the argument in that First Proposition -- just two steps, and the conclusion drawn from them. Kindly enter them in your notebook. And in order to refer to them conveniently, let's call them A, B, and Z: --

  • (A) Things that are equal to the same are equal to each other.
  • (B) The two sides of this Triangle are things that are equal to the same.
  • (Z) The two sides of this Triangle are equal to each other.

Readers of Euclid will grant, I suppose, that Z follows logically from A and B, so that any one who accepts A and B as true, must accept Z as true?"

"Undoubtedly! The youngest child in a High School -- as soon as High Schools are invented, which will not be till some two thousand years later -- will grant that."

"And if some reader had not yet accepted A and B as true, he might still accept the sequence as a valid one, I suppose?"

"No doubt such a reader might exist. He might say 'I accept as true the Hypothetical Proposition that, if A and B be true, Z must be true; but, I don't accept A and B as true.' Such a reader would do wisely in abandoning Euclid, and taking to football."

"And might there not also he some reader who would say 'I accept A and B as true, but I don't accept the Hypothetical '?"

"Certainly there might. He, also, had better take to football."

"And neither of these readers," the Tortoise continued, "is as yet under any logical necessity to accept Z as true?"

"Quite so," Achilles assented. "Well, now, I want you to consider me as a reader of the second kind, and to force me, logically, to accept Z as true."

"A tortoise playing football would be -- " Achilles was beginning

"-- an anomaly, of course," the Tortoise hastily interrupted. "Don't wander from the point. Let's have Z first, and football afterwards!"

"I'm to force you to accept Z, am I?" Achilles said musingly. "And your present position is that you accept A and B, but you don't accept the Hypothetical --"

"Let's call it C," said the Tortoise. "-- but you don't accept

(C) If A and B are true, Z must be true. "

"That is my present position," said the Tortoise.

"Then I must ask you to accept C."

"I'll do so," said the Tortoise, "as soon as you've entered it in that note-book of yours. What else have you got in it?"

"Only a few memoranda," said Achilles, nervously fluttering the leaves: "a few memoranda of -- of the battles in which I have distinguished myself!"

"Plenty of blank leaves, I see!" the Tortoise cheerily remarked. "We shall need them all!" (Achilles shuddered.) "Now write as I dictate: --

  • (A) Things that arc equal to the same are equal to each other.
  • (B) The two sides of this Triangle are things that are equal to the same.
  • (C) If A and B are true, Z must be true.
  • (Z) The two sides of this Triangle are equal to each other."

"You should call it D, not Z," said Achilles. "It comes next to the other three. If you accept A and B and C, you must accept Z."

"And why must I?"

"Because it follows logically from them. If A and B and C are true, Z must be true. You don't dispute that, I imagine?"

"If A and B and C are true, Z must he true," the Tortoise thoughtfully repeated. "That's another Hypothetical, isn't it? And, if I failed to see its truth, I might accept A and B and C', and still not accept Z. mightn't I?"

"You might," the candid hero admitted; "though such obtuseness would certainly be phenomenal. Still, the event is possible. So I must ask you to grant one more Hypothetical."

"Very good. I'm quite willing to grant it, as soon as you've written it down. We will call it

(D) If A and B and C are true, Z must be true.

"Have you entered that in your notebook?"

"I have!" Achilles joyfully exclaimed, as he ran the pencil into its sheath. "And at last we've got to the end of this ideal race-course! Now that you accept A and B and C and D, of course you accept Z."

"Do I?" said the Tortoise innocently. "Let's make that quite clear. I accept A and B and C and D. Suppose I still refused to accept Z?"

"Then Logic would force you to do it!" Achilles triumphantly replied. "Logic would tell you 'You can't help yourself. Now that you've accepted A and B and C and D, you must accept Z!' So you've no choice, you see."

"Whatever Logic is good enough to tell me is worth writing down," said the Tortoise. "So enter it in your book, please. We will call it

(E) If A and B and C and D are true, Z must be true. Until I've granted that, of course I needn't grant Z. So it's quite a necessary step, you see?"

"I see," said Achilles; and there was a touch of sadness in his tone. H ere narrator, having pressing business at the Bank, was obliged to leave the happy pair, and did not again pass the spot until some months afterwards. When he did so, Achilles was still seated on the back of the much-enduring Tortoise, and was writing in his note-book, which appeared to be nearly full.

The Tortoise was saying, "Have you got that last step written down? Unless I've lost count, that makes a thousand and one. There are several millions more to come. And would you mind, as a personal favour, considering what a lot of instruction this colloquy of ours will provide for the Logicians of the Nineteenth Century -- would you mind adopting a pun that my cousin the Mock-Turtle will then make, and allowing yourself to be re-named Taught-Us?"

"As you please!" replied the weary warrior, in the hollow tones of despair, as he buried his face in his hands. "Provided that you, for your part, will adopt a pun the Mock-Turtle never made, and allow yourself to be re-named A Kill-Ease!"