Richard Epstein

The Austerity Morass

A close look at the economic woes at home and abroad raises this unedifying question: who has proved more inept at handling the current economic crisis, the European Union or the United States? To Paul Krugman, this question has an easy answer: The Europeans for their maddening insistence on fiscal austerity when large government expenditures and credit infusions are needed to prop up a sagging economy. With fiendish glee, Krugman denounces the EU’s austerity measures as “pain without gain.”

The spending cuts of the EU nations, Krugman argues, have shrunk their economies, without offering any prospect of generating long-term growth. The Europeans, it seems, have emulated the worst of President Herbert Hoover’s skinflint budgets that helped prolong the Great Depression. The United States, which this time around has been more liberal with the purse, has suffered far less damage than the EU, which shunned Keynesian prescriptions.

Krugman’s cryptic Hoover reference is telling. In addition to worshiping balanced budgets, Hoover got economic policy wrong time and again. On trade, he acquiesced to the 1930 Smoot-Hawley Tariff; on labor, he signed on to the Davis-Bacon Act of 1931, which calls for “prevailing [i.e. union] wages” on government funded projects; on taxation, he championed the Revenue Act of 1932, which raised the top tax bracket to 62 percent; more globally, he stubbornly accepted the general deflation of the time. The combined effect of these various measures did much to deepen and prolong the Great Depression. His policies sadly misfired in so many directions that it is difficult to attribute his disastrous presidency to any one factor.

Krugman would do well to dwell on the multiple mistakes of the Hoover presidency. Yet, in his monochromatic way, he focuses in on only one piece of the larger mosaic: that governments here and abroad are not spending enough. For the United States, Krugman advocates for large transfers of federal revenues to the states to provide a large shot in the arm to local governments, putting them in a position “to rehire the hundreds of thousands of schoolteachers they have laid off and restart the building and maintenance projects they have canceled.”

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