The Bad Economics and Worse Political Science of Fiscal Retrenchment

I’m normally a skeptic about the power of ideas to change politics—I normally think of it all coming down to a hard-boiled clash of power and interests—but if you want a good example of Keynes’ theory that ideas matter a great deal, I think you can’t look much further than the current misguided global obsession with fiscal retrenchment.

Roughly speaking, people got it into their heads over the years that “deficits” are “bad” (which is usually true, but also pretty simplistic) and then the economic situation became very bad, so people have decided that large deficits must be the problem. This is a misunderstanding. An application of a crude, sorta-correct rule of thumb to an unusual situation. It also involves people confusing cause and effect. Steep economic downturns cause large deficits, which is bad. But the deficit is the symptom rather than the cause. Meanwhile, as Brendan Nyhan observes the Obama administration seems eager to pile bad political science on top of the mass public’s bad economics. People are upset, and they say they want a smaller deficit. So Obama’s proposing to give it to them, and seems to have no intention of doing anything about its own forecast of a years-long bleak economic situation.

In political terms, though, the actual performance of the economy in 2012 is going to be much more important to Obama’s re-election than the budget deficit. In particular, by directing its policymaking more at the things that the public thinks are the cause of economic problems rather than the things that economists think are the cause of economic problems, the administration is making is running a huge risk of GOP takeover of the House in 2010. What’s more, they’ve left themselves with almost no margin of error for their own re-election. And for double-irony, the very members of congress who are most endangered by poor short-term economic performance are the ones who are doing the most to urge the administration to adopt a fiscal retrenchment agenda. The faith in vox populi that this reflects (“the public will reward me for doing what they said they wanted me to do, even if it turns out not to work at all”) is sort of touching, but really lacks any basis in the evidence. It’s fascinating to me how few professional political operatives or reporters seem interested in systematic studies of US politics.