Kinsley, Krugman and Austerian Aliens

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Michael Kinsley, my former Bloomberg View colleague, goes to bat in the New Republic for "'austerians," a term he says is "a clever Krugman coinage that makes adherents sound like aliens from another planet." That would be Paul Krugman, Nobel laureate in economics, Princeton professor and New York Times columnist.

Toward the end of his column, Kinsley gets to the crux of the argument and something Krugman ignores. It's not that austerians -- those who advocate cuts in government spending and increases in taxes during bad times -- want other people to suffer. "They, for the most part, honestly believe that theirs is the quickest way through the suffering," Kinsley writes.

Exactly. This is the oldest economic argument in the book, as I wrote in my column two weeks ago. It's Keynes v. Hayek, or Keynesians v. Austrians. Keynesians want to fix what they see as a problem of insufficient aggregate demand with more government spending. They claim that a dollar spent by the government becomes someone else's income, which is then spent, multiplying the impact initial dollar borrowed or taxed from the public. They ignore what's unseen: What that same dollar, extracted from a saver, would have been used for if it hadn't been commandeered by the federal government.

Austrians believe that the cure for "malinvestment," or the misallocation of capital into, say, residential real estate in the first half of the last decade, is allowing prices to clear. Which means fall or dive or plummet. The more quickly that happens, the sooner the economy can start to grow. Austrians point to the depression of 1920-1921 and rapid recovery as evidence that a laissez-faire response leads to a better outcome.

"I don't think suffering is good, but I do believe that we have to pay a price for past sins, and the longer we put it off, the higher the price will be," Kinsley writes. Why, he sounds like an Austrian, which isn't nearly as alien as an austerian.

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