It recently occurs to me that in Texas, though, there has been no austerity debate. (One quick but crude metric: if you search Nexis for stories involving “austerity” AND “government” in the past year, you get more than a thousand from the New York Times and the New York Times’s blogs, and two for the Texas Tribune.)
Which makes sense, for reasons I’ll describe below. I suspect it is true in other states too. And I think it’s good that Texas, at least, hasn’t subscribed to this framework, for two reasons:
1) Obviously you can be a fiscally conservative person and still support the occasional government intervention, even economic stimulus, unless you have, for some reason, volunteered for this Manichean austerity-vs-Keynesianism debate.
2) That debate, i.e the national one, has been politicized, unproductive, thankless, and illogical.
So first, let me try to summarize the national debate.
On one side you have the group we can call the Keynesians, who believe that government spending--as in the 2009 stimulus--drives economic growth and employment. On the other side you have the austerity people, who have argued that in countries like the United States, an increase in government spending would actually be counterproductive, because it would drive up our debt, which is a drag on growth.
The latter camp got a boost with the 2010 publication of a paper by Harvard economists Carmen Reinhart and Kenneth Rogoff which concluded that since World War II, countries with advanced economies but a debt-to-GDP ratio greater than 90% have experienced demonstrably slower growth than those with lower debt loads. Then last month the empirical case for austerity apparently fell apart, after a graduate student discovered some errors in the Reinhart-Rogoff spreadsheet which, once corrected, erased the putative debt effect. (See Betsey Stevenson and Justin Wolfers for a fuller explanation of this.)
I have to say, it wasn’t until the Reinhart-Rogoff paper was debunked that I thought about it all. Weird, right, because I’m a journalist who’s spent the past six years writing about Texas, and specifically writing about the Texas model vis-a-vis the alternative economic approach espoused by progressives, and come to find out that all this time everyone’s been riveted by this paper that I never even gave any attention to.
Maybe with all the things happening in the national economy, and the Texas economy, the optimal ratio of public debt to GDP hasn’t really captured my imagination. I was aware of the "austerity" rhetoric--I’m sure I’ve used it at times--but I guess I thought it was a euphemism that progressives had borrowed from Europe to scold people who aren’t fully onboard with what they see as the blindingly obvious virtue and efficacy of Keynesian policies.
Maybe I should have inquired further, but nothing would have primed me to think that debt is the critical determinant of economic growth and employment. I’m sure it is one of the things that has some effect, but others are more important, such as taxes; and insofar as public debt will yield higher taxes, I think it’s problem; but that’s why I talk about taxes a lot more than debt ratios. And I really don’t think I’m alone in this.
So is the debate over the optimal size of government a debate about austerity, as Krugman et al describe it? Nobody in Texas has been talking about it in these terms, although the much-discussed Texas model basically conforms to the austerity approach. Low taxes, low revenue, low per-capita spending, and although we have a relatively high ratio of combined state and local debt as a percentage of state GDP, it’s still at about 20%, which is nowhere near the Reinhart-Rogoff putative danger zone.
But Texas isn’t doing this because it believes in austerity, or doesn’t believe in Keynes. Debates about taxing and spending, and about the proper size and role of government, simply aren’t framed that way. They never have been. I’m not sure it would even make sense: the state has a variety of restrictions on both taxing and spending, meaning that austerity is more or less inevitable. (The same could be true of other states compared to the federal government, because even the ‘blue’ states are supposed to balance their budgets.)
When Texans argue about the model, and they do, the arguments, on both sides, are primarily pragmatic rather than theoretical. So from the right, you hear things like: the Texas model is working, therefore it works. Texas should maintain fiscal discipline, because our discipline elicits confidence, meaning businesses want to move here and we have a good credit rating.
On the other side, similarly: Because we have more people, we need to have more roads. Because we have more knowledge jobs, we need to devote more resources to education. Because the state and local governments spend a lot of money on uninsured care, we should expand Medicaid; that would actually save us money, depending on how you figure the math.
Note that there’s an implicit premise on both sides: the revenue situation (which is effectively the spending situation, because of the state’s pay-as-you-go provision) is largely predetermined.
So the austerity debate doesn’t really map onto the Texas debate. And in fact, Texas isn’t dogmatically committed to austerity in all circumstances. That’s pretty clear from the fact that combined state and local debt has basically doubled over the past decade.
Or from the fact that Rick Perry, who has been nothing if not ardent in his support for the Texas model, recently called for the state to capitalize $41 billion in debt to pay for roads. Which kind of sounds like something the Keynesians would call for, although the Keynesians wouldn’t make the argument the way Perry did: “Now is the time to do the fiscally responsible thing and make our state more accessible and productive for generations to come. “
For that matter, for the Texans who are worried about debt, like my colleague Paul Burka, it’s not a theoretical debate over whether debt is a drag on growth. The concern is that interest payments, as modest as they might sound relative to state GDP, are bound to take a big bite out of our miniature budget.
It would also be fair, I think, to describe things like the Texas Enterprise Fund and the Texas Emerging Technology Fund as subconsciously Keynesian, in the sense that they look like Keynesian ideas but haven’t been conceived of or described in those terms.
In other words, if you want to describe Texas according to the terms of the national debate, you could say that the model is de facto austerity and intermittent, subconscious Keynesianism. And those two things are only in conflict if you accept the terms. To wit, I’ve been asked several times, during this book tour, why Texans claim that they believe in limited government, when in reality the state government does all this stuff. Setting aside that the questioners never explain why they think “limited government” means “no government”, I think you can make the case, as Perry did--and as a number of Republicans have done lately, not to mention the Democrats--that certain government interventions are compatible with the broader goal of limited government. These would be the interventions that:
(a) are funded by existing revenue streams, i.e., don’t involve a thoroughgoing expansion of “government” writ large
(b) support economic growth and development, because that means job creation, and people who have jobs typically have more autonomy, and less demand for government, than people who don’t.
Note that the second criterion can be interpreted pretty broadly (and in fact it is interpreted pretty broadly in Texas). The national Keynesians might say that that’s how they see it too; if private sector spending increases demand, the same must be true of government spending, any government spending.
I still think that too much government spending is bound to be counterproductive (for the reasons I alluded to above, which, again, have never had anything to do with Reinhart-Rogoff). Beyond that, some investments are bound to be better than others. And I don't know where the "too much" threshhold is, but the risk of uncritical Keynesianism, at the state level, is tempered by the fact that there’s a limit to how much money can be spent, which imposes a degree of deliberation on the spending decisions. You can’t allocate two billion dollars to the water fund, for example (water being important for the economy, because businesses use water) without getting past the gatekeepers who wanted that two billion dollars for public schools (also important for the economy, because businesses need access to an educated workforce).
At the federal level, however, no such clarity is required. Krugman, at least, has been a little lofty about the need to specify how he thinks the Obama administration should have allocated the stimulus, although whatever they were doing he thinks they should have doubled it.
It may be that this dissonance is simply a function of the fact that making economic policy at the national level is intrinsically different from the state-level debates, but I think we can all agree that on both sides, the difference has been thoroughly muddled. And if the account above is broadly correct, one of the reasons progressives and conservatives have been in such high dudgeon over the past few years is that the literati on each side--the Acela pundits, who are analogizing from the national level to the states, and the conservatives, who are more likely to be analogizing from the other direction--literally haven't been understanding what the other side is talking about.