The Mass Psychology of Austerity

Paul Krugman and Simon Wren-Lewis make a good point – the reason capital-A Austerity seems to come back to us over and over has to do with the psychology of humans, and not as much with the underlying economics.

Here’s Wren-Lewis:

“when the market starts to punish fiscal profligacy, it is as if a parent has discovered the child’s guilty secret. (The market is seen by many as a mysterious deity.) The politician wants to repent (or at least be seen to repent), and atone for past sins. After eating too many pastries, we go on a crash diet. After deficit bias, we have austerity.

So here are we Keynesians, telling politicians that they don’t need to go on that diet just yet – they can put it off until times are good. Indeed, now is just the time to eat more pastries – it will make you feel better, they are very cheap at the moment, and you might even lose weight in the long run! It sounds too good to be true, and just the kind of tale the devil might spin. Give in, and the all seeing parent/god that is the market will find you out again. So the politician ignores these siren voices, and buckles down to austerity. “

This reminded Krugman of Obamas first speech as a president, but it reminded me of something a bit more obscure. Wilhem Reich wrote a book “The Mass Psychology of Fascism“, in which he makes the claim:

“Suppression of the natural sexuality in the child, particularly of its genital sexuality, makes the child apprehensive, shy, obedient, afraid of authority, good and adjusted in the authoritarian sense; it paralyzes the rebellious forces because any rebellion is laden with anxiety; it produces, by inhibiting sexual curiosity and sexual thinking in the child, a general inhibition of thinking and of critical faculties. In brief, the goal of sexual suppression is that of producing an individual who is adjusted to the authoritarian order and who will submit to it in spite of all misery and degradation. At first the child has to submit to the structure of the authoritarian miniature state, the family; this makes it capable of later subordination to the general authoritarian system. The formation of the authoritarian structure takes place through the anchoring of sexual inhibition and anxiety.[5]

I dunno if the reason behind the fascist mentality is psycho-sexual, but I can see how Austerity is attractive to many people – it’s how they run their lives on a day to day basis! Successful people tend to deny themselves the immediate pleasurable experience – for example, sleeping in and going to work late – in favor of doing the hard, difficult action which pays off in the long run.

It’s a good way to live your personal life if you want to do more. I suspect this has something to do with the reason the entire mainstream discussion favors Austerity even when the evidence is all pointing at just giving piles of cash to the middle class. Giving piles of free cash to the middle class would be the easy, lazy way to approach this problem, and does not involve a hard choice at all. It’s very difficult to understand the easiest approach would also be the most successful approach to solving our output gap.

(Wilhelm Reich was a crazy person or perhaps a genius, who had 6 tons of his writings and research burned by the American Government! He after he became a well respected psycho-analyst, he threw this away and researched UFOs, sexual energy, bions (!), and a host of other seemingly insane topics. The wikipedia article is worth a read if you have a few minutes.)

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100 Comments on "The Mass Psychology of Austerity"

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ftm
4 years 4 months ago

“Giving piles of cash to the middle class” frames fiscal expansion in the worst light. An equally effective stimulus without the moral baggage would have government employ private firms to build needed public infrastructure. There are timing issues with long-term projects but these could be overcome by maintaining a backlog of approved projects standing by for stabilization related government funding. Given proper capital accounting, government investment expenditure would have much less impact on government deficits than current expenditures of equivalent magnitude.

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Philip Diehl
4 years 4 months ago

“‘Giving piles of cash to the middle class’ frames fiscal expansion in the worst light.”

Excellent point, especially since we gave the banks “piles of cash” which they proceeded to hoard instead of lending, thereby extending the recession. Geithner’s didn’t help matters by reneging on the promise to commit a big portion of TARP to aiding distressed homeowners and giving it to the banks instead, no strings attached. Funny how moral hazard applies to homeowners and college debt-carriers and not to the banks that brought the house down.

Guest
4 years 4 months ago

“‘Giving piles of cash to the middle class’ frames fiscal expansion in the worst light.”

Seventy years ago, Michal Kalecki said

“What the masses now ask for is not the mitigation of slumps but their total abolition. Nor should the resulting fuller utilization of resources be applied to unwanted public investment merely in order to provide work. The government spending programme should be devoted to public investment only to the extent to which such investment is actually needed. The rest of government spending necessary to maintain full employment should be used to subsidize consumption (through family allowances, old-age pensions, reduction in indirect taxation, and subsidizing necessities). Opponents of such government spending say that the government will then have nothing to show for their money. The reply is that the counterpart of this spending will be the higher standard of living of the masses. Is not this the purpose of all economic activity?”

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ftm
4 years 4 months ago

There are two issues here one is distributional – in whose hands will fiscal stimulus benefit the economy most and the other intertemporal – will the economy as a whole benefit more from expanding output of consumption goods today or by increasing future productivity via investment in long lived government assets. The most effective stimulus would look to which resources are currently underutilized and implement policy which balances both both distributional and intertemporal considerations. However, direct payments to needy individuals are always going to be more politically difficult to implement than government projects where benefits are more widely spread — like accelerating planned infrastructure projects. There is no question that resources can be wasted via either transfer payments or ill- advised investments but just because some resources might end up misdirected is never a reason to write-off any avenue for fiscal stabilization.

Guest
4 years 4 months ago

ftm, my view is that the best way is to have transfer payments to everyone rather than just needy people. Have it simply as a dividend for being a citizen just like shareholders get a dividend. It is government of the people for the people. If that is funded by an asset tax then that creates constant redistribution because asset ownership will always be greatly skewed towards those who have done well.
Consumers will then drive investment towards what people actually want. Remember also that small enterprises could be started using a citizens dividend to tide people over.
IMO it is a great advantage that such a system would be automatic and have no political choices being made as to who got what or paid what. Such politicing is what derails so many, well intentioned, programs.

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Philip Diehl
4 years 4 months ago

“Nor should the resulting fuller utilization of resources be applied to unwanted public investment merely in order to provide work.”

Yes, such as defense spending on boondoggle weapons systems and homeland security technology, “job-creating” tax subsidies to industry, and pork barrel projects. This is one of many ways that libertarians delude themselves. All governments redistribute wealth. It’s only a question of whether the redistribution increases disparities in wealth or reduces it. The or ideal of a government that is neutral on the question is either a pipe dream or a subterfuge.

Guest
4 years 4 months ago

To my mind, something like a citizen’s dividend would allow genuine job creation by allowing people to take the risk of trying to set up enterprises of their own.

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Greg
4 years 4 months ago

Citizens dividend, guaranteed basic income…. kind of sounds like a JG without the work. Not knocking it at all, I have felt that govt debt proceeds should go to a wider swath of our population for a while (I know via retirement accounts they reach many) but many are proposing a redistribution and calling it different things.

Lets just embrace redistribution and explain why its necessary. No one wants everyone “getting the same” and all but the lucky one dont want one guy getting it all, so we agree in substance that there are lines which make everyone uncomfortable the only question is have we crossed one?

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beowulf
4 years 4 months ago

Well the paperwork is all ready to go. Just copy the Alaska Permanent Fund dividend as a template. :o)
http://www.pfd.state.ak.us/

Guest
4 years 4 months ago

It differs from a “JG without the work” in that everyone would get it irrespective of what they are doing. It doesn’t entail people being herded around by JG administrators or being made to wait on the sidelines.

Guest
Philip Diehl
4 years 4 months ago

Richard Wolff discussed a similar idea with Bill Moyers Friday night: http://billmoyers.com/segment/richard-wolff-on-capitalisms-destructive-power/

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Philip Diehl
4 years 4 months ago
I entirely agree that our goal should be to boost the after-tax incomes of the middle class, especially as a center-cyclical measure. Where we disagree is in how to market it. “Giving piles of cash to the middle class” is a losing message. Even many, probably most, middle class voters would reject it as irresponsible or a cynical election ploy. Ask George McGovern how it worked for him. (Years later McGovern himself said his proposal to give $1000 to every American was a mistake. It wasn’t the GOP that killed the proposal as a vote-buying scheme; it was Humphrey.) Sure, the McGovern campaign was 40 years ago, but it says something that no Democratic candidate for the presidency since 1972 has made such a just-give-em-cash proposal. It’s always been middle class tax cuts or grants and loans for college tuition, and the like, not cash handouts. How much support a “piles of cash” proposal would receive from the middle class depends, of course, on how you define “middle class”. Some definitions go as high as annual incomes of $250,000 (ridiculously high IMO) and as low as $20,000 (below the federal poverty level). I think a range of 150% of the official poverty level (about $36,000) and $100,000 is more reasonable. Obama narrowly lost this vote. If you exclude African American and Latino voters in this income range (who voted for Obama by a margin of 85-15), the remaining middle class voters went strongly against Obama. I suppose you could make an argument that this group of middle class Romney voters could have been moved by a “piles of cash” offer, but it probably wouldn’t be a very good one. These are the voters who cheered Romney’s 47% statement, railed against Obamacare and the stimulus package, etc. They’re small government, low… Read more »
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Greg
4 years 4 months ago

“Deficits accumulate risk free financial assets. Risk free financial assets perform best when an austerity induced depression is looming. So after an extended period of deficits a constituency is created that actually benefits from the economy taking a nose dive.”

Very true. Those that have accumulated a lot of “nominal money” or MOE can find a lot of bargains during deflationary periods. Thus they will have a deflation bias, or at least an extreme anti inflation bias

Guest
4 years 4 months ago

You don’t need to be a bargain hunter to make it rich in a depression, you could entirely eschew all connections to the real economy and simply live off your portfolio of treasury bonds. Check out how well someone would have done if they had bought 30year bonds at a 6% interest rate and rolled them over each year as the interest rate fell to 0.7% (as long term rates fell to in Japan in 2001 I think) all of that in a deflation. We even now have 50 year inflation linked treasuries in the UK so a stagflation now has a constituency of cheerleaders too!

People don’t have to be “evil genius” types for this to have a political effect. I’m not saying there is a cabal of conspirators rubbing their hands and chuckling. It is simply that a general air of complacency is engendered because many powerful interests have a safety net. The more risk free financial assets we have, the better the safety net so the more economic recovery becomes something rich people consider is something we ought to do if we can think of a way of doing it that doesn’t loose them money rater than being something that must be done immediately at whatever cost or they will lose everything.

Guest
4 years 4 months ago

Deficits accumulate risk free financial assets. Risk free financial assets perform best when an austerity induced depression is looming. So after an extended period of deficits a constituency is created that actually benefits from the economy taking a nose dive. Just look at a chart of 30 year treasury bond prices; they gain 30% whenever a debt deflation is on the cards and fall in price if a tentative recovery appears. No wonder after a huge stock of treasuries has been created, campaign funding is for an “L shaped recession” economic strategy.

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Philip Diehl
4 years 4 months ago

But there’s a predicate to the risk- free assets that deficits create, especially deficits arising from tax cuts for the investor class. Tax cuts for the working poor and middle class are largely spent. These dollars pass through businesses and are then allocated between shareholders, employees and investments. But tax cuts for the wealthy go largely into investments. The fruits of 30 years of tax cuts for the investor class are pretty clear: a cycle of financial bubbles that has benefitted the wealthy and decimated the 401k’s, pensions and home equity of the middle class.

So equity investors benefit from running up the deficit via tax cuts on investment income and for the wealthy, then when equity values collapse at the conclusion of the inevitable bubble, they shift into risk-free bonds. And they pour a small portion of their gains into corrupting the political system in order to enact the fiscal policies that drive this dynamic.

This is not conspiracy theory stuff. I watched it happen at Senate Finance and and Treasury Department in the ’90s and it’s far worse today.

It wouldn’t be so offensive if this were the whole picture. But workers and small investors get screwed on the way up and on the way down. Then they’re the targets of austere policies designed to set us up to start the cycle all over again.

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Philip Diehl
4 years 4 months ago
“The politician wants to repent (or at least be seen to repent), and atone for past sins. After eating too many pastries, we go on a crash diet. After deficit bias, we have austerity.” I beg to differ. No politician wants to repent, and any repentance they perform is an act of desperation (typically with the wife standing beside them). And what’s this “we” kimosabe? “We” shouldn’t go on a diet; “they” should. “We” should have our tax cuts, defense contracts, tax incentives, SS and Medicare benefits and so on. “They” should have their taxes raised, loopholes eliminated, entitlements cuts, welfare abolished, etc. I don’t see many politicians saying “we” must sacrifice, except in the indefinite sense where they mean “you”. Why are progressives confused about the current rage for Austerity. This is just the logical extension of 30 years of GOP economic policies. They’ve run up the debt with tax cuts rationalized by supply-side economics, $2 trillion in war expenditures, a trillion doars in other defense and homeland security boondoggles, and a monumental economic collapse resulting from three decades of financial deregulation. And they’ve built a propaganda machine of massive proportions that has convinced a large part of the electorate that they can become wealthy by playing Wall Street roulette while the banksters played the house. Then when the schmucks watched their 401k’s, their home equity and their jobs vaporize, the propaganda machine went to work convincing them that Medicare and SS had to be cut, teachers, firemen and police had to be fired and their pensions cut, Head Start, WIC and Food Stamps had to be slashed, and oh yeah, we had to increase defense spending and cut taxes. Austerity policies are the culmination of the GOP’s starve-the-beast campaign to repeal the hated programs of the Great Society,… Read more »
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Greg
4 years 4 months ago

Considering that you and Mike seem to be saying things that are 180 degrees apart it might seem strange to say that I agree with both of you…. but I do.

The politician DOES want to be be seen as seeming to repent, at the very least. They must acknowledge that things are bad AND that the political system played a role in it. However no modern politician has embraced the full on fiscal package that MR and MMT promote(I know MR and MMT differ but there is policy they agree on) and always talks about balancing things gradually down the road (progressives) or paying the price now (conservatives).

Everything you say Mr Diehl I agree with, and I suspect Mike does too with much of it, but I think he makes a great point about our mass psychology. This is all mostly a result of bad religious indoctrination, with Calvinist roots, masquerading as real economic analysis

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Philip Diehl
4 years 4 months ago

I’m actually taking exception to the statement by Wren-Lewis. But I agree with Mike that economic conditions call for expansionary fiscal and monetary policies now followed, however, by debt reduction policies when GDP and unemployment reach –fill in the blank. I don’t know what the appropriate thresholds are.

You raise an important point about our Calvinist heritage. But Calvinism calls for accepting the consequences of one’s own actions and making amends. How does this fit with the austerity policies advocated today? Are the people responsible for the debt binge and economic collapse of the last decade saying their mea culpas and accepting the consequences? No. They’re passing the buck to others.

The Right’s propaganda machine has turned Calvinism inside out. Austerity is about enabling the “sinners” to escape the consequences of their actions. And the machine is so effective, the Right has managed to enlist a substantial number of the screwed in the cause of screwing themselves yet again.

We should be clearheaded about what’s happening. Americans are not reverting to a Calvinistic meme embedded in American culture. They are being manipulated by a pervasive and highly effective communications and political infrastructure whose foundation was laid in the wake of the New Deal and raised on the wreckage of the Goldwater campaign of 1964.

By now we surely know that advocates of austerity policies in the US are only interested in deficits as a means of marshaling public opinion to roll back the progressive reforms of the past 100 years. After 32 years of observing GOP policy making, is there any doubt that their obsession with deficits will vaporize when they’re back in power?

Cheney spoke the mantra of the GOP-in-power: “Deficits don’t matter.”

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Greg
4 years 4 months ago

Thanks for the reply Mr Diehl

Your point about inverted Calvinism is so true. Much of this comes, I believe, from opposing notions of lending responsibility. There are those who blame the govt for “making” the banks make bad loans and dubious borrowers for lying to banks about their status while others see the responsibilty with the banks primarily.

Without starting an argument about that here and now, I just want to say that, in my view there is some truth in both positions but more truth in the idea of banks’ responsibility. The banks are the entity that has he resources, if they choose to use them, to check the borrowers credit worthiness. They can verify employment, ask for additional collateral or…………………. just say no! They alone control the purse strings.

But if you view banks as the victim in all this thats where you get to this perverted Calvinism I think. Now you want borrowers to pay their penance…….. yet oddly you have no trouble actually reducing the means (employment) for paying the penance.

If you are familiar with the book “The Family” much of this perverted Calvinism/Christianity is discussed and explained historically. Its fascinating and scary. Essentially the ideology dissected in “The Family” is about placing our very successful people and leaders into a deified status. Viewing them as beneficiaries of Gods grace and embodiments of Jesus’ plan. Its a theology that essentially is a capitalist theology opposed to the seemingly socialist Jesus we always hear about.

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Philip Diehl
4 years 4 months ago

Yes, I’ve read The Family. I grew up among conservative Christians and John Birchers, and had been telling my DC friends that the mix of Social Darwinism, Christian fundamentalism, and massive amounts of corporate money in politics was a greater threat to progressive achievements, and even democracy itself, than was recognized. When The Family came out I gave them copies.

I hear you about how responsibility might be assigned to both sides of the lender-borrower equation. However, considering how sophisticated investors were hoodwinked by a corrupted system of mortgage lenders and bundlers, banks, credit rating agencies, analysts, and regulators, it’s difficult for me to place much blame on people who were offered their first shot at the American dream by lenders who made the same pitch to them that the quants were making to the banks and credit agencies: don’t worry, home prices will always rise.

And the fact that most players in this system have recovered or made out like bandits while borrowers continue to suffer seems all the more reason to give borrowers a pass on blame-assignment. They’re paying the price.

Blaming borrowers strikes me as the first step toward moral hazard policies targeting middle class and working poor debtors while we bail out the banks without addressing the moral hazard of the big players who brought down the house.

Guest
Greg
4 years 4 months ago
I agree with virtually your entire post here but there are some borrowers I feel less sorry for then others. Those that knew they were taking on more than they could afford and simply trying to make a quick buck with rising homeprices should get burned some but those who wanted a place to live and raise a family and now are way upside down, under or un employed and living a lower class lifestyle as opposed to middle class….. I feel for them. Its completely unnecessary. You make a great point about all the middle men; quants, securitizers, real estate agents, rating agencies and regulators were complicit (not necessarily in a conspiratorial way) in this whole mess. If it were just people buying their place to live via their bank, that would be one thing, but now we have people wanting to buy a house, realtors pushing them to get the biggest house they can afford, investors looking to get a cut of their monthly payments to a bank, other entities trying to quantify the default risk and offering insurance against default, still others being paid to put ratings on these bonds. Its all so crazy but all these things individually can make the mortgage experience safer. Paying for default insurance is smart if you are getting accurate default probabilities and arent engulfed in a system which is biased towards only positive information like perpetually rising house prices. If defaults dont result in falling house prices the whole thing goes on. Putting multiple mortgages into a CDO is smart and offers another savings vehicle for people but the underlying risks need to be accurately quantified and our system from 2003-2007 was not about accuracy but about volume because of all the players in the market. The whole scheme depended… Read more »
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