When does structural reform occur?

Noahpinion has an interesting post on the ideology of austerity. His main thesis is that austerity proponents believe that their respective countries require structural reform, and a demand driven recovery, unaccompanied by structural reform, would lead people to believe that structural reform isn't necessary. This would cause the political will required to accomplish the structural reform would dissipate.

This thesis makes sense. And was, sort of, confirmed by this WaPo piece. But I wanted to respond to Noah's last paragraph:

In other words, maybe people like the idea of austerity because they think an economic stagnation is our best chance to address what they perceive to be our long-term challenges. Allowing a crisis might be less terrible than wasting it.

Now, when stated that way, the idea sounds kind of silly - why don't we just periodically bomb our own cities, in the hope that governance will improve during the rebuilding? But I find it very difficult to state with any confidence that the idea is wrong. When economists discuss the costs of stabilization policy, they limit their discussion to distortionary taxation, unexpected inflation, and things like that. They almost never bring politics or institutions into the picture. The fact is, we just don't know how institutions really work. So I can't dismiss the idea that anti-recessionary macro policy might, in fact, rob us of our best chances to make needed reforms. (italics his)

I don't know that much about the political economy of southern Europe or Japan, but austerity advocates in the U.S. are wrong to think it is their best chance for structural reform.

Most advocates of austerity in the U.S. fall on the right side of the political spectrum. They generally favor lower marginal tax rates, reduced government spending, free trade, balanced budgets, less regulation, and "tax reform" (closing loopholes and lowering rates). With the exception of lower tax rates (which Republicans enact whenever they are in power), the major victories for these policies have generally come during periods of strong growth. Despite having a divided government for six years (and a Democrat in the white house), the strong growth of Clinton-era formed the backdrop for NAFTA, welfare reform, a bunch of deregulatory initiatives, and a balanced budget. Reagan's 1986 tax reform also came in the wake of three years of strong growth.

Their is a narrative on the right that the stagflation of the Jimmy Carter years helped usher in the Reagan revolution. There are aspects of truth to this, and certain Reagan political victories--the Kemp-Roth tax cut, the high-profile defeat of PATCO--occurred in the aftermath of the 1980 election. But the broader liberalization and deregulation of the U.S. economy took place duringthe great moderation period. A time of steady growth and low unemployment.

I would argue that this is to be expected. During periods of strong growth, supply side constraints become much more relevant and actually serve as an impediment to growth. (Matt Yglesias wrote about this a few months back.) And even though I personally think welfare reform wasn't good policy, the arguments in favor of it become much stronger--economically and politically--when jobs are readily available. For similar reasons, protectionism is much more popular during economic downturns, whereas, people are much more comfortable letting the market do its thing when the economy is booming. It really shouldn't be a surprise that strong growth in a capitalist economy is a good way to make the case for more capitalism.

Conversely, I think there is a decent argument to make that economic depressions produce structural changes preferred by people on the left. The welfare state was born in the great depression, and the recent recession has resulted in universal healthcare, the subsidization of "green technology" in the stimulus, and Dodd-Frank. Admittedly, Johnson's second term doesn't really fit this model, and seems to have been the product of unique political circumstances.

Maybe the austerians should rethink things.