Once a discussion of Austerity vs Stimulus economics begins it’s clear that for either to work properly, it must be implemented in the same balanced manner as a math equation. Both sides of an equations, regardless of layout, format, methodology, or complexity. One plus one not just does equal two, one plus one MUST equal two or the equation doesn’t make sense and it, and anything based on it, falls apart.
In a consumer-based economy (which is precisely what the U.S. is supposed to be the last time I checked) the cure for too little spending is more spending. If that’s the case, doesn’t that make everything else just rhetoric for political purposes?
It really doesn’t matter whether one prefers “small” government or “large” government. But I will say this. Last Friday, June 8th, in the midst of more Republican wailing and moaning about cuts that Republicans say MUST be made in government spending for the poor and disenfranchised in America, the House of Representatives heroically voted 307-102 to NOT cut their own budget one single penny.
Now that is just blatant hypocrisy. And of course, you will NOT see that on the Evening News.
No One Reading This Can Possibly Imagine What A Global Economic Meltdown Means
The definition of a depression is “a chronic condition of subnormal activity without any marked tendency either towards recovery or towards complete collapse”. I can only believe that it feels like purgatory. Is there any doubt whether this is the condition of most western economies? With the exception of Canada, output in the G7 countries is still no higher than at its 2007-2008 peaks. In the UK and Italy it is now 4-6 percent below those peaks.
Nevertheless I cannot sufficiently emphasize that there is nothing essentially “leftwing” about this analysis. But in a depression, consumers stop spending because of a backlog of indebtedness, joblessness (or fear of joblessness), and businesses will not invest because of pessimism about whether or not consumers will spring for their goods or services. It really is precisely that simple. Cutting taxes for the wealthy so-called “job-creators” does not affect this equation in any conceivable way. But it DOES keep Republican campaign coffers full.
Central banks can inject money, but there is a limit to what they can do when nominal interest rates are near zero. The Bank of England’s “no change” decision last Thursday illustrates these limits as well as the indigenous caution of most central banks. This leaves only governments to fill the gap whether “small government” ideologues want to believe it or not. I’d like to believe that eating only pizza and cookies won’t make me fat, but my belief has no bearing on the truth.
So where will the money come from to give consumers and businesses enough confidence to begin spending their money with confidence that they will have more coming in to replace it?
Governments of countries that have the good fortune to control their own currencies can borrow as much as required whether directly or indirectly from their central banks. But the conservative-inclined ideologues of the western world fret out loud, “won’t this “printing of money” be <gasp> inflationary?
The answer is YES!!! If these were normal times, with normal economic growth, with normal consumer confidence, with normal employment levels….YES, it would be inflationary….IN NORMAL TIMES.
But these are NOT normal times. Not when there is an ever-widening pool of unemployed or underemployed people, unusually large amounts of unused capacity, and country after country intentionally forcing demand to grind to a halt by forcing economic inactivity with ill-timed austerity.
If I Could Just Get Inside People’s Brains
I wish there were some magical means of getting into Republicans minds to learn what gene deficiency causes this sudden obsessive madness of theirs the deficit. Of course this obsession only exists when there is a Democrat in the White House named Obama.
There seems to be no threshold we can reach that will cause the Republicans to admit that U.S. citizens have suffered enough because of their hunger to make economic policy a morality play.
There is nothing new about the hostility of Republican opinion towards honestly caring about the entire country as a familial entity. But why has this seemingly genetic flaw been so difficult to for more than 50 percent of the country accept?
There is so much evidence that is currently taking place; one has to wonder what it takes to ignore such evidence. In real-time, the folly and failure of undertaking austerity experiments is not only obvious, but numerous. The euro zone is on the brink of collapse. England has slid right back into a double-dip recession after attempting for two years to cut spending to battle an economic downturn at the insistence of ConservativePrime Minister David Cameron.
So why then are the conservative leaders in Europe and their American counterparts in the Republican Party, so reluctant to rein back the restrictionist policies which might – just might – save the economies from total collapse?
Theories Are Simply Theories Unless They Are Proven(Or Dis-proven)
Pundits seem to think that conservatives honestly accept as truth that if they admit that government can play a useful role in fighting slumps, the next thing you know we’ll be living under socialism.
I have a simpler explanation. A shopkeeper or private citizen who cannot make ends meet is unlikely to get out of his debts by borrowing more. Granted. But this and other simplistic truisms are wrongly applied to governments in what is a long-established logical error known as “the fallacy of composition”. This very basic economic principle proves that attempting to apply macroeconomics policies (government and/or country) to microeconomics situations (business and individuals) is tantamount to trying to make 1+1=3.
No single theory is perfect (except my One-Penny-Solution, of course). Keynesian theory also has a couple of holes in it if not implemented in its entirety. A couple of examples:
- The first rule is the emphasis on boosting government spending.
- When real interest rates are low or negative, it is indeed an ideal time to undertake infrastructure projects.
- Nevertheless, demand could just as well be expanded by the tax-cutting route if they are aimed at lower-income families. Surcharges will relieve monetary stress on currency if they are small (like the One-Penny-Solution) cuts to be used explicitly in a finite and irrevocable manner. Too much emphasis on public spending reinforces the erroneous impression that expansionist policies are a “big government” idea. They are not. They simply balance the equation.
- Nobel-Prize winning Economist Paul Krugman has proposed in his new book, “End This Depression Now”, that the U.S. must raise the national inflation targets from 2 per cent to 4 per cent. The minute it would be implemented, the real burden of debts would be slashed. A similar suggestion is made by a British economic historian, Nicholas Crafts, in a paper for the British think-tank CentreForum.
In my humble opinion, this would necessitate careful and meticulous monitoring to prevent creeping inflation from accelerating into the runaway variety.
None of my reservations, however, detracts from the fact that austerity, in the midst of a recession, economic downturn, period of slow or no-growth, etc., is the WORST POSSIBLE idea.
Unless, of course, it’s being proposed for ideological reasons…like bringing down a President no matter the cost to average and poor Americans.
For that…and only that…it makes perfect sense.
- CHART: The Gobsmacking Drop In Government Spending Under Obama (tpmdc.talkingpointsmemo.com)