• This is a political forum that is non-biased/non-partisan and treats every person's position on topics equally. This debate forum is not aligned to any political party. In today's politics, many ideas are split between and even within all the political parties. Often we find ourselves agreeing on one platform but some topics break our mold. We are here to discuss them in a civil political debate. If this is your first visit to our political forums, be sure to check out the RULES. Registering for debate politics is necessary before posting. Register today to participate - it's free!

The Austerity Delusion

David_N

David_N

DP Veteran
Joined
Sep 26, 2015
Messages
6,562
Reaction score
2,769
Location
The United States
Gender
Male
Political Leaning
Liberal
Somewhat dated, but the point still stand. Austerity never works.
The austerity delusion | Paul Krugman | Business | The Guardian
in May 2010, as Britain headed into its last general election, elites all across the western world were gripped by austerity fever, a strange malady that combined extravagant fear with blithe optimism. Every country running significant budget deficits – as nearly all were in the aftermath of the financial crisis – was deemed at imminent risk of becoming another Greece unless it immediately began cutting spending and raising taxes. Concerns that imposing such austerity in already depressed economies would deepen their depression and delay recovery were airily dismissed; fiscal probity, we were assured, would inspire business-boosting confidence, and all would be well.
Click to expand...
Fast forward.. and we see the failure of austerity.
But that was five years ago, and the fever has long since broken. Greece is now seen as it should have been seen from the beginning – as a unique case, with few lessons for the rest of us. It is impossible for countries such as the US and the UK, which borrow in their own currencies, to experience Greek-style crises, because they cannot run out of money – they can always print more. Even within the eurozone, borrowing costs plunged once the European Central Bank began to do its job and protect its clients against self-fulfilling panics by standing ready to buy government bonds if necessary. As I write this, Italy and Spain have no trouble raising cash – they can borrow at the lowest rates in their history, indeed considerably below those in Britain – and even Portugal’s interest rates are within a whisker of those paid by HM Treasury.
Click to expand...
You can object to the government creating more dollars, but the reality is: Greece was a unique example. A country that couldn't create more dollars. Completely tied to the euro.
Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.
Click to expand...
It's delusional to assume massively cutting (G) will lead to economic growth.
when economic crisis struck the advanced economies in 2008, almost every government – even Germany – introduced some kind of stimulus programme, increasing spending and/or cutting taxes. There was no mystery why: it was all about zero.
Click to expand...
Common sense, a stimulus is the way to go.
So it was in 2008-2009. By late 2008 it was already clear in every major economy that conventional monetary policy, which involves pushing down the interest rate on short-term government debt, was going to be insufficient to fight the financial downdraft. Now what? The textbook answer was and is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers’ pockets; cut taxes to put more money in those pockets.
Click to expand...
Monetary policy should not be dominant over fiscal policy.
But won’t this lead to budget deficits? Yes, and that’s actually a good thing. An economy that is depressed even with zero interest rates is, in effect, an economy in which the public is trying to save more than businesses are willing to invest. In such an economy the government does everyone a service by running deficits and giving frustrated savers a chance to put their money to work. Nor does this borrowing compete with private investment. An economy where interest rates cannot go any lower is an economy awash in desired saving with no place to go, and deficit spending that expands the economy is, if anything, likely to lead to higher private investment than would otherwise materialise.
Click to expand...
 
Continued:
Part of the answer is that politicians were catering to a public that doesn’t understand the rationale for deficit spending, that tends to think of the government budget via analogies with family finances. When John Boehner, the Republican leader, opposed US stimulus plans on the grounds that “American families are tightening their belt, but they don’t see government tightening its belt,” economists cringed at the stupidity.
Click to expand...
Most americans don't understand the difference between the "national debt" and household debt. Most americans don't even know what a government bond is, let alone monetary policy/fiscal policy.
But within a few months the very same line was showing up in Barack Obama’s speeches, because his speechwriters found that it resonated with audiences. Similarly, the Labour party felt it necessary to dedicate the very first page of its 2015 general election manifesto to a “Budget Responsibility Lock”, promising to “cut the deficit every year”.
Click to expand...
The public working to harm themselves? Not surprising.
Beyond these economic misconceptions, there were political reasons why many influential players opposed fiscal stimulus even in the face of a deeply depressed economy. Conservatives like to use the alleged dangers of debt and deficits as clubs with which to beat the welfare state and justify cuts in benefits; suggestions that higher spending might actually be beneficial are definitely not welcome. Meanwhile, centrist politicians and pundits often try to demonstrate how serious and statesmanlike they are by calling for hard choices and sacrifice (by other people). Even Barack Obama’s first inaugural address, given in the face of a plunging economy, largely consisted of hard-choices boilerplate. As a result, centrists were almost as uncomfortable with the notion of fiscal stimulus as the hard right.
Click to expand...
The "starve the beast" lunacy. Most americans support government programs such as social security/medicaid/medicare though.
there were plenty of people strongly inclined to oppose fiscal stimulus and demand austerity. But they had a problem: their dire warnings about the consequences of deficit spending kept not coming true. Some of them were quite open about their frustration with the refusal of markets to deliver the disasters they expected and wanted. Alan Greenspan, the former chairman of the Federal Reserve, in 2010: “Inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.”
Click to expand...
Well, what do you know? Unfortunately, greece gave the austerians the perfect leg to stand on to justify their lunacy.
” Greece was the disaster austerians were looking for. In September 2009 Greece’s long-term borrowing costs were only 1.3 percentage points higher than Germany’s; by September 2010 that gap had increased sevenfold. Suddenly, austerians had a concrete demonstration of the dangers they had been warning about. A hard turn away from Keynesian policies could now be justified as an urgent defensive measure, lest your country abruptly turn into another Greece.
Still, what about the depressed state of western economies? The post-crisis recession bottomed out in the middle of 2009, and in most countries a recovery was under way, but output and employment were still far below normal. Wouldn’t a turn to austerity threaten the still-fragile upturn?
Click to expand...
Austerity would indeed threaten the fragile upturn, we already know this.
Besides, everybody knew that terrible things would happen if debt went above 90% of GDP.

Growth in a Time of Debt, the now-infamous 2010 paper by Carmen Reinhart and Kenneth Rogoff of Harvard University that claimed that 90% debt is a critical threshold, arguably played much less of a direct role in the turn to austerity than Alesina’s work. After all, austerians didn’t need Reinhart and Rogoff to provide dire scenarios about what could happen if deficits weren’t reined in – they had the Greek crisis for that. At most, the Reinhart and Rogoff paper provided a backup bogeyman, an answer to those who kept pointing out that nothing like the Greek story seemed to be happening to countries that borrowed in their own currencies: even if interest rates were low, austerians could point to Reinhart and Rogoff and declare that high debt is very, very bad.
Click to expand...
Let's not forget this paper is horribly flawed.

More at the link.
 
i heard some left of center economist just the other day saying he doesnt take krugman seriously - thats hes just a political hack.
 
lb_on_teh_cb said:
i heard some left of center economist just the other day saying he doesnt take krugman seriously - thats hes just a political hack.
Click to expand...

Uh, ok? Krugman may be a partisan, but when it comes to economics, he tends to get it right.
 
Another lie or dishonest narrative from the left that austerity never works.

Canada, mid 90s, was drowning in debt, huge annual deficits, and had lost its favoured credit rating and a Liberal government, at the urging of a center right finance minister at the time, set Canada on a very severe austerity path that saw the country end deficits, start recording surpluses, start paying down the debt, and recovering the top credit rating all within less than a decade.

It can be done and it can be very successful, but only when you have sensible politicians who are more concerned about the health of their nation than their chances in the next election.
 
David_N said:
Somewhat dated, but the point still stand. Austerity never works.
The austerity delusion | Paul Krugman | Business | The Guardian

Fast forward.. and we see the failure of austerity.

You can object to the government creating more dollars, but the reality is: Greece was a unique example. A country that couldn't create more dollars. Completely tied to the euro.

It's delusional to assume massively cutting (G) will lead to economic growth.

Common sense, a stimulus is the way to go.

Monetary policy should not be dominant over fiscal policy.
Click to expand...
How will you ever get a liberal government to do the second half of what is considered the "textbook answer was and is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers’ pockets; cut taxes to put more money in those pockets."? And when you cut taxes you have to borrow much more and so the Fed prints more so it can buy more government securities making them less and less attractive to future buyers as we keep printing money with nothing backing it to pay off those who we have already borrowed from. Seems like a nice, non-sustainable long term concept.

And with cutting taxes you should select and massively cut where necessary, all the fat goes.
 
Last edited:
CanadaJohn said:
Another lie or dishonest narrative from the left that austerity never works.

Canada, mid 90s, was drowning in debt, huge annual deficits, and had lost its favoured credit rating and a Liberal government, at the urging of a center right finance minister at the time, set Canada on a very severe austerity path that saw the country end deficits, start recording surpluses, start paying down the debt, and recovering the top credit rating all within less than a decade.

It can be done and it can be very successful, but only when you have sensible politicians who are more concerned about the health of their nation than their chances in the next election.
Click to expand...

- Canada has strong exports.
Also:
http://krugman.blogs.nytimes.com/20...on&action=Click&pgtype=Blogs&region=Body&_r=0
For comparison, look at everyone’s favorite example of successful austerity, Canada in the 1990s. Canada came in with gross debt of roughly 100 percent of GDP, roughly comparable to Greece on the eve of the financial crisis. It then proceeded to do a pretty big fiscal adjustment — 6 percent of GDP according to the IMF’s measure of the structural balance, which is about a third of what Greece has done but comparable to other European debtors. But unemployment fell steadily. What was Canada’s secret?

The answer was, easy money and a large currency depreciation. These offset the drag from austerity, allowing growth to continue.
Click to expand...
 
Gaugingcatenate said:
How will you ever get a liberal government to do the second half of what is considered the "textbook answer was and is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers’ pockets; cut taxes to put more money in those pockets."? And when you cut taxes you have to borrow much more and so the Fed prints more so it can buy more government securities making them less and less attractive to future buyers as we keep printing money with nothing backing it to pay off those who we have already borrowed from. Seems like a nice, non-sustainable long term concept.
Click to expand...

Why do you call it "borrowing?" Who are we "borrowing from?" China uses their hard earned us dollars to acquire government bonds? Even with near zero IR'S, entities still love government bonds. A safe place to park dollars.
 
David_N said:
Why do you call it "borrowing?" Who are we "borrowing from?" China uses their hard earned us dollars to acquire government bonds? Even with near zero IR'S, entities still love government bonds. A safe place to park dollars.
Click to expand...
What do you call it other than borrowing? When the Fed prints extra money from which to buy the Government's own securities so it can continue its mind boggling spending fetishes... what camouflaged term would you rather I use to associate with that? Monetizing the Debt, quantitative easing, what...?

Maybe it happened and I was unaware, but I dont remember near the talk of the US dollar losing its status as the world’s undisputed reserve currency.
 
Gaugingcatenate said:
What do you call it other than borrowing? When the Fed prints extra money from which to buy the Government's own securities so it can continue its mind boggling spending fetishes... what camouflaged term would you rather I use to associate with that? Monetizing the Debt, quantitative easing, what...?
Click to expand...

The federal government can (and does) fund itself. It hasn't "borrowed" in any real sense of the word since the dollar was gold-convertible; when the government limited itself to dollars that it could back with gold, they needed to borrow back gold-convertible dollars so as not to overextend. There is no such limitation anymore. Now, exchanging bonds for dollars (or vice versa) is merely an accounting operation. And bonds are so liquid that a bondholder can, with minimal trouble, convert and spend their dollars - so the "loan" doesn't really deprive the lender of the use of their dollars. When the government issues bonds in order to spend, it adds net assets to the private sector. That is not "borrowing."

There are plenty of terms you can use that are far less misleading. You can simply say that the government creates money and spends it.
 
Gaugingcatenate said:
Maybe it happened and I was unaware, but I dont remember near the talk of the US dollar losing its status as the world’s undisputed reserve currency.
Click to expand...
Which is, of course, created by its loss of those dollars in the first place. The US Dollar would not be the spectacular reserve currency it is if not for the confluence of both public sector deficits and trade deficits. I'm not sure that point is entirely relevant to this discussion, but it's always a fun distinction to make.

Gaugingcatenate said:
How will you ever get a liberal government to do the second half of what is considered the "textbook answer was and is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers’ pockets; cut taxes to put more money in those pockets."? And when you cut taxes you have to borrow much more and so the Fed prints more so it can buy more government securities making them less and less attractive to future buyers as we keep printing money with nothing backing it to pay off those who we have already borrowed from. Seems like a nice, non-sustainable long term concept.
Click to expand...
Your assessment is absolutely correct based on an important prior assumption--that "Ultimately, a government bond is nothing more than a claim of one portion of the population (those who receive interest) on another (those who pay taxes)" and that government is merely the agent or vehicle that connects the claim between bondholder and taxpayer. This is the assumption that obliges government to raise taxes to meet debt liability, no?

MMT (that is what at least JohnfrmClevelan is invoking here) rejects any such obligation of a government to be an agent that connects what, given fiat monetary sovereignty, is actually two separate claims--the necessary payment of interest being wholly removed from whatever necessity we see in taxes. Your assessment that this can lead to limitless deficit and limitless debt is perfectly fine, but MMT says "so what?" There is nothing that prohibits us from paying bondholders as much as legally required, while taxing and spending as we choose to create good social outcomes--apart from the legal barriers we create or maintain to feel better about ourselves, and ultimately that's all the debt ceiling really is.


I agree with MMT's analysis, just not with the implied prescription that some attach to it. I don't think the government should be in the business of handing out free money to those with capital to spare more for the fact that this is an agent of economic inequality, despite my recognizing that it is perfectly capable of doing so without raising taxes. There are plenty of better uses for investment dollars, besides.



(My quote was Piketty. Whatever you may think of his theories, he summed up the prevailing attitude quite nicely I think.)
 
Last edited:
gavinfielder said:
I agree with MMT's analysis, just not with the implied prescription that some attach to it. I don't think the government should be in the business of handing out free money to those with capital to spare more for the fact that this is an agent of economic inequality, despite my recognizing that it is perfectly capable of doing so without raising taxes. There are plenty of better uses for investment dollars, besides.
Click to expand...

Neither do we MMTers. But bonds are the reality, at least for the moment, and they do serve some useful purposes. :)
 
JohnfrmClevelan said:
The federal government can (and does) fund itself. It hasn't "borrowed" in any real sense of the word since the dollar was gold-convertible; when the government limited itself to dollars that it could back with gold, they needed to borrow back gold-convertible dollars so as not to overextend. There is no such limitation anymore. Now, exchanging bonds for dollars (or vice versa) is merely an accounting operation. And bonds are so liquid that a bondholder can, with minimal trouble, convert and spend their dollars - so the "loan" doesn't really deprive the lender of the use of their dollars. When the government issues bonds in order to spend, it adds net assets to the private sector. That is not "borrowing."

There are plenty of terms you can use that are far less misleading. You can simply say that the government creates money and spends it.
Click to expand...

So, the government can create, and spend as much money as it wishes, without any negative consequences?
 
countryboy said:
So, the government can create, and spend as much money as it wishes, without any negative consequences?
Click to expand...

Jesus, how many times do I have to answer this same question? Have you not read any of the other similar threads over the past two years?

The government can create and spend money as long as the domestic economy can meet the demand. Past that, you would get inflation.
 
whats going to happen when the dollar is no longer the world reserve currency? i think the game will be up
 
lb_on_teh_cb said:
whats going to happen when the dollar is no longer the world reserve currency? i think the game will be up
Click to expand...

OK - what would happen? (I won't even bother asking why we would lose that status, or what other currency would take it's place.) What do you think would happen, in detail?
 
JohnfrmClevelan said:
OK - what would happen? (I won't even bother asking why we would lose that status, or what other currency would take it's place.) What do you think would happen, in detail?
Click to expand...

dollars come flooding back to this country from all over the world?

China and Russia and are working together, maybe some of the other Brics too (as far as the yuan or some other new world reserve currency to replace the dollar) - this is what i hear at least, also that we threaten other countries that they will use the dollar for all oil trades OR ELSE
 
lb_on_teh_cb said:
dollars come flooding back to this country from all over the world?
Click to expand...

Dollars come flooding back.... as demand? Is that bad? Why would they all be coming back at once?

lb_on_teh_cb said:
China and Russia and are working together, maybe some of the other Brics too (as far as the yuan or some other new world reserve currency to replace the dollar) - this is what i hear at least, also that we threaten other countries that they will use the dollar for all oil trades OR ELSE
Click to expand...

To be a reserve currency, there needs to be a lot of the currency in foreign hands. China runs an export economy, which makes the yuan ill-suited for a reserve currency. Russia's economy is in rough shape. Japan holds most of its own debt domestically. The euro has all sorts of troubles. And any new currency invented for the purpose will end up in the hands of the exporter that exploits its labor the most (China); it would not work well for anybody. When it was gold, all the gold flowed to the U.S. after WWII; we had to give other countries money just to keep trade moving. A new currency would create more problems than it would solve.
 
JohnfrmClevelan said:
Dollars come flooding back.... as demand? Is that bad? Why would they all be coming back at once?



To be a reserve currency, there needs to be a lot of the currency in foreign hands. China runs an export economy, which makes the yuan ill-suited for a reserve currency. Russia's economy is in rough shape. Japan holds most of its own debt domestically. The euro has all sorts of troubles. And any new currency invented for the purpose will end up in the hands of the exporter that exploits its labor the most (China); it would not work well for anybody. When it was gold, all the gold flowed to the U.S. after WWII; we had to give other countries money just to keep trade moving. A new currency would create more problems than it would solve.
Click to expand...

i hope you're right
 
David_N said:
Most americans don't understand the difference between the "national debt" and household debt. Most americans don't even know what a government bond is, let alone monetary policy/fiscal policy..
Click to expand...

Proof of your accusation? (Meaning it could well be true, but how do we know?)

Careful, this is a debate forum. Far too many comments are unsubstantiated, emotional, careless - whatever.

Where you can, it is sound advice to substantiate your comment/opinion/thought with hard data.

Otherwise it remains innuendo ...
 
lb_on_teh_cb said:
... as far as the yuan or some other new world reserve currency to replace the dollar
Click to expand...

Aint gonna happen.

The reason why the dollar is a reserve currency is due to its economic viability. The dollar is supported by a dynamic economy. If and when that dynamism should fail, then and only then, will the dollar loose its supremacy as a reserve currency.

There is a major candidate for, not replacement, but sharing the spotlight as a reserve currency. Which economy has the potential to rival the dollar in terms purely of its internal market-economy potential? (After all the key attribute of a reserve currency is the ability to sell it and get out into an alternative investment, if desired or necessary.)

The Euro. Remember, the EU is a combined market-place of more than 652 million consumers - to the 320 in the US. Half the size.

Mind you, Europe has plenty of challenges before that happens. But reserve currency as the ultimate outcome - yes, it has solid potential.
 
Last edited:
You must log in or register to reply here.
Back
Top Bottom