AUSTERITY-EXPANSION May 3, 2012Posted by wmmbb in Global Electoral Politics, US Politics.
For a non-economist the policy pursued by the EU and implemented elsewhere can be puzzling because they seem obviously self destructive and contrary to the interests of the vast majority of the people.
I have always suspected that Marx was right in general terms about ideology, but I was never sure broad-based consumption would be maintained by cutting back on social spending, limiting employment, or reducing working conditions or wages. I suppose, contra Immanuel Kant, Homo Econimus was always a means to an end rather than the opposite. Furthermore, it did not seem such a stretch that transnational “monopoly” companies were equally indifferent to the environment as they were to people. This could be observed as a characteristic of the organizational systems in place, and I suppose that the economic policy environment can be reinforce that modus operandi.
Andrew Leonard at Salon describes the policy choice between austerity and expansion in the context of the upcoming contest for the US presidency. He explains:
The stances of the two main camps have been clear for years and endlessly debated by economists and pundits. The pro-stimulus, Keynesian argument holds that the problem afflicting stagnant economies all over the world is a lack of demand. When everyone is worried about their economic future, everyone simultaneously tightens their belt, and the capitalist machine stops in its tracks. Since no one is willing to buy anything, companies can’t sell their goods and services and respond by laying off their employees, and that further exacerbates the overall problem. Under such constraints, only the government has the power to step in and stimulate demand. Once the economy is growing strongly and consistently, only then do you look for ways to balance the budget — a task that becomes much easier when tax revenues are booming again.
The opposing camp, now commonly referred to as “Austerians,” believes the problem isn’t a lack of demand, but a lack of confidence. People are afraid to invest and buy and take risks because they’re worried that high deficits inevitably lead to high taxes, or high interest rates, or general fiscal chaos (or all of the above). And they’re going to hunker down until they’re sure that governments intend to act responsibly, and live within their means.
The Austerian camp’s stance translated into one of the most delightfully mindbendingly oxymoronic proposals to enter the economic policy parlance in years: “expansionary fiscal contraction.” Cutting government spending will boost confidence, which will lead to growth! To get big, one must first get small.
It was all the rage two years ago. Today, not so much. The problem with expansionary fiscal contraction is that when you try it at a time when the economy is stagnant or recessionary, you run a real risk of exacerbating the problem you are trying to cure. Slashing government spending subtracts demand from the economy. Growth slows, tax revenues fall, and suddenly the government has even less to spend, which subtracts even more demand from the economy.
The social impacts of the proposed policy experiments are not, it seems, to the forefront, and neither is careful evaluation proposed ahead of implementation. Once you get in a hole dig harder and faster because presumably you are going somewhere or nowhere.
Mark Blyth, somewhat dramatically, argues that “austerity is not common sense, but a nonsense, and a dangerous one at that”:
- Mitt: The real European (salon.com)
- Global ‘Austerity Trap’ Has Caused ‘Alarming’ Jobs Crisis | Common Dreams (2012indyinfo.com)
- The Man who Blew Up the Harvard Endowment Has Some Advice for Europe (economicpolicyjournal.com)
- Krugman: “Keynesians have been completely right, Austerians utterly wrong” (leftfootforward.org)
- ‘The Austerity Trap Has Sprung': Countries Should Chose Growth-Oriented Policies (commondreams.org)
- Paul Krugman: Death of a Fairy Tale (economistsview.typepad.com)
- European unemployment nears 11% (cbc.ca)
- The Confidence Fairy is dead but the reign of economic errors continues (alpinedailyplanet.typepad.com)
- Blame Budget Austerity for Poor GDP Growth (usnews.com)
- Martin Wolf on Fiscal Austerity and Deficit Outcomes in Europe (delong.typepad.com)