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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

austerity's siren song « Previous | |Next »
May 16, 2013

Mark Blyth’s Austerity: The History of a Dangerous Idea looks at the ideas of those austerians who have succeeded in casting government spending as useless profligacy that has made the economy worse and centered the economic policy debate on budget on cuts to government spending.

Austerity is the only way to restore prosperity is their claim. The idea of “expansionary austerity,” the proposition that cutting spending would actually lead to higher economic growth, is what sits behind this claim. As the Business Council of Australia constantly reminds us confidence-inspiring policies ( ie., the sustainability of public finances or budget surpluses) will foster and not hamper economic recovery, because confidence is the key factor.

RoweDbudgetReply.jpg David Rowe

Blyth argues that in the current situation post global financial crisis the accumulation of debt by the public sector throughout the industrial world has far more to do with the direct and indirect effects of financial distress than it does with government profligacy. Indeed, countries such as Ireland and Spain had more favourable records of government debt accumulation than even Germany before the crisis. He makes a strong case that at times such as the present, austerity can actually be self-defeating in that its adverse effects on growth exceed any direct benefits from reduced borrowing.

He has a point, as the turn to austerity after 2010 was drastic, particularly in European debtor nations. Greece , for instance, imposed spending cuts and tax increases amounting to 15 percent of GDP; Ireland and Portugal imposed 6 percent. The United Kingdom’s economy shrank due to the austerity imposed by the Cameron Conservative Government. In these countries austerity did not lead to a surge in confidence nor enable these countries pull themselves by their own bootstraps out of the quagmire. It had major adverse economic effects, so much so that the IMF reversed its position on the idea of austerity actually boosting economic growth.

The history of economic policy shows that governments have experimented with austerity, it has led to disaster, and yet a couple of decades later, their successors try again, with equally dismal consequences. The current lot run a morality tale about the need to reduce government debt by ending entitlements and hacking away at out-of-control government spending. In doing so they avoid the bad behavior of the private sector in the global financial crisis and the way that finance capital made taxpayers liable for banks’ morally hazardous behavior.

It is faulty economics. Free market economic liberals acknowledge that economic crises have happened, but they have thought of them as an inevitable hangover from previous economic exuberance. All that the state could do was balance the budget, and perhaps even raise taxes, to restore economic confidence. Under this theory, austerity was something like allowing the economy to purge itself between successive bouts of overindulgence. The pain is necessary as it is part of an inevitable cleansing process to “purge the rottenness” from the system.

Greece is the poster child

| Posted by Gary Sauer-Thompson at 8:26 PM | | Comments (4)
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Comments

The idea of “expansionary austerity,” the proposition that cutting spending would actually lead to higher economic growth, is what sits behind this claim."

Advocates of austerity believe that slashing spending spurs private investment, since it signals that the government will neither be crowding out the market for investment with its own stimulus efforts nor be adding to its debt burden. Consumers and producers, the argument goes, will feel confident about the future and will spend more, allowing the economy to grow again...

Mark Blyth is interviewd here Referring the global financial crisis, which was caused by theg financial sector generating a set of asset bubbles he says:

four or five years ago, there was this thing called the financial crisis? Right. So basically, when private sector debt gets very, very high and the underlying cash flows can't support it, it collapses. And at that point, when you've built too big to fail institutions, as you had in the United States and also in Europe, you essentially take on that debt to the public balance sheet. And then you do that transfer. So you can think of it as sort of the greatest bait and switch in human history.

He goes on to say that:
So essentially, you build a business model around being too big to fail, which is essentially a free insurance and an extortion racket. And then when that goes bang you hand all that to the state. And the state puts it on its balance sheet. You get bailed out. And then you turn around to the state and say, my goodness, look at all that debt. That's terrible. We've been spending like drunken sailors. Now we need to cut it back.

He adds that the people who created this debt have just been bailed. They tend to be the higher earners in society. They tend to be the people who do not rely on government produced services.

On the other hand, the very people who will suffer the cost of the bust are the ones who are now being asked to pay for the bill. So they pay once through the bust itself, through consequent unemployment, lower growth, et cetera through the bailouts. And then they've been asked again by cuts in public services, the public sector services that they actually consume.

"expansionary austerity”

Who actually decides to open up a factory in the middle of a recession? When the economy's falling around your ears and the government cuts, then people suddenly become more confident and want to spend their money ---its a fairy tale.

It is lunacy.
What is WRONG with the Australian public's head at the moment.. don't they watch the news, the last four or five years?