Sunday, December 16, 2012

Andy Carling — Galbraith: ‘I cannot imagine how a sane person can believe in austerity’

Leading economist slams austerity policies
New Europe
Galbraith: ‘I cannot imagine how a sane person can believe in austerity’
Andy Carling
(h/t Kevin Fathi via email)


Dan Kervick said...

How is it that we ended up with a generation of leaders in both Europe and the United States who don't understand how economic growth happens, and who hate humanity so much that they don't even care?

Ralph Musgrave said...

Galbraith’s anti-austerity point is fatuous as regards the Eurozone. And I’ve noticed numerous so called “professional” economists making the same fatuous point.

Austerity in the Euro periphery is simply the way a common currency area deals with countries that have become uncompetitive. It’s blindingly obvious that that involves austerity and serious social consequences. But that’s just part and parcel of a common currency system. The latter system has advantages and disadvantages, and one of the disadvantages is possible periods of austerity.

If a country thinks the disadvantages outweigh the advantages then (like the UK) it doesn’t join.

Austerity in the US arises for totally different reasons, and when economists like Galbraith lump the US and the Eurozone together in their attacks on austerity, they are just displaying their ignorance.

Kaj Risberg said...

Eurozone's austerity has nothing to with improving competitiveness. How does privatisation of monopolies and closing hospitals improve "competitiveness?"

Matt Franko said...


"Austerity in the Euro periphery is simply the way a common currency area deals with countries that have become uncompetitive."

Well if it is, it is not a very good way now is it?!

Dan Kervick said...

Ralph, I don't follow your reasoning. The United States is a common currency system, and some of our states are less productive than others. As a result, there are transfers made constantly from more productive states to less productive states. Following the recession we enacted a large federal spending package to help restore growth via deficit spending (it was too small alas). We should do more. Unfortunately, some of our politicians don't get it and are planning now to suck revenues out of the private sector for totally unnecessary reasons.

There is nothing either obvious or economically determined about the path Europeans have chosen. Rather Europeans policy makers have behaved stupidly and blindly. They have chosen prolonged stagnation and unemployment to indulge their bigotry and cover up their incompetence.

Ralph Musgrave said...

Kaj, Prior to the introduction of the Euro, inflation rates and changes in export performance (i.e. competitiveness) were not the same in different Euro countries. No big surprise there. Equally unsurprising is that those differences in inflation and export performance continue to be substantially different as between different countries.

When each country had its own currency, those differences could be dealt with very easily: via devaluation or revaluation of the currency. That option is no longer available. So Euro countries have to resort to damping inflation in countries where it has been excessive by imposing deflation: i.e. cuts in public spending / tax increases.

That is a daft system and it results in your “closing hospitals”. I’m not defending the system. I’m just explaining the reality.

Dan, The reason Europeans don’t go for something similar to the “transfers to less productive states” is that there is not sufficient political cohesion: i.e. Germans didn’t sign up to the Euro on the basis that they’d have to subsidise other countries and they don’t look like being willing to do so any time soon. The big mistake Euro countries made was to implement monetary union without enough corresponding political union. That’s the unfortunate reality. As you say, they’ve behaved “stupidly and blindly”.

Jose Guilherme said...

"Austerity in the Euro periphery is simply the way a common currency area deals with countries that have become uncompetitive."!

The eurosystem is still financing net imports from the deficit nations - automatically, via unlimited and uncollaterized credit lines between the eurozone's central banks.

This process could go on forever, because there's no limit to the amounts financed and no deadline for "paying back" said amounts.

The forced adjustment through austerity was rather the result of difficulties periphery governments started having in rolling over maturing debt at acceptable interest rates. Not wanting to face the high rates demanded by private lenders, the governments of Greece and Portugal decided to apply for Troika "help" instead. And the Troika imposed crippling austerity measures as a condition for sending in the needed funds.

In fact, the elites of the periphery are rejoicing over the harsh austerity conditions imposed on their countries' economies. Why? Because they now have the needed pretext to impose a brutal reduction of the welfare state under the argument that "it's mandated by the Troika and since we no longer have an independent currency we don't really have a choice on this issue here". The elites had tried to introduce welfare cuts before but soon found they were not strong enough to impose such measures on a non compliant population - absent a Troika intervention, that is.

So perhaps we could provide a piece of advice to left-wing, anti-austerity groups of the periphery who may one day win elections on the wave of popular revulsion against austerity. Since the eurozone's central banks have been providing automatic financing of current account deficits in the absence of normally functioning interbank markets (frozen since 2008), why not force them also to finance the rolling over of government debts?

Just nationalize a commercial bank - or use an existing one - and "sell" new issues of public debt to said bank to subsequently pay off maturing debt held abroad with the newly-created government deposits.

The central banks of the countries involved will then take care to provide the necessary advances of funds to guarantee such scheme will function smoothly.

And if bureaucrats at the national treasury or the NCB try to block this solution by coming out with the usual pretexts ("it's too risky, the eurocrats wouldn't love us anymore after we do this", etc.)just ignore them and call in an investment bank team (say, at GS or Deutsche Bank)who'll certainly be able to implement this solution for maximum effectiveness.

After all, if GS was smart enough to cook Greece's books at the request of bureaucrats in Athens (backed by their colleagues in Brussels) surely it will find it a child's game to place debt on a state owned bank's books and send payments abroad - this time, under the legal and legitimate cover of TARGET2.

And then we can all forget about austerity and go back to the transfer union that was implicitly set up by the eurozone's clearing and settlement mechanism among central banks.

Tom Hickey said...

Exactly, Jose. Imposition of a neoliberal regime was a big reason for the euro architecture from the get-go, as explained by one of the architects, Robert Mundell.

Greg Palast, Robert Mundell, evil genius of the euro, The Guardian (26 June 2012)

John Zelnicker said...

Dan -- I really think it's not so much that they hate humanity, but that they love money so much that humanity is nowhere to be found in their thinking. Not that this is any less immoral. They are still psychopaths.

Kaj Risberg said...

I have not heard of inflation in periphery countries. If they count housing bubble as inflation, then ok. But what ever "inflation" they have is now killed by debt deflation. It is sheer lunacy to kill real productive capacity like hospitals.

Privatisation of monopolies will create a new bubble, inflation and debt deflation. Troika's "program" is just vandalism.