Friday, May 22, 2015

Michael Stephens — Austerity and Growth: Missing the Point

The pseudo-debate about whether Keynesians and other fellow travellers ought to be embarrassed when governments that engage in fiscal austerity nevertheless experience positive economic growth rates has become a distraction.
For countries like the US and the UK, it is possible under current circumstances for governments to implement budget cuts and still see their economies grow. But the truth of that statement is not fatal to the Keynesian-inspired critique of austerity policies; it is not by any means the end of the story. The more meaningful question is this: What would have to happen in these economies for significant growth to occur in the midst of budget tightening?
Finding an answer to that last question is one of the strengths of the approach to thinking about the economy pioneered by Wynne Godley, and fleshed out further in the Levy Institute’s strategic analysis series. This approach also provides a clear understanding of how deeply irresponsible it is to cut government spending under present economic conditions: because the danger, given the state of the US and UK economies, is not just that budget cuts might slow down the economy, but that they might not.….
Countries can grow along with reducing government contribution either by increasing exports or private debt. Not all countries can increase exports simultaneously so some countries either have to increase the government contribution or see private debt rise in order to grow. The US is unlikely to become a net exporter or even significantly reduce its CAD anytime soon, even with shale oil and fracking. So the growth option under continued austerity is increasing private debt, which is not sustainable and would lead to another crisis down the road. Since the level of private debt is already high historically, it might not be very far down the road.
To bring this back to the tired discussions surrounding austerity policies: yes, it is possible for the United States to have both tight budgets and rising GDP over the next few years. Fiscal conservatism doesn’t make economic growth impossible in the near term — it makes it impossible to grow without increasing financial fragility. In the absence of a significant increase in net exports, keeping the government budget on its current track will lead to either stagnation or an acute crisis. 
Austerians in the United States and elsewhere have been allowed to portray themselves as the champions of steely-eyed realism and prudence. In reality, unless their budget proposals come attached with some workable plan to substantially reduce trade deficits, they are courting private-debt-driven financial crises. In any meaningful sense, they are the true practitioners of fiscal irresponsibility.
And a strong dollar is inimical to increasing net exports. Austerity tends to strengthen a currency. not so much by making it harder to get as by increasing confidence in the discipline and responsibility of the monetary authority — the same erroneous rationale that drives austerity.

Multiplier Effect
Austerity and Growth: Missing the Point
Michael Stephens


Unknown said...

The other way for the economy to grow without deficit spending, increasing exports or private debt is for there to be a redistribution of national income share to people with a higher propensity to spend.

One person with $100 million can never generate as much general economic activity with their spending as 10K people with $10K more to spend each year would.

This is one of the main beneficial properties of high marginal rates on large incomes (both salary and capital gains income). It makes less business sense to pay the govt $90 million if your executives are going to net $10M on $100 million in compensation w\ Eisenhower tax percentages.

Unknown said...

A better way to put it, is that maybe businesses would invest more in themselves if they had to pay $9 to the Govt for every additional $1 in executive compensation above some legislated level ($20 M per year maybe???)....combine this tax policy with corporate governance reform and increased bargaining rights for workers and we could realistically see a reversion in national income share back to the middle and working classes.

Which brings to mind what I think is an important political consideration for the left. Theoretically, it should be easier politics to pass the deficit spending solution to aggregate demand deficiency then a large redistribution agenda. The rich will fight alot harder against a direct reduction in their wealth then to a general reduction in their relative wealth by lifting the bottom directly via Govt spending (UBI, Min wage\JG etc).

Tom Hickey said...

This is really an example of addressing economic rent and rent-seeking.

Along with a steep progressive tax an inheritance tax that prevents cross-generational wealth from arising and dynasties from perpetuating would be another example.

Probably the single most important factor in economics that is assumed away in conventional economics is economic rent. economic rent is a killer of liberal democracy in that it drives the formation of a power elite, oligarchy and privilege.

Unknown said...

Right Tom, rent is one of the biggest examples of economic hypocrisy from the neo-liberal and mainstream cohort. They drone on and on about "markets" blah blah blah, when in reality they would raise hell if reforms were put in place to make markets competitive. As real competition is one way to reduce extravagant rent taking. But big business is not in the business of giving up its power and influence. So as long as the people dont seem to care, the Pols are certainly never going to do anything about it. And so rent, oligopoly, and monopoly it is!!!

John said...

"For countries like the US and the UK, it is possible under current circumstances for governments to implement budget cuts and still see their economies grow."

What budget cuts? As far as I can gather, in the UK it was only when George Osborne halted the austerity that the economy stopped sinking. True, it barely grew but that's because his deficit spending was miserly.

NeilW said...

"As far as I can gather, in the UK it was only when George Osborne halted the austerity that the economy stopped sinking"

He never started in the first place. It was all blather.

Osborne was saying one thing so that he could slash public spending, while allowing the auto-stabilisers to work and fill in the gaps.

In the latest public budget statement the cuts have hit local government the hardest. They then keep the plates spinning by simply failing to maintain the infrastructure - hence the mountain of potholes in roads that never get fixed. (They can't raise local taxes because of capping rules).

It's very clever politics - saying one thing, doing exactly the opposite and then attributing the result to what they said rather than did.

John said...

Politics is, as ever, watch what they do not what they say. Osborne may have talked tough, but he didn't act tough on the aggregate over the five years he was chancellor. Certain departments have felt a real pinch, but the aggregate spending over the political cycle is another matter.

Nevertheless, I was under the impression that UK government spending dipped for a couple of years before rising again. I may be wrong. I'll have to find the figures.

Neil, we could both be right. Arithmetically the spending may have kept on rising, but it dropped for a short period as a percentage of total spending needed to keep the economy from free fall.

Austerity is the wrong description for what happened in the UK. Decelerating spending may be the right term. And decelerating spending given the circumstances was an economically illiterate thing to do. Politically it worked out.

Tom Hickey said...

Politically it worked out.

That's all that counts for the political class.

Iron Law of Institutions, you know.

"The iron law of institutions, usually attributed to political blogger Jonathan Schwartz, states:[1]
”The people who control institutions care first and foremost about their power within the institution rather than the power of the institution itself. Thus, they would rather the institution 'fail' while they remain in power within the institution than for the institution to 'succeed' if that requires them to lose power within the institution."….

John Milton said much the same (through his character, Lucifer):
”It is better to rule in Hell than to serve in Heaven."

NeilW said...


The autostabilisers include the taxation system, and Osborne has been very generous there.

To the wrong entities, but generous nonetheless.