The Myth of Expansionary Austerity — Christian Breuer

In my new INET working paper, I revisit their method and identify a fatal fallacy of the case for expansionary austerity that by itself overturns the claims made for the view.
Statisticians call the mistake “reverse causality.” What it means, in this case, is that the statistical techniques adopted to test models of expansionary austerity fail to properly account for cyclical movements in the expenditure-GDP ratio. It follows that decreasing expenditure-GDP-ratios appear to cause an increase in GDP, instead of the the other way around....

Naked Capitalism
The Myth of Expansionary Austerity 

Christian Breuer, Junior Professor, Chemnitz University of Technology and Head of Wirtschaftsdienst and Intereconomics, zbw – the Leibniz Information Centre for Economics
Originally published at the Institute for New Economic Thinking website

Jared Dillian — It's Dumb To Have No Gold Amid All Of This

A bit of ideological bias at work influencing view of causality, namely, that austerity is expansionary because saving funds investment?

I suppose that if Modern Monetary Theory (MMT) were implemented, foreign exchange markets would have their say about it (provided we still had floating exchange rates).

Do you think it is a coincidence that the two biggest bull markets correspond with government austerity? I do not.

And tell us what happened after the two biggest bull markets? MMT explains why.

Hint: The expansion was funded by unsustainable private debt that culminated in Ponzi finance as Hyman Minksy's finanical instability hypothesis would predict. MMT develops this explanation in terms of the crucial difference between a sovereign currency issuer and users of the currency that have to obtain it to meet obligations.

Seeking Alpha
It's Dumb To Have No Gold Amid All Of This

Jared Dillian

Bill Mitchell — IMF Euro hitman in denial of the reality that the monetary union has become

The IMF hitman in Europe, one Poul Thomsem recently published a European Money and Finance Forum (SUERF) Policy Note (October 2018) – A Financial Union for the Euro Area – where he basically told us that any changes that the IMF will allow to occur in the Eurozone architecture will be minimal and will not stop Member States “from being forced to undertake large pro-cyclical fiscal adjustments when the next shock or major downturn hits”. The term “large pro-cyclical fiscal adjustments” means harsh fiscal austerity at the same time as the non-government sector spending in those Member States is collapsing. Fiscal policy thus reinforces the non-government spending withdrawal and worsens the outcome for employment, growth, income generation etc. Why? Because “all member countries” must “respect the Stability and Growth Pact”. End of story. Welcome to the Eurozone dystopia – the world where governments must follow rules set by technocrats which are incapable of delivering sustained prosperity for all but clearly suit the top-end-of-town. He then waxed lyrical about a whole set of neoliberal financial market reforms that the IMF is proposing which will further diminish the capacity of the Member States. But, at that point, he just starts to dream. The Member States are already deeply suspicious of the financial reforms that have been introduced to date, ineffective as they are. They are not about to cede more power to Brussels and Frankfurt any time soon....

Stabilize the EZ financially by destabilizing it socially, politically, and economically. How is that working out for you one wonders, with people taking to the barricades and the old order collapsing as nationalism and populism rise? See below.

Bill Mitchell – billy blog
IMF Euro hitman in denial of the reality that the monetary union has become
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

See also

French authorities have predictably blamed the right-wing for the protests - with interior minister Christophe Castaner denouncing National Rally (*formerly National Front) leader Marine Le Pen of encouraging the violence.

"Marine Le Pen urged people to come to the Champs Elysees, and there are members of the ultra-right putting up barriers," said Castaner, adding "They have responded to Marine Le Pen's call and want to take the institutions of state. We want people to be responsible."
The real cause, however, may be quite a bit more nuanced and a long time coming. As political commentator Kark Sharro suggests in a seven-part tweetstorm, the Yellow Vest movement is "about marginalsation and the impotence felt by ordinary people."

Zero Hedge

Explaining France's Grassroots "Yellow Vest" Movement - And Why It's Spreading Across Europe

Tyler Durden

See also

 As I see it, what was happening ... in the streets, explains the different responses to the two crashes. It was the Left—in the form of political parties (Socialist, Communist, and the left-wing of the Democratic Party), but also labor unions, councils of the unemployed, academics, and so on—that pushed the administration of Franklin Delano Roosevelt and Congress to adopt policies that moved beyond restoring economic growth to fundamentally restructure the U.S. economy (which, of course, continued during and after the war years).*** Nothing similar happened in the United States after 2008. As a result, the policies that were discussed and eventually adopted only meant a recovery for large corporations and wealthy households. Everyone else has been left to battle over the scraps—attempting to get by on low-paying jobs retirement incomes based on volatile stock markets, with underwater mortgages and rising student debt, and facing out-of-control healthcare costs....

Occasional Links & Commentary
Tale of two depressions
David F. Ruccio | Professor of Economics, University of Notre Dame

Bill Mitchell — The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – Part 2

This is the second and final part in my discussion about the latest attempts by the IMF and notable New Keynesian macroeconomists to keep the ‘fiscal contraction expansion’ lie alive. The crisis in Italy is once again giving these characters a ‘playing field’ to rehearse their destructive ideas that rose to prominence during the worst days of the GFC, when the European Commission and the IMF (along with the OECD and other groups) touted the idea of ‘growth friendly’ austerity. Nations were told that if they savagely cut public spending their economies would grow because interest rates would be lower and private investment would more than fill the gap left by the spending cuts. History tells us that the application of this nonsense caused devastation throughout, with Greece being the showcase nation. The damage and carnage left by the application of these mainstream New Keynesian ideas are still reverberating in elevated unemployment rates, high poverty rates, broken communities and increased suicide rates, to name a few of the pathologies it engendered. In their article – The Italian Budget: A Case of Contractionary Fiscal Expansion? – Olivier Blanchard and Jeromin Zettlemeyer, from the Peter Peterson Institute for International Economics continue to argue the case for austerity in Italy as the only way to engender growth. In this second part of my analysis of their argument I show that there is little evidential basis for concluding that Italy is a special case. I argue that imposing fiscal austerity on Italy will turn out badly. The broader conclusion is that the mainstream economics profession has learned very little from the GFC. For them the story stays the same. It is one that we should reject in every circle it arises.

Bill Mitchell – billy blog
The ‘fiscal contraction expansion’ lie lives on – now playing in Italy – Part 2
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brazilian President Temer Signs Constitutional Amendment Imposing 20 Years of Austerity — Sharmini Peries interviews Alfredo Saad-Filho

"Expansionary fiscal austerity" mandated. Another reality show in the making.

ALFREDO SAAD-FILHO: This constitutional amendment, as you explained in your introduction, limits government spending in all areas by the Federal Executive, by the Legislature and the judicial system to spending this current year plus the rate of inflation for the next 20 years. This is what it is intended to do: the idea is to limit the government deficit and to provide credibility to economic policy in Brazil.

Paging the confidence fairy.

Real News Network
Brazilian President Temer Signs Constitutional Amendment Imposing 20 Years of Austerity
Sharmini Peries interviews Alfredo Saad-Filho, Professor of Political Economy at the School of Oriental and African Studies (SOAS), University of London, and formerly a senior economic affairs officer at the United Nations Conference on Trade and Development

Herr Schauble’s Foibles: The eurozone Rebalancing Conundrum

Digging the hole deeper.

New Economic Perspectives
Herr Schauble’s Foibles: The eurozone Rebalancing Conundrum
Rob Parenteau

Bill Mitchell — The Balanced Budget silly season is upon us again

"Again" in the post title  refers to the US in 1936 when FDR was persuaded by Treasury Secretary Henry Morgentau to adopt a policy of fiscal conservatism after years of fiscal liberalism on the advice of Fed chair Marriner Eccles. While the policy recommended by Eccles had been working, its reversal was soon followed by a reversal in the economy, too, in the recession of 1937. Bill catches us up on the history to show why the supposed medicine of fiscal discipline is actually poison for the economy.

Bill Mitchell – billy blog
The Balanced Budget silly season is upon us again
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Austral

Bill McBride — Opinion: Did Germany Fulfill their Promises? Did Austerity in Greece Deliver?

Back in 2010, Greece agreed to a number of austerity measures. In general, Greece met their obligations and is currently running a primary surplus. 

Greece was told by the IMF, the Germans, and other that this would turn the Greek economy around. Greece clearly needed some austerity, however many of us argued austerity alone would be a disaster for Greece, and for Europe in general. 

Below are the forecasts for Greece (IMF) and the actual results (Eurostat).
Clearly austerity alone failed. Sadly European officials like German Finance minister Wolfgang Schauble have not changed their views and apologized to the Greeks.
Here is an actual quote from Schauble in 2013:

"Nobody in Europe sees this contradiction between fiscal policy consolidation and growth,” Schauble said. “We have a growth-friendly process of consolidation, and we have sustainable growth, however you want to word it.”

A "growth friendly process"? "Sustainable growth"? Nonsense.…

Calculated Risk
Opinion: Did Germany Fulfill their Promises? Did Austerity in Greece Deliver?
Bill McBride

Dirk Ehnts — Steinbrück on Greece – it’s politics, not economics!

The drama of Greek debt is a political drama. The troika was invented during the crisis. Austerity was never a threat before the crisis happened and was imposed because the European Commission wanted it, not because it had to. These were political decisions, and they were not based on macroeconomics textbooks. Expansionary austerity and the confidence fairy where stories invented on the go, without proper theoretical foundations (and not mentioned in macroeconomics textbooks). It is about time to stop T.B.T.F. (too big to fail) and T.I.N.A. (there is no alternative) and rethink the whole episode 2008-2014. Learning from mistakes is hard, but it must happen.

econoblog 101
Steinbrück on Greece – it’s politics, not economics!
Dirk Ehnts | Berlin School for Economics and Law

Lawrence Delevingne — Germany: Our job is to strengthen Europe

A top German official has said the country supports Europe's efforts to kick start the region's economy -- including a quantitative easing (QE) program -- but that other countries have to sell reforms to their citizens. 

"The task for Germany now today is, through its own policies, structural reforms, its own investments, to support the EU and the Commission when it brings on to the market, so to speak, its stability package,"Sigmar Gabriel, vice-chancellor and federal minister of economic affairs and energy of Germany, said at the World Economic Forum Thursday in Davos, Switzerland.

"But every nation," he added, "has to have the courage to broach such structural reforms and speak clearly about them without making people afraid. This is difficult."

There could be significant political cost—such as losing elections—from such structural reforms, Gabriel said, but stressed there was no other choice.

"There is no alternative. The alternative is to simply prolonging the crisis and this situation becomes untenable for citizens," he said during a discussion about Europe's economy.

Then comes the delusional appeal to the confidence fairy.

"How can one give people the sufficient confidence to believe that they will benefit from...these structural reforms?" Gabriel added. 

"That is a difficult task for politicians to give such confidence to the electorate, so they can believe that their children will be better off. That is one of the major task of politicians and I think some have been quite successful."

Good luck with that.

CNBC Davos
Germany: Our job is to strengthen Europe
Lawrence Delevingne

Jeffrey Sachs, Paul Krugman and Brad DeLong square off

Is the glass half full or half empty. It depends on the perspective from which one is looking. Krugman reflects the popular perception that workers, that is, most of the economic participants, are being left out, while Sachs cherrypicks the numbers and finds that all is getting better under austerity.

However, Sachs agrees that "better" is not good enough.

To be clear, I believe that we do need more government spending as a share of GDP for education, infrastructure, low-carbon energy, research and development and benefits for low-income families. But we should pay for this through higher taxes on high incomes and high net worth, a carbon tax, and future tolls collected on new infrastructure. We need the liberal conscience, but without the chronic budget deficits. 

There is nothing progressive about large budget deficits and a rising debt-to-GDP ratio. After all, large deficits have no reliable effect on reducing unemployment, and deficit reduction can be consistent with falling unemployment.

The Guardian
Paul Krugman has got it wrong on austerity
Jeffrey Sachs

Grasping Reality
Why Yes, I Do Believe Jeffrey Sachs Has Lost His Mind. Why Do You Ask?
Brad Delong

It seems to me that the fundamental question is whether it is progressive to accommodate saving desire in an economic environment based chiefly on rent-seeking and rent-extraction.

Robert Skidelsky — Speech on the Autumn Statement, in the House of Lords, 4th December 2014

I concentrate on one point: the Chancellor’s failure to meet his budgetary targets.…

Ever since I started writing and speaking about these matters in 2010, I have been predicting that the Chancellor would not meet his budget targets. 

The reason I gave was that the pursuit of those targets in itself slows down the economic growth on which their achievement depends.

Why? Because it slows down the rate of spending in the economy, and growth depends on spending. The cuts have hit the spending, and the spending has hit growth.…

So why has the British economy been growing at all? The answer is very largely because there are more people. The population was 62.3 million in 2010, today there are 64.1m, 2 million more, virtually all of them of working age. And more people are coming. 

Any economy will grow if has more people to do the work. The only relevant welfare measure –the measure by which the government should be judged –is GDP per head. GDP grew by 4.1%, between 2010 and 2013, but GDP per head has grown by only 2.3%, and the typical earner is £1600 a year worse off. 

So we are left with the prospect of another round of brutal spending cuts with the rolling five year programme rolling ever further into the future.

It sometimes helps if people running economic policy know some Keynesian economics.

Speech on the Autumn Statement, in the House of Lords, 4th December 2014
Robert Skidelsky

h/t Brad DeLong

Joe Weisenthal — Here's David Cameron Calling For Permanent Austerity In Front Of All Kinds Of Ridiculous Gold Things

Business Insider
Here's David Cameron Calling For Permanent Austerity In Front Of All Kinds Of Ridiculous Gold Things
Joe Weisenthal
h/t Jan Milch

Time to tighten the cummerbunds.

Menzie Chinn — British Economic Triumphalism in Perspective

Econbrowser

British Economic Triumphalism in Perspective
Menzie Chinn

Dig a deep hole with "expansionary fiscal austerity" and then declare victory when you start to climb out of it with selected data to prove it.

Larx Syll — Latvia and Sweden — the ultimate Keynes killers? (video)

Some people seem to consider the case of Latvia the ultimate Keynes killer, showing that austerity policies suffice to get you out of deep recessions and not having to fall back on Keynesian stimulus.Hmm …What are the facts? Latvia today has a real GDP that still is far below its pre-crisis peak. Its unemployment rate is close to 15 %. Indeed an impressive success …

Latvia and Sweden — the ultimate Keynes killers? (video)

Lars P. Syll | Professor of Social Studies and Associate Professor of Economics, Malmo University
(h/t Ralph Musgrave via email)

Mark Thoma on Paul Krugman 'Is There Any Point To Economic Analysis?'

Mark Thoma on Paul Krugman. Professor Thoma observes:

The arguments serve an ideological goal. Perhaps we shouldn't assume that the main motivation of many pundits and policymakers is economic rather than political?

The neoliberal position is that politics is economics and economics is laissez-faire. TINA period. Alternatives are ruled out.

Economist's View
'Is There Any Point To Economic Analysis?'
Mark Thoma

Mark Thoma — 'The Intellectual Bankruptcy of the Austerians'

Some comments on the latest report from the BIS

Economist's View
'The Intellectual Bankruptcy of the Austerians'
Mark Thoma | Professor of Economics, University of Oregon

BIS or BS? The title to this post should be "Calling BS."

Martin Wolf — How Austerity Has Failed

Austerity has failed. It turned a nascent recovery into stagnation. That imposes huge and unnecessary costs, not just in the short run, but also in the long term: the costs of investments unmade, of businesses not started, of skills atrophied, and of hopes destroyed.

Martin Wolf takes austerity and the austerians apart.

What is being done here in the UK and also in much of the eurozone is worse than a crime, it is a blunder.

 In today's environment, it's more insulting to call someone stupid than a criminal.

New York Review of Books
How Austerity Has Failed
Martin Wolf

(h/t Bill McBride at Calculated Risk)

Joshua Sperber — Krugman’s Austerity Blinders

Yet what is critical here is Krugman and other liberals’ understanding of precisely what “work” in fact means. 

Liberals are of course correct that European austerity, as well as the US version, has not generated an immediate economic expansion. But to get a clearer idea of the actual purpose of austerity, it is far more useful to listen not to liberal economists but to the politicians who actually decide to implement it. Greek European Commissioner Maria Damanaki recently noted, “‘The strategy of the European Commission over the past year and a half or two has been to reduce the labour costs in all European countries in order to improve the competitiveness of European companies over the rivals from Eastern Europe and Asia.’”

Similarly, in her recent keynote speech at the World Economic Forum, Angela Merkel was admirably frank in asserting that high unemployment is, according to the Guardian, the “price Europe had to pay to become more competitive.” Merkel’s statement that austerity is intended to “ensure the prosperity of our people” is an oxymoron only to those liberal economists who do not see capitalism as a class-based system. For, Krugman’s contention that recessions are merely “technical malfunctions” ignores what both politicians and capitalists have long asserted: recessions are “correctives” that reduce the cost of the one commodity that is more adjustable and often more expensive than any other: labor. 

Austerity, via slashing social spending and expanding a surplus labor pool that is ever more desperate, achieves its aim via making labor cheap enough so that it can again be profitably exploited by capitalists. That is, our recession will come to an end, and the standard of living will be ever-lower, once business can again make a profit off of an ample number of workers, which of course is wage labor’s raison d’etre in capitalism in the first place. While the consequences of further impoverishing millions of people in order to more effectively profit off of them might engender political instability, this is not part of the economic equation. After all, political instability is what police states are for.

Counterpunch
Krugman’s Austerity Blinders
Joshua Sperber

(h/t Kevin Fathi via email

Austerity was never about "fixing the debt" or reducing the deficit. Just another tool for wage suppression and reduction of worker benefits and protections in a race to the bottom with emerging markets and the undeveloped world. This race will occupy the better part of this century unless something intervenes.

Mark Blyth — The Austerity Delusion: Why a Bad Idea Won Over the West

The results of Europe’s experiment with austerity are in and they’re clear: it doesn’t work. Here’s how such a flawed idea became the West’s default response to financial crises.

Foreign Affairs — Published by the Council on Foreign Relations
The Austerity Delusion: Why a Bad Idea Won Over the West
Mark Blyth | Professor of International Political Economy at Brown University

Brilliant historical summary.