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Austerity is now a failed policy.

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May 07, 2012 – Comments (38)

The great Keynesian experiment of 2008-2012 can now be examined.

The stage: a global recession affecting all major economies.  Large debts on all major western economies. 

For the large United States and Chinese economies, Keynesian approaches to dealing with loss of demand were tested.  The methods included bailing out banks, low interest rates, stimulative measures such as stimulus spending in construction, food stamps, tax breaks.  

For the second sample set, European and UK governments, Austrian approaches were tested.  These included attempting to directly treat the problem of government debts by increasing taxes, while cutting government jobs and benefits.  

If Keynesians were correct, the US and Chinese economies would be healthy and recovering presently.

If Austrian economics was correct, US and Chinese governments would have wasted all the money of stimulus and now look in poor fiscal shape compared to the European countries which attempted to directly address debt during a recession.

What are the results?

 US unemployment is falling, GDP has been growing, stock market near all time highs.

 Chinese economy still growing, overall ok (though some major political scandals of late that are quite notable).

 UK - rising unemployment and problems.

 Spain - rising unemployment and problems.

 Greece - rising unemployment and problems.

---

 Consequences?

  Major election changes now in Greece and France.  Austerity now no longer popularly supported compared to Keynesian methods of stimulus.  It appears that the EU is now starting to change course.  I am hopeful that they have a strong change of direction, attempt to restore employment and pursue economic growth now during the recession.  These elections have made me hopeful for change.  

 Greece still needs to have major debt forgiveness.  Spain needs to spend more to bailout banks, same with France and Germany.  Overall EU needs to lower interest rates and keep them low.  Heck - EU should just admit that the US was correct and consult Bernanke on how to recover from their mess and get back on track.

 -Rof 

38 Comments – Post Your Own

#1) On May 07, 2012 at 9:15 PM, rofgile (99.43) wrote:

Unemployment in UK will rise until 2016

Spanish unemployment hits a record 5.64 million.

France unemployment near 10%

1/5 greeks is unemployed.

 

China's unemployment is officially 4.1% (but only 9.05 million Chinese claimed to be unemployed, total workforce is only 215 million, and the total population of China is 1.35 billion)  So.. there are 1.1 billion chinese who are doing.. what?  Statistics and China are impossible to trust right now.

In the United States, unemployment peaked in fall of 2009, and has been steadily dropping since then.  The chart is beginning to resemble that of the early 1980's recession. 

"To balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people. To do so we should either have had to make a capital levy that would have been confiscatory, or we should have had to set our face against human suffering with callous indifference. When Americans suffered, we refused to pass by on the other side. Humanity came first.

... This debt is not going to be paid by oppressive taxation on future generations. It is not going to be paid by taking away the hard-won savings of the present generation. It is going to be paid out of an increased national income and increased individual incomes produced by increasing national prosperity." -- Franklin Roosevelt, 1936 

 

 

 

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#2) On May 07, 2012 at 10:10 PM, JakilaTheHun (99.93) wrote:

I've predicted that austerity would fail in Europe, but there's a reason why it failed.  The important thing to understand is that when money supply in an economy begins to contract, there needs to be a counteracting force.  Sustained deflation is a problem because is results in minimal investment, therefore causing some economies to enter a spiral of sorts.  Austerity exacerbates the issue, because fiscal policy is the primary vehicle through which new money is created.

Monetary policy can result in higher money supply, as well, but the eurozone nations essentially have a one-size-fits-all pegged monetary policy, that creates hard money policies in the PIIGS, but loose money policies in places like Germany and the Netherlands. 

So you have hard money monetary policies in the PIIGS, coupled with fiscal policies that exacerrbate things on the monetary front. 

Here in the US, we could probably implement a slow austerity program and be reasonably alright (so long as we implemented gradually), because our monetary policy is flexible.  And austerity is actually good in a speculative boom (we're not in that right now, but we should have shifted to austerity in 2003.)

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#3) On May 07, 2012 at 10:38 PM, whereaminow (< 20) wrote:

1. Where did you read that the "Austrian" approach to recession is to increase taxes?

2. If the "Austrian" approach had been followed, would the national deficits and money stocks of these countries have continued to grow?

If the answer to these two questions is "oops", then you really don't know what economic ideology was followed in either America or Europe.

The truth is that both continents have taken a mixed path since 2008 (and before then, to get themselves into this mess), and both have taken a mixed path out.

Stop reading Krugman. His demogaguery is influencing your writing.

David in Liberty

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#4) On May 07, 2012 at 10:42 PM, Frankydontfailme (27.47) wrote:

What austerity?

None of the nations you mentioned practiced austerity.

They are all heavily indebted nations.

Many surplus nations are doing well, many debtor nations are struggling. Keynsians lose. 

http://www.financialsense.com/contributors/leslie-cuadra/2011/08/31/list-of-worlds-largest-creditor-and-debtor-nations 

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#5) On May 08, 2012 at 1:26 AM, awallejr (79.53) wrote:

I agree with Rof.  That is also why the stock market didn't crash today as I am sure many thought otherwise would happen.  Austerity is stupid in Europe.  Germany, howecer, would love it but they won't suffer the consequences.  Until Europe drops all its national boundaries (which it won't for racial preservation) and creates a national gov't, sticking to the Euro simply punishes the weaker economies. 

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#6) On May 08, 2012 at 1:35 AM, portefeuille (99.67) wrote:

which it won't for racial preservation

glad to know what those boundaries are for ...

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#7) On May 08, 2012 at 1:39 AM, portefeuille (99.67) wrote:

European and UK governments

please consult maps or wikipedia ...

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#8) On May 08, 2012 at 1:45 AM, portefeuille (99.67) wrote:

#6,7 I am simply annoyed by quite a bit of nonsense written about Europe. Still amusing to see all those from the U.S. complain about "having to bother with hearing/reading about Europe". The average European is "bothered" by around 70% "non-European news" from age 0.

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#9) On May 08, 2012 at 1:51 AM, portefeuille (99.67) wrote:

Back to equity research. This ratio "will rise in the next few weeks", I think ...



enlarge

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#10) On May 08, 2012 at 2:28 AM, portefeuille (99.67) wrote:

This could not go on forever, hehe ...

Greece / New Zealand.

 

IMF - GDP data.

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#11) On May 08, 2012 at 2:32 AM, portefeuille (99.67) wrote:

a close race.

Ireland / USA.

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#12) On May 08, 2012 at 3:25 AM, dag154 (55.62) wrote:

Irrelevant of what has happened before, shutting down government spending cannot be the only solution.

This is simple mathematics.  Greece is in it's 5th year of recession with nearly -7% last year and an estinated -5% this year. Unemployment is in exess of 20%.

The solution?  Cut government spending and increase taxes by 5% of GDP in order to balance the accounts.  HELLO!!!!  Where do you think the economy will be next year?  At exactly the same Debt / GDP ratio, with higher unemployment.

The solution next year? Cut government spending and increase taxes .... 

Of course, one could adopt the 'let the freeloaders bleed' policy, but the deeper Greece goes into recession, the less likely it is to pay anything at all in debt repayment.

Greece was the junkie and the bankers were the happy dealers.  It is time for rehab, not for putting the junkie in jail. 

 

 

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#13) On May 08, 2012 at 7:24 AM, devoish (96.50) wrote:

Port makes a good point, comparing the present state of the USA vs Ireland per cpaita GDP. 

Direction also matters. 

For good measure we should also check the direction of Hugo Chavez's socialist Government, the protectionist tarrif policys of Brazil,  the managed economy of Communist China, the stimulus of the USA, and the austerity of Ireland, Spain and France.

 http://www.indexmundi.com/facts/indicators/NY.GDP.PCAP.CD/compare?country=ie#country=br:cn:fr:ie:es:us:ve

I would say that austerity is a success only if the goal is to indebt the vast majority of a population to its property owners.

Best wishes,

Steven 

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#14) On May 08, 2012 at 10:59 AM, rofgile (99.43) wrote:

#3: Would things be much different in the EU if instead of raising taxes, they only cut government jobs and spending?  I think the net result would be the same and problems would be the same.

 

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#15) On May 08, 2012 at 11:43 AM, Frankydontfailme (27.47) wrote:

I've been proposing from the beginning that these nations default and leave the Euro, not enact austerity. It's the keynsians that demand the nations remain enslaved.

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#16) On May 08, 2012 at 12:01 PM, whereaminow (< 20) wrote:

#3: Would things be much different in the EU if instead of raising taxes, they only cut government jobs and spending?  I think the net result would be the same and problems would be the same.

Rofgile, as Ludwig Von Mises said, "Without theory, one can assume anything."

The Austrian School position is to the maximize the amount of voluntary transactions in an economy, not to have bureaucrats and bankers scheme a way to get out of the mess they created only to land in a new mess.

If you want to discuss economic theory, that leads us down a different path. Your post is not about economic theory. It's about the fake Left/Right politlical paradigm where two sets of schemers plot the next power grab while everyone who holds paper money or is dependent on government services gets the screw job.  That's the way it always is.

Austrians would favor repudiating the national debts, since they were entered into through non-binding contracts (you can't bind someone who is not a party to the agreement, i.e. the individual citizen). They would favor lowering taxes. They would favor cutting governmnet spending.  

But none of that is really occuring anywhere.  Besides the increase in direct taxes, monetary creation also has created an inflation tax. Government spending is not being cut, only it's rate of increase might be slowed in some cases.  Nothing comes anywhere close to some of the periods of budget slashing the USA has seen in its past (such as 1921 and 1946) - periods that did not cause the Earth to spin off its axis.

But all that is not realy for this blog. I'm just pointing out that in order to criticize a theory, you must at least be familiar with it.

David in Liberty

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#17) On May 08, 2012 at 1:53 PM, PeteysTired (< 20) wrote:

Had the rate of growth been but or was spending actually cut in Europe?

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#18) On May 08, 2012 at 3:32 PM, rofgile (99.43) wrote:

whereaminow:

 Fair enough.   It would have been quite interesting if there was an experiment simultaneously where debts had simply been repudiated or been defaulted.  Perhaps Iceland? It has been recovering since 2010 during this experimental time period from 2008-2012.  Though it has not gotten back to the economic strength preceding the problems leading to nationalization of its banks, though their are few countries I would say are doing better now than they were in say 2005-2006.

 I think any major economic change will have winners and losers, and I guess depending on your perspective those are power grabs.  But, in any time of crisis someone can make a profit I suppose (think of smugglers in a war).  I would say that the owners of the big banks more or less did well in the US.  Owners of treasury bonds did well.  Shareholders may or may not have done well depending on their choices.  

 -Rof 

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#19) On May 08, 2012 at 3:50 PM, awallejr (79.53) wrote:

"glad to know what those boundaries are for ... "

Well read the argument's Hollande and Sarkozy were making.  Any American citizen living in one state can move to another freely.  So if some states are offering better economic opportunities all citizens are free to go there.  That isn't the way in Europe hence you have the weak economies not really sharing in the benefits.  Greeks can't up and go to Germany whenever they wish to live and find work, nor to France.

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#20) On May 08, 2012 at 4:42 PM, portefeuille (99.67) wrote:

#19 http://en.wikipedia.org/wiki/Freedom_of_movement_for_workers.

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#21) On May 08, 2012 at 7:01 PM, awallejr (79.53) wrote:

#20 Some excerpts:

It shall entail the right, subject to limitations justified on grounds of public policy, public security or public health

The provisions of this article shall not apply to employment in the public service. . .

Citizenship of the Union is hereby established. Every person holding the nationality of a Member State shall be a citizen of the Union. Citizenship of the Union shall be additional to and not replace national citizenship.

While nationals of Member States are citizens of the union, "It is for each Member State, having due regard to Union law, to lay down the conditions for the acquisition and loss of nationality."

Thus in practice, a member state may withhold EU citizenship from certain groups of citizens 

Member States can distinguish between nationals and Union citizens

The ECJ's case law on citizenship has been criticised for subjecting an increasing number of national rules to the proportionality assessment

And:

"PARIS: French Socialist presidential frontrunner Francois Hollande toughened his stance on immigration on Friday in a campaign increasingly fought on themes dear to the far right. Hollande will face right-wing Nicolas Sarkozy in a May 6 run-off for the presidency, and both are scrambling to recruit voters who backed far-right anti-immigrant candidate Marine Le Pen in the first round.

Sarkozy has gone the furthest to reach out to the former pariah, insisting that her values are not incompatible with France's republican tradition, and vowing to secure Europe's borders and fight multiculturalism.

But first-round winner Hollande, attacked by the right for his plan to give foreign residents the vote in local elections, has come under pressure to clarify his stance on immigration and citizenship ahead of a debate next week.

Le Pen did well in Sunday's first-round among white working class voters who might once have backed the left and in a radio interview on Friday the Socialist candidate made a concession to their concerns.

"In the period of crisis we are going through, limiting economic immigration is necessary and essential," he told RTL radio. "I also want to fight illegal immigration on the economic front. It is not right that a certain number of employers, in a cynical way, are hiring illegal migrants," he said.

Hollande repeated a pledge to ask parliament to cap the number of migrants allowed into France every year -- Sarkozy has vowed to halve the number to around 100,000 -- but warned it would never halt the flow. "

Sorry but is not the same as the US.

 

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#22) On May 08, 2012 at 7:33 PM, portefeuille (99.67) wrote:

not the same as the US

Well, of course it is not. No one wants it to be like the US. 

citizens are free to go there

They are "to a large extent" free to work anywhere in the EU. Of course they are not allowed to take certain jobs on the federal government level in countries they are not citizens of.

see the table here.

http://en.wikipedia.org/wiki/Freedom_of_movement_for_workers#Transitional_provisions_in_new_member_states

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#23) On May 08, 2012 at 7:39 PM, portefeuille (99.67) wrote:

People in the U.S. tend to have strange ideas about Europe. And for some reason not even living over here for quite some time is usually helpful in changing those strange ideas. They just don't get it, hehe ...

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#24) On May 09, 2012 at 1:05 AM, awallejr (79.53) wrote:

That wasn't the point.  The point was you don't have the same kind of free movement in Europe as you do in the US which you seemed to imply with your initial link.  Hence many countries in Europe will always be behind the eight ball, such as Greece.

They certainly aren't to a large extent free to work anywhere in the EU.  France just told you they want to limit "migrant" workers.  Each country has the power to even stop the migrations through the vague "public policy, public security or public health" clause or the "proportionality assessment."  Why "of course" they aren't allowed to work in public positions such as fireman, policeman or sanitation worker?  You can from state to state in the US, aside from maybe a 1 or 2 year residency requirement.  Read your own link instead of just putting it there as if that meant anything. 

Germany isn't letting 1 million greeks into their country to seek better jobs and wages.  Greece and Portugal and Spain are basically to suffer probably for decades if they go strictly austerity.  

 

 

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#25) On May 09, 2012 at 1:17 AM, awallejr (79.53) wrote:

And as for your new meaningless link, all that chart showed you was the "transitional" periods for each nation and nothing more.  Show me a chart that indicates the numbers of migrants from differing countries being allowed annually into other nations since the Euro began.  That's a chart I would like to see.  It certainly would influence my argument.

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#26) On May 09, 2012 at 8:54 AM, portefeuille (99.67) wrote:

all that chart showed you was the "transitional" periods for each nation and nothing more

No, it was just posted in the section "Transitional provisions in new member states". The table shows just what its title "Establishment of rights of nationals of each member state to work in each member state" suggests.

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#27) On May 09, 2012 at 9:06 AM, portefeuille (99.67) wrote:

http://www.eurofound.europa.eu/areas/populationandsociety/migration.htm

22 August 2006, 'Nearly 600,000' new EU migrants

28 December 2011, German immigration rates soar

http://www.workpermit.com/news/europe_immigration.htm

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#28) On May 09, 2012 at 9:11 AM, portefeuille (99.67) wrote:

http://www.google.com/#q=worker+migration+europe

Health Worker Migration in the European Region: Country Case Studies and Policy Implications (pdf)

 

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#29) On May 09, 2012 at 3:09 PM, awallejr (79.53) wrote:

Well Porte you are the one person I don't want to get into a "link war" with.  The gist of yours indicates that the EU loves to attract the "skilled" workers and Health care workers, same as in the US.  

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#30) On May 09, 2012 at 4:48 PM, portefeuille (99.67) wrote:

#29 My internet connection was a little spotty the last 2 days, which wore my nerves a little. Peace, hehe ...

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#31) On May 09, 2012 at 5:02 PM, dragonLZ (99.36) wrote:

#6) On May 08, 2012 at 1:35 AM, portefeuille (99.74) wrote:

which it won't for racial preservation

glad to know what those boundaries are for ...

 

I thought you were teasing awallejr for thinking borders in Europe are dividing people based on race...

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#32) On May 09, 2012 at 5:02 PM, portefeuille (99.67) wrote:

#30 I think it is simply a bad idea to let a few centimeters of two more or less bare copper wires be part of my internet connection. A new cable is in the mail ...

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#33) On May 09, 2012 at 5:04 PM, portefeuille (99.67) wrote:

I thought you were teasing awallejr for thinking borders in Europe are dividing people based on race...

I still think I was.

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#34) On May 09, 2012 at 5:11 PM, portefeuille (99.67) wrote:

#32 I inadvertently took this picture with my macbook a few seconds after having taken the one above.

 

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#35) On May 09, 2012 at 5:12 PM, portefeuille (99.67) wrote:

having taken

taking

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#36) On May 09, 2012 at 5:19 PM, Frankydontfailme (27.47) wrote:

That's not the point at all port. The people in many European countries (actually also true in the US) have become completely dependent on their government for their livelyhood. How can one of the many unemployed Greek people migrate to Germany and France when they have a family to feed at home and need handouts to survive.

Good for you posting links that technically show imigration is legal. We're all so impressed with enlightened Europe.

In other news (as awall points out), nationalism is on the rise in Europe. Neo-Nazis are gaining influence in Greece and Switzerland citizens think they have too many Germans in their country. Enjoy.

Next time try freedom rather than bureaucrats.

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#37) On May 09, 2012 at 5:38 PM, awallejr (79.53) wrote:

Oh I didn't mind the tease, just gave me a reason to post more.  Post #20 bugged me;p

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#38) On May 14, 2012 at 9:36 PM, Marlonito9 (< 20) wrote:

Some people needs to research more. In making post projects, comment posters, and participants should have all the knowledge needed by criticizers. Most can still go wrong though.

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