Austerity Leads To... Austerity!
Very good post
Austerity Leads To... Austerity!
John T. Harvey
5/01/2013 @ 11:18AM
Ever since this blog started about two years ago, I’ve been repeating over and over that what the economy needs is more deficit spending, not less. This is so because:
* We have plenty of idle capacity. Our problem is not one that requires that we each settle for less because we have “spent beyond our means” and thus can no longer produce the goods and services we did five or ten or fifteen years ago (if anything, that ability has grown). We have no logical need for layoffs, pay cuts, and forced days off. All that will do is create even more idle capacity.
* The reason for the idle capacity is the systemic inability of the private sector to generate sufficient demand to hire every willing worker. Such levels can be sustained for short periods, but in general consumers and firms are unable to spend enough money to allow all those who want a job to find one. (See Why do Recessions Happen? A Practical Guide to the Business Cycle for a more in-depth explanation of this point.)
* The extra demand necessary to bring us back to full capacity and employment can come from foreign countries (i.e., US exports) or the public sector (i.e., the government). If we could export more, we would already be doing so. Furthermore, our trading partners have no responsibility to help our economy. The federal government does.
* Not only that, but the federal government does not face a budget constraint. There is no debt denominated in dollars that we cannot repay and thus the idea that the US could be forced to default is absolute, utter, ignorant nonsense. Deficit spending can create inflation and capture of resources IF we are at or near full employment. Otherwise, however, a public sector deficit is like having a trade surplus.
* The basic accounting is inescapable: public sector deficits = private sector income and public sector debt = private sector assets.
This is not to say that there are not good and bad ways for the federal government to create demand or that abuse cannot occur. But those (very real) concerns are independent of whether or not we spend in deficit. We can, we should, and we must. It’s not a drag on the economy, it is a vital boost.
I and many of my colleagues have been banging this drum for a long time. Not that all economists agree, of course, and probably the highest-profile dissenters were Kenneth Rogoff and Carmen Reinhart. Their work not only came out of the Harvard economics department, but it was cited repeatedly by those in Congress arguing for deficit reduction. And yet the egregious errors in Rogoff and Reinhart’s study are now well known (discovered, I am proud to say, by economists in my school of thought):
Did This Excel Error Cause Panic Over Federal Debt?
Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems
On National TV Last Night, The Austerity Movement Became A Laughingstock
Debt-to-GDP Ratios and Growth: Country Heterogeneity and Reverse Causation, the Case of Japan
Conclusion: at best, Rogoff and Reinhart’s work is sloppy.
And so it is high time for an outright rejection of the austerity model for recovery. It doesn’t make sense theoretically, there is no empirical evidence, and it is illogical. Are the groceries that air traffic controllers used to buy gone? Did we have less stuff to go around and therefore needed to reduce their income so their demand wouldn’t just lead to inflation? Of course not, the groceries are still there, they are just sitting unsold on the shelf. The air traffic controllers are worse off, the grocery store is worse off, the farmers are worse off, and air travelers are worse off. Nothing positive have been accomplished. Austerity accomplishes one thing and one thing only: austerity. We demand aggregate demand.