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Austerity Leads To... Austerity!



May 01, 2013 – Comments (7)

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.

7 Comments – Post Your Own

#1) On May 01, 2013 at 2:52 PM, Frankydontfailme (29.58) wrote:

More importantly, where do you see the current market cyclical uptrend relative to the secular bear market? Especially in light of the marginal increase in taxes (and the occasional cut), looks like we have austerity.

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#2) On May 01, 2013 at 7:50 PM, binve (< 20) wrote:

I think the current deficit reduction efforts (especially the FICA tax hike / relinquishment of cut) are enough to maintain flat growth in the economy. 2009-2010 deficits were ~10% of GDP. Now they are roughly 5% of GDP. Private sector credit expansion started to pick up the slack at the end of 2012, but the current sequestration (especially FICA tax) will start to hamper that. So if things are left unchecked, we would be in a muddle-through scenario.

But I don't think things will be left uncheck, because despite the R&R debunking and the obviously counterproductive austerity policies that we can see in Europe, the rhetoric continues to focus around deficits being 'too high'. So I see continued government fiscal restriction which will choke off the current economic cycle. 

From a market point of view, corporate profits are nearing a cycle high. But that usually doesn't mark the end of a bull market: . But things are set in place to start rolling over with the the current margin peak and fiscal tigheting.

 So I think: we have one (maybe two) years left in the cyclical bull market. We will likely get one decent pullback before the final peak. This will put in place serious internal divergences (profit margins, VIX, advace/decline, etc.) that we saw at the 2000 and 2007 peaks. Then we will get one more cyclical bear market to finish out the secular bear.

My take at any rate.

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#3) On May 01, 2013 at 8:23 PM, Starfirenv (< 20) wrote:

 Greetings B-Man!  According to Thom Hartmann via (link below). Re; Rogoff/Reinhart Study

 "Meet the Billionaire Bankrolling Austerity, As He Stands to Make Billions More From Privatization of Safety Net"

"... Pete Peterson's organizations bankrolled that study.

Kenneth Rogoff, one of the study's leading authors, is a member of the Advisory Board at the Peterson Institute, which published the pro-austerity study. And, Carmen Reinhart is a regular participant of Peterson Institute functions, along with the likes of Paul Ryan and Alan Simpson. While the now-debunked study's math might have been written off as a mere error by the authors, the link to Peterson indicates that ideology, rather than incompetence, is the cause. " 

Who? From Wikipedia...
-  Chairman of the Federal Reserve Bank of New York between 2000 and 2004.
-   He succeeded David Rockefeller as Chairman of the Council on Foreign Relations in 1985 and served until his retirement in 2007.

And more...   Best.

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#4) On May 02, 2013 at 9:06 AM, binve (< 20) wrote:

Hey Starfire,

How are you man! Yes, Pete Peterson has been bankrolling all kinds of studies trying to show that deficits are categorically bad and that we should embrace austerity. It has a very heavy ideological bias and the stance continues to lose credibility based on a false premise, evidence we see in Europe, complete misunderstanding of monetary system (etc.). And as is pointed out in the link, there are ulterior motives as well.

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#5) On May 07, 2013 at 2:26 PM, Melaschasm (< 20) wrote:

I agree that tax increases during recessions are generally bad for the economy.  

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#6) On May 17, 2013 at 9:31 PM, portefeuille (98.94) wrote:

update of my little chart :)


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#7) On August 12, 2013 at 12:23 PM, dnelyo (< 20) wrote:

Hey Binve!  Long time no post

 saw some graphene love and thought of you 

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