Speaking of Math
Austerity does not promote econonomic growth. Here is another excellent post along the same lines as this one: Regarding the Myth that Austerity promotes Fiscal Expansion. Again, Professor Bill Mitchell's site is something that should be on your daily reading list.
The impossible equation
Posted on Tuesday, August 23, 2011 by bill
The current period is providing us with an excellent (though tragic) real world laboratory to test the dominant economic theories. Forget all the mathematical models and regression equations. We don’t need Matlab, Scilab or SpaceLab. We don’t need to argue whether some function is non-linear, specified, identified or deep fried. We don’t have to worry about transversality, homogeneity, boundaries or continuity. This is real life – we have Britain.
Britain is now been enduring fiscal austerity since May 2010 – so more than 15 months even though many of the cut backs and tax hikes are only now being introduced. But the British households and firms have known since the election result in May what was ahead of them and so have had time to make adjustments to their spending and saving patterns to take into account the expected future.
The mainstream macroeconomics paradigm predicted that the net public spending cuts (and the advanced notice to the public of the intention to make these cuts) would stimulate private spending. This is the notion of Ricardian Equivalence which claims that that private spending is weak because we are scared of the future tax implications of the rising budget deficits.
MMT predicted that as a result of the fiscal austerity plans, the British economy would slow down again as private consumers and firms cut back on their own spending driven strongly by the fear of unemployment and flat sales conditions that accompany that situation. MMT also predicted that an export-led growth strategy in a international environment of declining growth driven by similar fiscal austerity programs elsewhere would fail.
Please read my blogs – Deficits should be cut in a recession. Not! and Fiscal austerity – the newest fallacy of composition – for more discussion on this point.
There was thus a stark difference between the two predictive sets – they are so different that there is very little room to blur the outcomes so that the data fails to distinguish between the theoretical predictions. This was never going to be a case of observational equivalence.
Here is an impossible equation:
Cut private spending + Reduce Net exports + Cut net public spending = economic growth
The left-hand side of the equation is more or less what is happening in the UK. Which is why the real world right-hand side is showing declining real GDP growth.