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binve (< 20)

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August 23, 2011 – Comments (4)

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.

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The impossible equation
Posted on Tuesday, August 23, 2011 by bill
http://bilbo.economicoutlook.net/blog/?p=15774

[excerpt]

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.

4 Comments – Post Your Own

#1) On August 23, 2011 at 2:03 PM, MikeMark (30.26) wrote:

Yes. An impossible equation. Here's another:

Gross Domestic Product = Consumption + Investment + Government Purchases of Goods and Services + Net Exports.

Here's why:

Government purchases are paid for with taxes which reduce GDP. Therefore the correct equation is:

Gross Domestic Product = Consumption + Investment - Government Purchases of Goods and Services + Net Exports.

Don't be surprised if you miss the difference on the first look. That one little sign is the cause of the entire world's economic distress.

-mikemark

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#2) On August 23, 2011 at 2:05 PM, whereaminow (73.77) wrote:

So if spending, just any kind of spending promotes economic growth (and let's set aside Prof Mitchell's superficial analysis that Britain is suffering in austerity ROFL!), here's a great dilemna to be solved.

It is a recession (even though the Fed says it's not - which one is it, MMTers??) and you are promoting counter cyclical spending.   On the one hand, crazy obstructionists are promoting a balanced budget.  On the other, wise overlords are promoting a $2 trillion increase in spending.   However, the money will be used to investigate, hunt down, incarcerate and torture MMT professors, bloggers, and supporters!!!

Heavens, what will you do? Save us by sacrificing yourselves?

ROFL, we see the reduction to absurdity that is MMT.  They want spending, but they have no answers as to why the money spent is always wasted.  That's because they have closed their eyes to the nature of the state.  

binve says, bad policy wrecks any monetary idea.  Oh so not true!  Bad policy is policy.  So perhaps binve should have said, government wrecks any monetary idea.  You see, by saying it is "bad policy", binve hints that there is good policy.  But there is no good policy that results from one group of people pointing a gun at your head to achieve their economic targets.

Here is an impossible equation:

Cut private spending + Reduce Net exports + Cut net public spending = economic growth

Where is human action in this equation? 

Of course, Prof Mitchell defines economic growth as an increase in net financial assets, which if pressed he would admit is purely nominal and in no relation to real wealth.

So is he a liar or just lost in his own accounting dreams?

David in Qatar

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#3) On August 23, 2011 at 4:39 PM, PeteysTired (< 20) wrote:

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.

So has MMT predicted the US's slow/anemic growth despite  its record deficits?  Is the equation that the US hasn't spent enough?

I will tell you this MMT can predict anything with its equations, but it will not predict what I will do, you will do or anyone else in CAPS?  I don't want to spend money I want to save.  WhereamInow probably spends like a drunken sailor.  How can MMT predict that?

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#4) On August 23, 2011 at 7:15 PM, MikeMark (30.26) wrote:

Hi PeteysTired,

Glad to hear that you want to save. That savings is what the future is built upon. Your future, and the future of everyone who deals with you. Especially if you run your own business.

See, the trick of savings is what you do with it, or how you create it. The entrepenuer who succeeds is the one who saves the most people the most of whatever they need saved. Space, time, money, effort, water, you name it.

The best way to save for yourself is to find the best way to create savings for others. Then shout it out loudly to the world. They will come and give you the savings you crave.

Then do it again.

-MikeMark

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