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The case for cuts was a lie. Why does Britain still believe it?

In May 2010, as Britain headed into its last general election, elites all across the western world were gripped by austerity fever, a strange malady that combined extravagant fear with blithe optimism.

Every country running significant budget deficits – as nearly all were in the aftermath of the financial crisis – was deemed at imminent risk of becoming another Greece unless it immediately began cutting spending and raising taxes.

Concerns that imposing such austerity in already depressed economies would deepen their depression and delay recovery were airily dismissed; fiscal probity, we were assured, would inspire business-boosting confidence, and all would be well.

PAUL KRUGMAN this April 29,2015

Illustrations by Mark Long, Design by Sam Morris and Chris Clarke

People holding these beliefs came to be widely known in economic circles as“austerians” – a term coined by the economist Rob Parenteau – and for a while the austerian ideology swept all before it.

But that was five years ago, and the fever has long since broken.

Greece is now seen as it should have been seen from the beginning – as a unique case, with few lessons for the rest of us.

It is impossible for countries such as the US and the UK, which borrow in their own currencies, to experience Greek-style crises, because they cannot run out of money – they can always print more.

Even within the eurozone, borrowing costs plunged once the European Central Bank began to do its job and protect its clients against self-fulfilling panics by standing ready to buy government bonds if necessary.

As I write this, Italy and Spain have no trouble raising cash – they can borrow at the lowest rates in their history, indeed considerably below those in Britain – and even Portugal’s interest rates are within a whisker of those paid by HM Treasury.

All of the economic research that allegedly supported the austerity push has been discredited

On the other side of the ledger, the benefits of improved confidence failed to make their promised appearance.

Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity.

In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.

Widely touted statistical results were, it turned out, based on highly dubious assumptions and procedures – plus a few outright mistakes – and evaporated under closer scrutiny.

It is rare, in the history of economic thought, for debates to get resolved this decisively.

The austerian ideology that dominated elite discourse five years ago has collapsed, to the point where hardly anyone still believes it.

Hardly anyone, that is, except the coalition that still rules Britain – and most of the British media.

I don’t know how many Britons realise the extent to which their economic debate has diverged from the rest of the western world – the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere.

George Osborne and David Cameron boast that their policies saved Britain from a Greek-style crisis of soaring interest rates, apparently oblivious to the fact that interest rates are at historic lows all across the western world.

The press seizes on Ed Miliband’s failure to mention the budget deficit in a speech as a huge gaffe, a supposed revelation of irresponsibility; meanwhile, Hillary Clinton is talking, seriously, not about budget deficits but about the “fun deficit” facing America’s children.

Is there some good reason why deficit obsession should still rule in Britain, even as it fades away everywhere else? No. This country is not different. The economics of austerity are the same – and the intellectual case as bankrupt – in Britain as everywhere else.

When economic crisis struck the advanced economies in 2008, almost every government – even Germany – introduced some kind of stimulus programme, increasing spending and/or cutting taxes. There was no mystery why: it was all about zero.

Normally, monetary authorities – the Federal Reserve, the Bank of England – can respond to a temporary economic downturn by cutting interest rates; this encourages private spending, especially on housing, and sets the stage for recovery. But there’s a limit to how much they can do in that direction. Until recently, the conventional wisdom was that you couldn’t cut interest rates below zero. We now know that this wasn’t quite right, since many European bonds now pay slightly negative interest.

Still, there can’t be much room for sub-zero rates. And if cutting rates all the way to zero isn’t enough to cure what ails the economy, the usual remedy for recession falls short.

So it was in 2008-2009. By late 2008 it was already clear in every major economy that conventional monetary policy, which involves pushing down the interest rate on short-term government debt, was going to be insufficient to fight the financial downdraft. Now what? The textbook answer was and is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers’ pockets; cut taxes to put more money in those pockets.

But won’t this lead to budget deficits? Yes, and that’s actually a good thing.

An economy that is depressed even with zero interest rates is, in effect, an economy in which the public is trying to save more than businesses are willing to invest. In such an economy the government does everyone a service by running deficits and giving frustrated savers a chance to put their money to work. Nor does this borrowing compete with private investment.

An economy where interest rates cannot go any lower is an economy awash in desired saving with no place to go, and deficit spending that expands the economy is, if anything, likely to lead to higher private investment than would otherwise materialise.

It’s true that you can’t run big budget deficits for ever (although you can do it for a long time), because at some point interest payments start to swallow too large a share of the budget. But it’s foolish and destructive to worry about deficits when borrowing is very cheap and the funds you borrow would otherwise go to waste.

At some point you do want to reverse stimulus. But you don’t want to do it too soon – specifically, you don’t want to remove fiscal support as long as pedal-to-the-metal monetary policy is still insufficient. Instead, you want to wait until there can be a sort of handoff, in which the central bank offsets the effects of declining spending and rising taxes by keeping rates low. As John Maynard Keynes wrote in 1937: “The boom, not the slump, is the right time for austerity at the Treasury.”

All of this is standard macroeconomics. I often encounter people on both the left and the right who imagine that austerity policies were what the textbook said you should do – that those of us who protested against the turn to austerity were staking out some kind of heterodox, radical position. But the truth is that mainstream, textbook economics not only justified the initial round of post-crisis stimulus, but said that this stimulus should continue until economies had recovered.

What we got instead, however, was a hard right turn in elite opinion, away from concerns about unemployment and toward a focus on slashing deficits, mainly with spending cuts. Why?

Conservatives like to use the alleged dangers of debt and deficits as clubs with which to beat the welfare state and justify cuts in benefits

Part of the answer is that politicians were catering to a public that doesn’t understand the rationale for deficit spending, that tends to think of the government budget via analogies with family finances. When John Boehner, the Republican leader, opposed US stimulus plans on the grounds that “American families are tightening their belt, but they don’t see government tightening its belt,” economists cringed at the stupidity.

But within a few months the very same line was showing up in Barack Obama’s speeches, because his speechwriters found that it resonated with audiences. Similarly, the Labour party felt it necessary to dedicate the very first page of its 2015 general election manifesto to a “Budget Responsibility Lock”, promising to “cut the deficit every year”.

Let us not, however, be too harsh on the public. Many elite opinion-makers, including people who imagine themselves sophisticated on matters economic, demonstrated at best a higher level of incomprehension, not getting at all the logic of deficit spending in the face of excess desired saving.

For example, in the spring of 2009 the Harvard historian and economic commentator Niall Ferguson, talking about the United States, was quite sure what would happen: “There is going to be, I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates.” The weeks and months turned into years – six years, at this point – and interest rates remain at historic lows.

Beyond these economic misconceptions, there were political reasons why many influential players opposed fiscal stimulus even in the face of a deeply depressed economy. Conservatives like to use the alleged dangers of debt and deficits as clubs with which to beat the welfare state and justify cuts in benefits; suggestions that higher spending might actually be beneficial are definitely not welcome.

Meanwhile, centrist politicians and pundits often try to demonstrate how serious and statesmanlike they are by calling for hard choices and sacrifice (by other people). Even Barack Obama’s first inaugural address, given in the face of a plunging economy, largely consisted of hard-choices boilerplate. As a result, centrists were almost as uncomfortable with the notion of fiscal stimulus as the hard right.

In a way, the remarkable thing about economic policy in 2008-2009 was the fact that the case for fiscal stimulus made any headway at all against the forces of incomprehension and vested interests demanding harsher and harsher austerity. The best explanation of this temporary and limited success I’ve seen comes from the political scientist Henry Farrell, writing with the economist John Quiggin.Farrell and Quiggin note that Keynesian economists were intellectually prepared for the possibility of crisis, in a way that free-market fundamentalists weren’t, and that they were also relatively media-savvy.

So they got their take on the appropriate policy response out much more quickly than the other side, creating “the appearance of a new apparent consensus among expert economists” in favour of fiscal stimulus.

If this is right, there was inevitably going to be a growing backlash – a turn against stimulus and toward austerity – once the shock of the crisis wore off. Indeed, there were signs of such a backlash by the early fall of 2009. But the real turning point came at the end of that year, when Greece hit the wall. As a result, the year of Britain’s last general election was also the year of austerity.

rom the beginning, there were plenty of people strongly inclined to oppose fiscal stimulus and demand austerity. But they had a problem: their dire warnings about the consequences of deficit spending kept not coming true. Some of them were quite open about their frustration with the refusal of markets to deliver the disasters they expected and wanted.

Alan Greenspan, the former chairman of the Federal Reserve, in 2010: “Inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.”

But he had an answer: “Growing analogies to Greece set the stage for a serious response.”

Greece was the disaster austerians were looking for. In September 2009 Greece’s long-term borrowing costs were only 1.3 percentage points higher than Germany’s; by September 2010 that gap had increased sevenfold. Suddenly, austerians had a concrete demonstration of the dangers they had been warning about. A hard turn away from Keynesian policies could now be justified as an urgent defensive measure, lest your country abruptly turn into another Greece.

Still, what about the depressed state of western economies? The post-crisis recession bottomed out in the middle of 2009, and in most countries a recovery was under way, but output and employment were still far below normal. Wouldn’t a turn to austerity threaten the still-fragile upturn?

Not according to many policymakers, who engaged in one of history’s most remarkable displays of collective wishful thinking. Standard macroeconomics said that cutting spending in a depressed economy, with no room to offset these cuts by reducing interest rates that were already near zero, would indeed deepen the slump. But policymakers at the European Commission, the European Central Bank, and in the British government that took power in May 2010 eagerly seized on economic research that claimed to show the opposite.

The doctrine of “expansionary austerity” is largely associated with work by Alberto Alesina, an economist at Harvard. Alesina used statistical techniques that supposedly identified all large fiscal policy changes in advanced countries between 1970 and 2007, and claimed to find evidence that spending cuts, in particular, were often “associated with economic expansions rather than recessions”. The reason, he and those who seized on his work suggested, was that spending cuts create confidence, and that the positive effects of this increase in confidence trump the direct negative effects of reduced spending.

Greece was the disaster austerians were looking for

This may sound too good to be true – and it was. But policymakers knew what they wanted to hear, so it was, as Business Week put it, “Alesina’s hour”. The doctrine of expansionary austerity quickly became orthodoxy in much of Europe. “The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, then the president of the European Central Bank, because “confidence-inspiring policies will foster and not hamper economic recovery”.

Besides, everybody knew that terrible things would happen if debt went above 90% of GDP.

Growth in a Time of Debt, the now-infamous 2010 paper by Carmen Reinhart and Kenneth Rogoff of Harvard University that claimed that 90% debt is a critical threshold, arguably played much less of a direct role in the turn to austerity than Alesina’s work. After all, austerians didn’t need Reinhart and Rogoff to provide dire scenarios about what could happen if deficits weren’t reined in – they had the Greek crisis for that.

At most, the Reinhart and Rogoff paper provided a backup bogeyman, an answer to those who kept pointing out that nothing like the Greek story seemed to be happening to countries that borrowed in their own currencies: even if interest rates were low, austerians could point to Reinhart and Rogoff and declare that high debt is very, very bad.

What Reinhart and Rogoff did bring to the austerity camp was academic cachet. Their 2009 book This Time is Different, which brought a vast array of historical data to bear on the subject of economic crises, was widely celebrated by both policymakers and economists – myself included – for its prescient warnings that we were at risk of a major crisis and that recovery from that crisis was likely to be slow. So they brought a lot of prestige to the austerity push when they were perceived as weighing in on that side of the policy debate. (They now claim that they did no such thing, but they did nothing to correct that impression at the time.)

When the coalition government came to power, then, all the pieces were in place for policymakers who were already inclined to push for austerity. Fiscal retrenchment could be presented as urgently needed to avert a Greek-style strike by bond buyers. “Greece stands as a warning of what happens to countries that lose their credibility, or whose governments pretend that difficult decisions can somehow be avoided,” declared David Cameron soon after taking office. It could also be presented as urgently needed to stop debt, already almost 80% of GDP, from crossing the 90% red line.

In a 2010 speech laying out his plan to eliminate the deficit, Osborne cited Reinhart and Rogoff by name, while declaring that “soaring government debt … is very likely to trigger the next crisis.” Concerns about delaying recovery could be waved away with an appeal to positive effects on confidence. Economists who objected to any or all of these lines of argument were simply ignored.

But that was, as I said, five years ago.

To understand what happened to austerianism, it helps to start with two charts.

The first chart shows interest rates on the bonds of a selection of advanced countries as of mid-April 2015. What you can see right away is that Greece remains unique, more than five years after it was heralded as an object lesson for all nations. Everyone else is paying very low interest rates by historical standards.

This includes the United States, where the co-chairs of a debt commission created by President Obama confidently warned that crisis loomed within two years unless their recommendations were adopted; that was four years ago. It includes Spain and Italy, which faced a financial panic in 2011-2012, but saw that panic subside – despite debt that continued to rise – once the European Central Bank began doing its job as lender of last resort.

It includes France, which many commentators singled out as the next domino to fall, yet can now borrow long-term for less than 0.5%.

And it includes Japan, which has debt more than twice its gross domestic product yet pays even less.

The Greek exception

10-year interest rates as of 14 April 2015

Chart 1Source: Bloomberg

Back in 2010 some economists argued that fears of a Greek-style funding crisis were vastly overblown – I referred to the myth of the “invisible bond vigilantes”. Well, those bond vigilantes have stayed invisible. For countries such as the UK, the US, and Japan that borrow in their own currencies, it’s hard to even see how the predicted crises could happen. Such countries cannot, after all, run out of money, and if worries about solvency weakened their currencies, this would actually help their economies in a time of weak growth and low inflation.

Chart 2 takes a bit more explaining. A couple of years after the great turn towards austerity, a number of economists realised that the austerians were performing what amounted to a great natural experiment. Historically, large cuts in government spending have usually occurred either in overheated economies suffering from inflation or in the aftermath of wars, as nations demobilise.

Neither kind of episode offers much guidance on what to expect from the kind of spending cuts – imposed on already depressed economies – that the austerians were advocating. But after 2009, in a generalised economic depression, some countries chose (or were forced) to impose severe austerity, while others did not. So what happened?

Austerity and growth 2009-13

More austere countries have a lower rate of GDP growth

Chart 2Source: IMF

In Chart 2, each dot represents the experience of an advanced economy from 2009 to 2013, the last year of major spending cuts. The horizontal axis shows a widely used measure of austerity – the average annual change in the cyclically adjusted primary surplus, an estimate of what the difference between taxes and non-interest spending would be if the economy were at full employment. As you move further right on the graph, in other words, austerity becomes more severe. You can quibble with the details of this measure, but the basic result – harsh austerity in Ireland, Spain, and Portugal, incredibly harsh austerity in Greece – is surely right.

Meanwhile, the vertical axis shows the annual rate of economic growth over the same period. The negative correlation is, of course, strong and obvious – and not at all what the austerians had asserted would happen.

Again, some economists argued from the beginning that all the talk of expansionary austerity was foolish – back in 2010 I dubbed it belief in the “confidence fairy”, a term that seems to have stuck. But why did the alleged statistical evidence – from Alesina, among others – that spending cuts were often good for growth prove so misleading?

The answer, it turned out, was that it wasn’t very good statistical work. A review by the IMF found that the methods Alesina used in an attempt to identify examples of sharp austerity produced many misidentifications.

For example, in 2000 Finland’s budget deficit dropped sharply thanks to a stock market boom, which caused a surge in government revenue – but Alesina mistakenly identified this as a major austerity programme. When the IMF laboriously put together a new database of austerity measures derived from actual changes in spending and tax rates, it found that austerity has a consistently negative effect on growth.

Yet even the IMF’s analysis fell short – as the institution itself eventually acknowledged. I’ve already explained why: most historical episodes of austerity took place under conditions very different from those confronting western economies in 2010.

For example, when Canada began a major fiscal retrenchment in the mid-1990s, interest rates were high, so the Bank of Canada could offset fiscal austerity with sharp rate cuts – not a useful model of the likely results of austerity in economies where interest rates were already very low. In 2010 and 2011, IMF projections of the effects of austerity programmes assumed that those effects would be similar to the historical average. But a 2013 paper co-authored by the organisation’s chief economist concluded that under post-crisis conditions the true effect had turned out to be nearly three times as large as expected.

So much, then, for invisible bond vigilantes and faith in the confidence fairy. What about the backup bogeyman, the Reinhart-Rogoff claim that there was a red line for debt at 90% of GDP?

Well, in early 2013 researchers at the University of Massachusetts examined the data behind the Reinhart-Rogoff work. They found that the results were partly driven by a spreadsheet error. More important, the results weren’t at all robust: using standard statistical procedures rather than the rather odd approach Reinhart and Rogoff used, or adding a few more years of data, caused the 90% cliff to vanish.

What was left was a modest negative correlation between debt and growth, and there was good reason to believe that in general slow growth causes high debt, not the other way around.

By about two years ago, then, the entire edifice of austerian economics had crumbled. Events had utterly failed to play out as the austerians predicted, while the academic research that allegedly supported the doctrine had withered under scrutiny. Hardly anyone has admitted being wrong – hardly anyone ever does, on any subject – but quite a few prominent austerians now deny having said what they did, in fact, say. The doctrine that ruled the world in 2010 has more or less vanished from the scene.

In the US, you no longer hear much from the deficit scolds who loomed so large in the national debate circa 2011. Some commentators and media organisations still try to make budget red ink an issue, but there’s a pleading, even whining, tone to their exhortations. The day of the austerians has come and gone.

Yet Britain zigged just as the rest of us were zagging.

By 2013, austerian doctrine was in ignominious retreat in most of the world – yet at that very moment much of the UK press was declaring that doctrine vindicated. “Osborne wins the battle on austerity,” the Financial Times announced in September 2013, and the sentiment was widely echoed.

What was going on? You might think that British debate took a different turn because the British experience was out of line with developments elsewhere – in particular, that Britain’s return to economic growth in 2013 was somehow at odds with the predictions of standard economics. But you would be wrong.

Austerity in the UK

Cyclically adjusted primary balance, percent of GDP

Chart 3Source: IMF, OECD, and OBR

The key point to understand about fiscal policy under Cameron and Osborne is that British austerity, while very real and quite severe, was mostly imposed during the coalition’s first two years in power. Chart 3 shows estimates of our old friend the cyclically adjusted primary balance since 2009. I’ve included three sources – the IMF, the OECD, and Britain’s own Office of Budget Responsibility – just in case someone wants to argue that any one of these sources is biased. In fact, every one tells the same story: big spending cuts and a large tax rise between 2009 and 2011, not much change thereafter.

Given the fact that the coalition essentially stopped imposing new austerity measures after its first two years, there’s nothing at all surprising about seeing a revival of economic growth in 2013.

Look back at Chart 2, and specifically at what happened to countries that did little if any fiscal tightening. For the most part, their economies grew at between 2 and 4%. Well, Britain did almost no fiscal tightening in 2014, and grew 2.9%. In other words, it performed pretty much exactly as you should have expected. And the growth of recent years does nothing to change the fact that Britain paid a high price for the austerity of 2010-2012.

British economists have no doubt about the economic damage wrought by austerity. The Centre for Macroeconomics in London regularly surveys a panel of leading UK economists on a variety of questions. When it asked whether the coalition’s policies had promoted growth and employment, those disagreeing outnumbered those agreeing four to one. This isn’t quite the level of unanimity on fiscal policy one finds in the US, where a similar survey of economists found only 2% disagreed with the proposition that the Obama stimulus led to higher output and employment than would have prevailed otherwise, but it’s still an overwhelming consensus.

By this point, some readers will nonetheless be shaking their heads and declaring, “But the economy is booming, and you said that couldn’t happen under austerity.” But Keynesian logic says that a one-time tightening of fiscal policy will produce a one-time hit to the economy, not a permanent reduction in the growth rate. A return to growth after austerity has been put on hold is not at all surprising. As I pointed out recently: “If this counts as a policy success, why not try repeatedly hitting yourself in the face for a few minutes? After all, it will feel great when you stop.”

In that case, however, what’s with sophisticated media outlets such as the FT seeming to endorse this crude fallacy? Well, if you actually read that 2013 leader and many similar pieces, you discover that they are very carefully worded. The FT never said outright that the economic case for austerity had been vindicated.

It only declared that Osborne had won the political battle, because the general public doesn’t understand all this business about front-loaded policies, or for that matter the difference between levels and growth rates. One might have expected the press to seek to remedy such confusions, rather than amplify them. But apparently not.

Which brings me, finally, to the role of interests in distorting economic debate.

As Oxford’s Simon Wren-Lewis noted, on the very same day that the Centre for Macroeconomics revealed that the great majority of British economists disagree with the proposition that austerity is good for growth, the Telegraph published on its front page a letter from 100 business leaders declaring the opposite. Why does big business love austerity and hate Keynesian economics? After all, you might expect corporate leaders to want policies that produce strong sales and hence strong profits.

I’ve already suggested one answer: scare talk about debt and deficits is often used as a cover for a very different agenda, namely an attempt to reduce the overall size of government and especially spending on social insurance. This has been transparently obvious in the United States, where many supposed deficit-reduction plans just happen to include sharp cuts in tax rates on corporations and the wealthy even as they take away healthcare and nutritional aid for the poor. But it’s also a fairly obvious motivation in the UK, if not so crudely expressed.

The “primary purpose” of austerity, the Telegraph admitted in 2013, “is to shrink the size of government spending” – or, as Cameron put it in a speech later that year, to make the state “leaner … not just now, but permanently”.

Beyond that lies a point made most strongly in the US by Mike Konczal of the Roosevelt Institute: business interests dislike Keynesian economics because it threatens their political bargaining power. Business leaders love the idea that the health of the economy depends on confidence, which in turn – or so they argue – requires making them happy.

In the US there were, until the recent takeoff in job growth, many speeches and opinion pieces arguing that President Obama’s anti-business rhetoric – which only existed in the right’s imagination, but never mind – was holding back recovery. The message was clear: don’t criticise big business, or the economy will suffer.

If the political opposition won’t challenge the coalition’s bad economics, who will?

But this kind of argument loses its force if one acknowledges that job creation can be achieved through deliberate policy, that deficit spending, not buttering up business leaders, is the way to revive a depressed economy. So business interests are strongly inclined to reject standard macroeconomics and insist that boosting confidence – which is to say, keeping them happy – is the only way to go.

Still, all these motivations are the same in the United States as they are in Britain. Why are the US’s austerians on the run, while Britain’s still rule the debate?

It has been astonishing, from a US perspective, to witness the limpness of Labour’s response to the austerity push. Britain’s opposition has been amazingly willing to accept claims that budget deficits are the biggest economic issue facing the nation, and has made hardly any effort to challenge the extremely dubious proposition that fiscal policy under Blair and Brown was deeply irresponsible – or even the nonsensical proposition that this supposed fiscal irresponsibility caused the crisis of 2008-2009.

Why this weakness? In part it may reflect the fact that the crisis occurred on Labour’s watch; American liberals should count themselves fortunate that Lehman Brothers didn’t fall a year later, with Democrats holding the White House. More broadly, the whole European centre-left seems stuck in a kind of reflexive cringe, unable to stand up for its own ideas. In this respect Britain seems much closer to Europe than it is to America.

The closest parallel I can give from my side of the Atlantic is the erstwhile weakness of Democrats on foreign policy – their apparent inability back in 2003 or so to take a stand against obviously terrible ideas like the invasion of Iraq. If the political opposition won’t challenge the coalition’s bad economics, who will?

You might be tempted to say that this is all water under the bridge, given that the coalition, whatever it may claim, effectively called a halt to fiscal tightening midway through its term. But this story isn’t over. Cameron is campaigning largely on a spurious claim to have “rescued” the British economy – and promising, if he stays in power, to continue making substantial cuts in the years ahead.

Labour, sad to say, are echoing that position. So both major parties are in effect promising a new round of austerity that might well hold back a recovery that has, so far, come nowhere near to making up the ground lost during the recession and the initial phase of austerity.

For whatever the politics, the economics of austerity are no different in Britain from what they are in the rest of the advanced world. Harsh austerity in depressed economies isn’t necessary, and does major damage when it is imposed. That was true of Britain five years ago – and it’s still true today.

Follow the Long Read on Twitter: @gdnlongread

Andrew Bossone shared this link. 1 hr ·

“Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity….It is rare, in the history of economic thought, for debates to get resolved this decisively. The austerian ideology that dominated elite discourse five years ago has collapsed, to the point where hardly anyone still believes it. Hardly anyone, that is, except the coalition that still rules Britain – and most of the British media.”

The long read: The case for cuts was a lie. Why does Britain still believe it?

Chapter three Decline and fall of the austerity cult

The solution to (nearly) everything: working less

Had you asked John Maynard Keynes what the biggest challenge of the 21st century would be, he wouldn’t have had to think twice.


In fact, Keynes anticipated that, barring “disastrous mistakes” by policymakers (austerity during an economic crisis, for instance), the western standard of living would multiply to at least four times that of 1930 within a century. By his calculations, in 2030 we’d be working just 15 hours a week.

In 2000, countries such as the UK and the US were already five times as wealthy as in 1930.

Yet as we hurtle through the first decades of the 21st century, our biggest challenges are not too much leisure and boredom, but stress and uncertainty.

Gino Raidy shared this link. April 18 at 2:35pm ·

“Not until men do their fair share of cooking, cleaning and other domestic labour will women be free to fully participate in the broader economy.”

(As Jimmy Carter said lately: “Men don’t give a damn if women don’t take on their responsibilities for a fair system on discrimination”

Excessive work and pressure are status symbols. But overtime is deadly.|By Rutger Bregman

What does working less actually solve, I was asked recently. I’d rather turn the question around: is there anything that working less does not solve?

Take climate change. A worldwide shift to a shorter working week could cut the CO2 emitted this century by half. (Car travel to work for example)

Countries with a shorter working week have a smaller ecological footprint. Consuming less starts with working less – or, better yet – with consuming our prosperity in the form of leisure.

Overtime is deadly.

Long working days lead to more errors: tired surgeons are more prone to slip-ups and soldiers who get too little shut-eye are more prone to miss targets.

From Chernobyl to the space shuttle Challenger, overworked managers often prove to have played a role in disasters.

It is no coincidence that the financial sector, which triggered the biggest disaster of the past decade, is absolutely groaning with people doing overtime.

Countless studies have shown that people who work less are more satisfied with their lives.

In a recent poll conducted among working women, German researchers quantified the “perfect day”. The largest share of minutes (106) would go toward “intimate relationships”.

Down at the bottom of the list were work (36) and commuting (33). The researchers noted that “in order to maximise wellbeing it is likely that working and consuming (which increases GDP) might play a smaller role in people’s daily activities compared with now”.

Obviously, you can’t simply chop a job up into smaller pieces. Nevertheless, researchers at the International Labour Organization have concluded that job sharing – in which two part-time employees split a workload traditionally assigned to one full-time worker – went a long way towards resolving the last economic crisis.

Particularly in times of recession with spiking unemployment and production exceeding demand, sharing jobs can help to soften the blow. (Which requires plenty of training and coordination?)

Furthermore, countries with shorter working weeks consistently top gender-equality rankings. (In many part of the world, men work less and the burden is heaped on the women)

The central issue is achieving a more equitable distribution of work. Not until men do their fair share of cooking, cleaning and other domestic labour will women be free to fully participate in the broader economy.

Take Sweden, a country with a truly decent system for childcare and paternity leave – and the world’s smallest work-time disparity between men and women.

Besides distributing jobs more equally between the sexes, we also have to share them across the generations.

Older people increasingly want to continue working even after hitting pensionable age. But while thirtysomethings are drowning in work, family responsibilities and mortgages, seniors struggle to get hired, even though (some) working has proven health benefits.

Young workers who are just entering the labour market may well continue working into their 80s. In return, they could put in not 40 hours a week for all those years, but perhaps just 20-30.

“In the 20th century we had a redistribution of wealth,” one leading demographer has observed. “In this century, the great redistribution will be in terms of working hours.”.

And then there is the issue of economic inequality.

The countries with the biggest disparities in wealth are precisely those with the longest working weeks.

While the poor are working longer hours just to get by, the rich are finding it ever more “expensive” to take time off as their hourly rates rise.

Nowadays excessive work and pressure are status symbols. Time to oneself is sooner equated with unemployment and laziness, certainly in countries where the wealth gap has widened.

It doesn’t have to be this way. We have the ability to cut a big chunk off our working week. Not only would it make all of society a whole lot healthier, it would also put an end to untold piles of pointless and even downright harmful tasks (a recent poll found that as many as 37% of British workers think they have a “bullshit job”).

A universal basic income would be the best way to give everyone the opportunity to do more unpaid but incredibly important work, such as caring for children and the elderly.

“But wouldn’t everybody just be glued to the TV all the time?”, you may wonder.

Actually, it is precisely in overworked countries like Japan, England and the US that people watch an absurd amount of television. Up to four hours a day in England, which adds up to nine years over an average lifetime.

Sure, swimming in a sea of spare time won’t be easy. But that’s why a 21st century education should prepare people not only for joining the workforce, but also (and more importantly) for life.

“Since men will not be tired in their spare time,” the philosopher Bertrand Russell wrote in 1932, “they will not demand only such amusements as are passive and vapid.”

We can handle the good life, if only we take the time.

Post-war Germany recovery? Any roles to Greece, Spain, and Turkey…?

Sixty years ago today, an agreement was reached in London to cancel half of postwar Germany’s debt.

That cancellation, and the way it was done, was vital to the reconstruction of Europe from war.

It stands in marked contrast to the suffering being inflicted on European people today in the name of debt.

Germany emerged from the WWII still owing debt that originated with the first world war: the reparations imposed on the country following the Versailles peace conference in 1919.

Many, including John Maynard Keynes, argued that these unpayable debts and the economic policies they entailed led to the rise of the Nazis and the second world war.

By 1953, Germany also had debts based on reconstruction loans made immediately after the end of the second world war. Germany’s creditors included Greece and Spain, Pakistan and Egypt, as well as the US, UK and France.

German debts were well below the levels seen in Greece, Ireland, Portugal and Spain today, making up around a quarter of national income.

But even at this level, there was serious concern that debt payments would use up precious foreign currency earnings and endanger reconstruction.

Needing a strong West Germany as a bulwark against communism, the country’s creditors came together in London and showed that they understood how you help a country that you want to recover from devastation.

It showed they also understood that debt can never be seen as the responsibility of the debtor alone. Countries such as Greece willingly took part in a deal to help create a stable and prosperous western Europe, despite the war crimes that German occupiers had inflicted just a few years before.

The debt cancellation for Germany was swift, taking place in advance of an actual crisis.

Germany was given large cancellation of 50% of its debt. The deal covered all debts, including those owed by the private sector and even individuals. It also covered all creditors.

No one was allowed to “hold out” and extract greater profits than anyone else. Any problems would be dealt with by negotiations between equals rather than through sanctions or the imposition of undemocratic policies.

Perhaps the most innovative feature of the London agreement was a clause that said West Germany should only pay for debts out of its trade surplus, and any repayments were limited to 3% of exports earnings every year.

This meant those countries that were owed debt had to buy West German exports in order to be paid.

It meant West Germany would only pay from genuine earnings, without recourse to new loans.

And it meant Germany’s creditors had an interest in the country growing and its economy thriving.

Following the London deal, West Germany experienced an “economic miracle”, with the debt problem resolved and years of economic growth.

The medicine doled out to heavily indebted countries over the last 30 years could not be more different.

Instead, the practice since the early 1980s has been to bail out reckless lenders through giving new loans, while forcing governments to implement austerity and free-market liberalisation to become “more competitive”.

As a result of this, from Latin America and Africa in the 80s and 90s to Greece, Ireland and Spain today, poverty has increased and inequality soared.

In Africa in the 80s and 90s, the number of people living in extreme poverty increased by 125 million, while economies shrank.

In Greece today, the economy has shrunk by more than 20%, while one in two young people are unemployed. In both cases, debt ballooned.

The priority of an indebted government today is to repay its debts, whatever the amount of the budget these repayments consume.

In contrast to the 3% limit on German debt payments, today the IMF and World Bank regard debt payments of up to 15-25% of export revenues as being “sustainable” for impoverished countries. The Greek government’s foreign debt payments are around 30% of exports.

When debts have been “restructured”, they are only a portion of the total debts owed, with only willing creditors participating.

In 2012, only Greece’s private creditors had debt reduced. Creditors that held British or Swiss law debt were also able to “hold out” against the restructuring, and will doubtless pursue Greece for many years to come.

The “strategy” in Greece, Ireland, Portugal and Spain today is to put the burden of adjustment solely on the debtor country to make its economy more competitive through mass unemployment and wage cuts.

But without creditors like Germany willing to buy more of their exports, this will not happen, bringing pain without end.

The German debt deal was a key element of recovering from the devastation of the second world war. In Europe today, debt is tearing up the social fabric.

Outside Europe, heavily indebted countries are still treated to a package of austerity and “restructuring” measures.

Pakistan, the Philippines, El Salvador and Jamaica are all spending between 10 and 20% of export revenues on government foreign debt payments, and this doesn’t include debt payments by the private sector.

If we had no evidence of how to solve a debt crisis equitably, we could perhaps regard the policies of Europe’s leaders as misguided.

But we have the positive example of Germany 60 years ago, and the devastating example of the Latin American debt crisis 30 years ago. The actions of Europe’s leaders are nothing short of criminal.

Note 1: While Greece, Spain and Turkey were bailing out Germany, their citizens were flocking to Germany to work under the recovery program.

Note 2: I guess the creditors were convinced that the hard working and law abiding Germans, under institutions still functioning, and an industrial know how… will generate the necessary profit to pay back the loans. I guess France and Germany do not believe that the other EU States, crumbling under their debts, are good enough people with sane institutions to generate any profit.

Najat Rizk shared a link.
Nick Dearden: Sixty years ago, half of German war debts were cancelled to build its economy. Yet today, debt is destroying those creditors

More Copper Reserves for China (April 30, 2009)


            The price of copper was forecasted to fall 20% this year in this economic recession but it increased 50% instead:  China is willing to pay around $5,000 the ton of copper instead of buying more US Treasury Bonds.  China has purchased 375,000 tons of copper in March and increasing each month. The Chinese Central Bank governor Xiaochuan view the US financial famine to a black hole since the US is about to print more dollars to paying the Chinese State, thus practically devaluing the US currency and reselling the Chinese more hot air.  The Chinese are not about to re-value the Yuan before the US and the European Union restore credibility and confidence in the financial system.

            Among the many industrial usage of copper is the manufacture of hybrid engines in cars that China is putting in its market.  Italy has been promoting hybrid cars for a while and many more gas stations are filling methane gas.  Methane does not emit carbon dioxide.  The driver would start and accelerate on regular gas and then shift into methane combustion.  As a matter of fact, the Green Peace advocates regards the European Union policy of selling carbon dioxides permits to the heavier polluters is not reducing the CO2 in the atmosphere.  For example, Germany has reduced its polluting energy consumption by 15% by relying on Aeolians, solar panels, and biomass; thus, Germany would sell 15% reduction in pollution to Poland and Slovenia that are still relying on coal.

I read in a post the following information: 62% of the World’s copper is used for the production of small denomination coins such as the penny. 84% of small denomination coins are classed by the World’s Governments as missing – it is presumed that members of the public have stashed the coins as savings. On average, each person in the World has stashed $22.34 worth of copper in small denomination coins.

            Goldman Sachs predicts that the GNP of China will surpass Japan by 2010 and the USA before 2030.  India will surpass Japan by 2030 and become third after the USA.  Brazil will be fifth after Japan in 2030.

            China is using its two trillion dollars surplus to accumulating reserves in aluminum, zinc, nickel, titanium, indium and rhodium so that it may resume its industrial acceleration once the current crisis is stabilized. This policy of purchasing minerals instead of US Treasury Bonds is compatible with China recommendation of creating an international banknote indexed on the prices of a basket of raw materials as was proposed by John Maynard Keynes at Bretton Woods in 1944; the “bancor” of Keynes was based then on 30 raw materials.

I suggest in a previous post “The Third World War is Tolling” the folowing: 

“First, the developed States have to agree on another tangible standard (like gold) for currencies.  Gold would not do because the US has abolished it in 1967 because all the gold in the world could not sustain the huge amount of paper dollars circulating or intended to circulate around the world.  The alternative is a basket of depleting minerals that are essentials for manufacturing and production.  The processed minerals do not have to be rare but very essentials for development.  The US can agree to this idea since it has huge reserves in many important minerals.

Second, all the States that can account for at least 3% of all curency circulation should join an “International Money Printing Council” with tight control and monitoring creteria.  Any combined States with over 40% of cash money shares in the global market should have a veto power.

Failing a convincing and sustainable agreement for monetary stability the Third World War is altready in the planning stage as the easiest and quickest way out of that morass.  Only in major wars do printed money with no tangible backing has mythical values.  No, the next region for the war scene is not Iran: no European or US soldiers want to fight in this “cursed region”.  It won’t be Afghanistan: if Afghanistan was worth it then Bush Junior would not have invaded Iraq before stabilizing Afghanistan.  It won’t be North Korea: it is bordering China.  The batlefield will not be in any area bordering Russia.  It won’t be the Congo River zone: no Western soldiers is about to step in this infested and contagious disease plagued region with AIDS consuming 30% of the population. The next world war is in Sudan, this continent/State rich in oil and all kinds of minerals”.

Actually, Sudan is the focus of investment for China in the last two decades.




September 2020

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