How delusional were the consequences for States to adopt austerity budgets (Posted in 2016)
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 States were in the aftermath of the financial crisis and before the crisis for a long time – was deemed at imminent risk of becoming another Greece bankrupt State, 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 austerity ideology swept all before it.
But that was five years ago, and the fever has long since been 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. (Not for Lebanon in any case)
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. (Greece has to rely on Germany that print the Euro in order to satisfy its internal market)
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 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 austerity ideology that dominated elite discourse 5 years ago has collapsed, to the point where hardly anyone still believes it.
Hardly anyone, 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 Third World States have to borrow at least at 5 percent rate higher than what colonial powers get)
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.
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 byAlberto 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: confidence-inspiring policies will foster and not hamper economic recovery” declared Jean-Claude Trichet, then the president of the European Central Bank
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 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”.
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%.
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.
“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 austerity 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.”
For the past couple of months, thoughtful people have been quietly worrying that the Trump administration might get us into a foreign policy crisis, maybe even a war.
Partly this worry reflected Donald Trump’s addiction to bombast and swagger, which plays fine in Breitbart and on Fox News but doesn’t go down well with foreign governments.
But it also reflected a cold view of the incentives the new administration would face: as working-class voters began to realize that candidate Trump’s promises about jobs and health care were insincere, foreign distractions would look increasingly attractive.
The most likely flash point seemed to be China, the subject of much Trumpist tough talk, where disputes over islands in the South China Sea could easily turn into shooting incidents.
But the war with China will, it seems, have to wait.
First comes Australia. And Mexico. And Iran. And the European Union. But never Russia (That’s the only good wait)
And while there may be an element of cynical calculation in some of the administration’s crisismongering, this is looking less and less like a political strategy and more and more like a psychological syndrome.
The Australian confrontation has gotten the most press, probably because it’s so weirdly gratuitous. Australia is, after all, arguably America’s most faithful friend in the whole world, a nation that has fought by our side again and again. We will, of course, have disputes, as any two nations will, but nothing that should disturb the strength of our alliance — especially because Australia is one of the countries we will need to rely on if there is a confrontation with China.
But this is the age of Trump: In a call with Malcolm Turnbull, Australia’s prime minister, the U.S. president boasted about his election victory and complained about an existing agreement to take some of the refugees Australia has been holding, accusing Mr. Turnbull of sending us the “next Boston bombers.” Then he abruptly ended the conversation after only 25 minutes.
Well, at least Mr. Trump didn’t threaten to invade Australia. In his conversation with President Enrique Peña Nieto of Mexico, however, he did just that.
According to The Associated Press, he told our neighbor’s democratically elected leader: “You have a bunch of bad hombres down there. You aren’t doing enough to stop them. I think your military is scared. Our military isn’t, so I just might send them down to take care of it.”
White House sources are now claiming that this threat — remember, the U.S. has in fact invaded Mexico in the past, and the Mexicans have not forgotten — was a lighthearted joke. If you believe that, I have a Mexico-paid-for border wall to sell you.
The blowups with Mexico and Australia have overshadowed a more conventional war of words with Iran, which tested a missile on Sunday. This was definitely a provocation.
But the White House warning that it was “putting Iran on notice” raises the question, notice of what?
Given the way the administration has been alienating our allies, tighter sanctions aren’t going to happen. Are we ready for a war?
There was also a curious contrast between the response to Iran and the response to another, more serious provocation: Russia’s escalation of its proxy war in Ukraine.
Senator John McCain called on the president to help Ukraine. Strangely, however, the White House has said nothing at all about Russia’s actions. This is getting a bit obvious, isn’t it?
Oh, and one more thing: Peter Navarro, head of Mr. Trump’s new National Trade Council, accused Germany of exploiting the United States with an undervalued currency.
There’s an interesting economics discussion to be had here, but government officials aren’t supposed to make that sort of accusation unless they’re prepared to fight a trade war. Are they?
I doubt it. In fact, this administration doesn’t seem prepared on any front.
Mr. Trump’s confrontational phone calls, in particular, don’t sound like the working out of an economic or even political strategy — cunning schemers don’t waste time boasting about their election victories and whining about media reports on crowd sizes.
No, what we’re hearing sounds like a man who is out of his depth and out of control, who can’t even pretend to master his feelings of personal insecurity.
His first two weeks in office have been utter chaos, and things just keep getting worse — perhaps because he responds to each debacle with a desperate attempt to change the subject that only leads to a fresh debacle.
America and the world can’t take much more of this.
Think about it: If you had an employee behaving this way, you’d immediately remove him from any position of responsibility and strongly suggest that he seek counseling. And this guy is commander in chief of the world’s most powerful military.
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 byAlberto 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.
“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.”
Paul Krugman posted this article this July 5, 2015
Europe dodged a bullet on Sunday. Confounding many predictions, Greek voters strongly supported their government’s rejection of creditor demands.
And even the most ardent supporters of European union should be breathing a sigh of relief.
Of course, that’s not the way the creditors would have you see it.
Their story, echoed by many in the business press, is that the failure of their attempt to bully Greece into acquiescence was a triumph of irrationality and irresponsibility over sound technocratic advice.
But the campaign of bullying — the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out of office — was a shameful moment in a Europe that claims to believe in democratic principles.
It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense.
What’s more, the creditors weren’t.
The truth is that Europe’s self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding.
A “yes” vote in Greece would have condemned the country to years more of suffering under policies that haven’t worked and in fact, given the arithmetic, can’t work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose.
The landslide victory of the “No” side offers at least a chance for an escape from this trap.
But how can such an escape be managed? Is there any way for Greece to remain in the euro? And is this desirable in any case?
The most immediate question involves Greek banks.
In advance of the referendum, the European Central Bank cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls.
The EU central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency.
Specifically, if the money doesn’t start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency — and which might soon turn into the new drachma.
Suppose, on the other hand, that the central bank does resume normal lending, and the banking crisis eases. That still leaves the question of how to restore economic growth.
In the failed negotiations that led up to Sunday’s referendum, the central sticking point was Greece’s demand for permanent debt relief, to remove the cloud hanging over its economy.
The troika — the institutions representing creditor interests — refused, even though we now know that one member of the troika, the International Monetary Fund, had concluded independently that Greece’s debt cannot be paid.
But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?
I have no idea — and in any case there is now a strong argument that Greek exit from the euro is the best of bad options.
Imagine, for a moment, that Greece had never adopted the euro, that it had merely fixed the value of the drachma in terms of euros.
What would basic economic analysis say it should do now?
The answer, overwhelmingly, would be that it should devalue — let the drachma’s value drop, both to encourage exports and to break out of the cycle of deflation.
Of course, Greece no longer has its own currency, and many analysts used to claim that adopting the euro was an irreversible move — after all, any hint of euro exit would set off devastating bank runs and a financial crisis.
But at this point that financial crisis has already happened, so that the biggest costs of euro exit have been paid. Why, then, not go for the benefits?
Would Greek exit from the euro work as well as Iceland’s highly successful devaluation in 2008-09, or Argentina’s abandonment of its one-peso-one-dollar policy in 2001-02?
Maybe not — but consider the alternatives.
Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.
And let’s be clear: if Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans.
Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over.
If they can’t make a go of Europe’s common currency, it’s because that common currency offers no respite for countries in trouble.
The important thing now is to do whatever it takes to end the bleeding.
Note: “Podemos movement (We Can)” in Spain has gained a lot of ground, emulating Greece resistance to the dicta of the EU troika and IMF. Whatever deal is reached with Greece will have repercussion in Spain.
What do you think can create jobs? Can government budgeting for better infrastructures (roads, trains, communication network, allocating more money to city and town administration and management…) create jobs? Can Creative enterprises create jobs? Can spending on military hardware create jobs? Can empowered communities create jobs?
Polish economist Michael Kalecki wrote something to that effect: “If common people start to admit that the government can create jobs, then the message is to reduce the perceived importance of business confidence” Which means, the business people and multinational financial enterprises will lose the grip on holding government hostage to spending big money on totally destructive projects (more performing military jets, nuclear weapons, sparing the ultra rich so that they keep confident in the system…) that do not benefit the economy of the vast majority of citizens.
John Maynard Keynes offered a partial answer 75 years ago, when he noted a curious “preference for wholly wasteful forms of loan expenditure, rather than for partly wasteful forms” Why? Partially wasteful projects tend to be judged on strict ‘business’ principles.” For example, spend money on some useful goal, like the promotion of new energy sources, and people start screaming, “Waste!” Spend money on a weapons system we don’t need, and those voices are silent, because nobody expects F-22s to be a good business proposition anyway. That is funny. Mankind twisted mind is funny, until the weapons are used, phosphorous bombs dropped, cluster bombs carpeting entire land…
Keynes suggested that government bury bottles full of cash in disused mines and letting the private sector dig them back up. Government may bury old jets with some cash, and let people figure out where they are buried…
PAUL KRUGMAN published in the New York Times under “Bombs, Bridges and Jobs” (I rearranged the article and edited slightly):
“A few years back, Representative Barney Frank coined an apt phrase for many of his colleagues: “weaponized Keynesians”. They are the colleagues in Congress who believe “that the government does not create jobs when it funds the building of bridges or important research or retrains workers, but when it builds airplanes that are never going to be used in combat, that is of course economic salvation.”
Right now the weaponized Keynesians are out in full force — which makes this a good time to see what’s really going on in debates over economic policy.
What’s bringing out the military big spenders is the approaching deadline for the so-called supercommittee to agree on a plan for deficit reduction. If no agreement is reached, this failure is supposed to trigger cuts in the defense budget.
Faced with this prospect, Republicans — who normally insist that the government can’t create jobs, and who have argued that lower, not higher, federal spending is the key to recovery — have rushed to oppose any cuts in military spending. Why? Because, they say, such cuts would destroy jobs.
Consequently, Representative Buck McKeon, Republican of California, once attacked the Obama stimulus plan because “more spending is not what California or this country needs.” But two weeks ago, writing in The Wall Street Journal, Mr. McKeon — now the chairman of the House Armed Services Committee — warned that the defense cuts that are scheduled to take place if the supercommittee fails to agree would eliminate jobs and raise the unemployment rate.
What makes this particular form of hypocrisy so enduring?
First: Military spending does create jobs when the economy is depressed and when government decide to building up the military readiness. In the same vein, I recently suggested that a fake threat of alien invasion, requiring vast anti-alien spending, might be just the thing to get the economy moving again.
Second: There are darker motives behind weaponized Keynesianism. For one thing, to admit that public spending on useful projects can create jobs is to admit that such spending can in fact do good, that sometimes government is the solution, not the problem.
Fear that voters might reach the same conclusion is, I’d argue, the main reason the political right has always seen Keynesian economics as a leftist doctrine, when it’s actually nothing of the sort. However, spending on useless or, even better, destructive projects doesn’t present conservatives with the same problem.
Third: Appeals to confidence have always been a key debating point for opponents of taxes and regulation. For example, Wall Street’s whining about President Obama is part of a long tradition in which wealthy businessmen and their flacks argue that any hint of populism on the part of politicians will upset people like them, and that this is bad for the economy.
Once you concede that the government can act directly to create jobs, however, that whining loses much of its persuasive power — so Keynesian economics must be rejected, except in those cases where it’s being used to defend lucrative contracts.
The sudden upsurge in weaponized Keynesianism reveals the reality behind our political debates. At a fundamental level, the opponents of any serious job-creation program know perfectly well, that such a program would probably work, for the same reason that defense cuts would temporary raise unemployment. But they don’t want voters to know what they know, because that would hurt their larger agenda like keeping regulation and taxes on the wealthy at bay.”
Paul Krugman wrote: “Indeed, much of the evidence that Keynesian economics works comes from tracking the effects of past military buildups. Some liberals dislike this conclusion, but economics isn’t a morality play: spending on things you don’t like is still spending, and more spending would create more jobs”. I think that is a shallow argument. What has been spent on military buildups turns to a huge deficit once a preemptive war is launched. The effects are felt right after the war, and for many decades later. Preemptive wars are decided upon mainly to absorb the lower middle class citizens off the streets in times of economic downturns and sending them overseas to be killed and maimed…
One critic wrote: “How can one disengage ethics from economics when it affects the well being of all humans and of Earth? Krugman has so ossified his views that he attempts to summarize Keynes with a single quote. Spending does not create jobs; creative people and entrepreneurs create jobs. Giving handouts to corporations, particularly those in the business of selling arms, creates corruption, indulgence and death.
US next in line to Tunisia: Unemployment popular revolt?
The title might be extreme; maybe the regime in the US will not change that drastically and that quickly. Or maybe Egypt is next in line to witness a humongous popular upheaval, but if anyone is disregarding the option that the USA is inevitably ripe for a popular, non-peaceful, mass revolt is not listening, reading, and watching carefully the predicting indicators, as it happened in Tunisia. When revolt lands in the US, it might not be that peaceful as in Tunisia and Egypt.
In Tunisia, graduate students, out of a job for 5 years, were communicating their rage and frustration on the social web platforms. There are indications that President Ben Ali was closeted in his Palaces and just listening to his oligarchic retinues and relying on the western States for times of crisis. Ben Ali considered his citizens as invisible. The “whites” in the US consider Obama as invisible, as in the “invisible man”; and thus, no matter what Obama does or achieve is not that relevant to the “red necks” and Christian neo-conservatives.
To the CONSERVATIVE “whites”, Obama is as good as being closeted in his White House, and if they grudgingly have to deal with the administration, it is only through the civil servants in the White House. Obama is interested to what the Whites are saying but it is not reciprocated. For one thing, no Black is ever to be President again, and Obama is not going to remain for a second term: Not because he is a failure (he cannot ever be worse than Bush Jr), but because racism is endemic in the US.
Ben Ali was very close to Israel and opened Tunisia market to products coming from Jewish colonies in the West Bank. Israel is antagonizing the US of Obama, not because the US ceased to be totally supporting Israel, but because racist and apartheid Israel hates the Black President Obama. Obama has been doing his best to pleasure every community who hated him out of racist attitudes, and he failed to do his job as President and promoting equitable and fair negotiations and dealings.
The western media were all laudatory and praise of Ben Ali’s open market policies for financial transactions, dumping of subsidized agricultural products, and dumping of all kinds of products and services. The industrial and agricultural bases in Tunisia were not developing and the economy relied on the tourism sector and fictitious investments by multinational financial institutions.
Are there any productive development in the US? Paul Krugman has claimed that the US experienced no growth in the last two decades, even if profits from financial institutions increased from 8 to 16% of the total GNP.
Tunisia was witnessing over 30% of unemployment among graduate students, the same effective rate in the US among the lower middle class citizen, regardless of the kinds of misinformation the media and the administration is disseminating on unemployment rates. The US statistics must start classifying unemployment rates according to economic classes and race.
The talking heads and financial journals are liars: The economy in the US has not stabilized at all; growth is fictitious as before, and a mirror-image of the non-productive financial transactions consequences. But unemployment is steadily increasing. Most lower middle class citizens are reluctant to cashing unemployment subsidies and thus, unemployment statistics are heavily biased toward the lower trend.
Watch out America! All that it takes is a “red neck” burning himself in front of the Capitol or the White House to rally embitered US citizen for all their frustrations at declining easy credits to sustaining their previous life-style. The US is no better than Tunisia when people are unemployed and feeling ignored and degraded. You may read my link on my prediction of Egypt’s successful non-violent revolution in note#2.
Note 1: It is disturbing how superpowers treat smaller and weaker States. Everyday, the US, France, and the EU meddle in the internal affairs of Lebanon, but have the guts to lambast Syria and Iran as “rogue nations” for effectively and directly aiding the Lebanese people economically and militarily to resist Israel’s frequent preemptive wars and incursions in Lebanon.
Iran and Qatar were the only States to extending cash money for the reconstruction efforts after the 2006 war by Israel. The US and the EU offered nothing but speeches and countless political constraints for miserly pocket-money changes. The US and France and the EU still believe that they can exert more leverage on Lebanese citizens than Iran or Syria. The last week demonstrated that Lebanon and Tunisia do not give much weight to Western recriminations or political pressures.
Note 2: I realized that I published this post one day before the start of Egypt’s mass revolt on Jan. 25. I was taken by surprise that the Egyptian revolt materialized that fast, but I was dead certain that eventually Mubarak is a goner. You may read my prediction on Egypt’s successful non-violent revolution https://adonis49.wordpress.com/2011/02/01/the-january-revolution-of-the-century-great-people-of-egypt/
Don The Porsche drives a yellow Porsche to work and wears cotton shirts double knitted; he is a super trader at a multinational bank and is in demand speaking to schools and universities. Don is now enjoying big bonuses from the billion in profit that the bank is generating by buying and selling financial papers (such as forms of credit derivatives, Treasury Bills, short-term contracts…) through million of financial transactions a day; kind of making profit on high rate of turnover for small profit as in supermarkets. Multinational banks take advantage of opportunities in the financial market, an “incoherent” market with frequent fluctuations in interest rates through million of financial transaction a day.
Don The Porsche has climbed the ranks of this “drug cartel” kind of structure by learning the rules of the game: Total loyalty to the institution that pays for your Porsche and standard of living, in return for damping your moral values and ethical conducts. Don has learned to make a clean blackboard on previously acquired values. Don is now in the middle of the food chain, between the shark and the hyena.
The bank trades by shuffling “financial products” from one debtor State to another debtor State, as political programs and plans are announced by governments for stated goals to satisfying States’ economies. Actually, all 192 States in the UN are debtor nations with “sovereign debts” to creditors, private or other governments. The difference is that powerful nations pay lower interests on loans than the poorer nations, and thus, the strong nations loan to poorer nation for profit on difference in interest rates. How that mechanism works?
The previous G8 of the developed nations (initially the previous colonial powers) have created rating companies such as Standard & Poors, Moody’s, and Fitch; they control and supervise these “private” rating companies that are assigned the task of attributing rating of financial and economical viabilities of State governments for paying off interests on loans and the principal on due dates.
The rating companies are politically motivated and obey the G8 of the Western powers political decisions for rating less harshly governments that follow their political lines (in the UN) and programs. The rating companies punish “rogue governments” that dared contradict the “consensus politics” with very bad ratings, thus, pressuring rogue States paying high interest rates on badly needed loans. Consequently, the biggest debtor nations get credits at low interest rates and in return their multinational financial institutions and International institutions (World Bank and Monetary Fund…) loans to developing nations at high interest rates. Consequently, the former “colonies” that got their physical “independence” 50 years ago are still controlled financially “soft control” and subjugated to remaining in a developing conditions.
An individual asks Don this pertinent question: “The more a State is in difficulty, the more it needs to borrow, the poorer its financial rating, the costlier the loans, and the deeper in trouble the State is plunged in.” Don’s reaction is a ready placating answer such as: “You cannot comprehend the complex world of finance. If it was that simple a logic then, how could financial institutions transact 5 trillion dollars in every single day?” Don is very much aware of the simple logic empowering developed nations to impoverishing developing nations; but Don has learned not to get sentimental and accumulating “headaches for other people problems”: He has to purchase a newer more powerful versions of Porsche and is awaiting an even bigger bonus.
Like most “successful” traders, Don earned a university degree in the finance field. He probably was initiated in the university at producing statistical analysis from various updated mathematical models that compute trends in the financial market. It is not difficult a job since data are instantly produced and displayed: The computer is automatically programmed to run the math models at the click of key on the keyboard. Don learned to look at the graphs and analyzing trends. Don was initially hired to be in the background consultant for the “in-the-field” traders in the “Hall market”.
Basically, Don’s initial job position is for “arbitrating rate products”; he uses a set of techniques to generating profits due to market incoherences; he keeps an eye on opportunities created on the screen of his monitor. (The financial field applies advanced mathematics in probability, statistics, numerical analysis, signal treatment, genetics laws, fluid mechanics and dynamics laws and all kinds of natural and human behavior laws that seem applicable to market finance. Most of these models and techniques can be applied to irrigation network, fighting diseases, reducing environmental pollution, safeguarding biodiversity, retaining virgin forests…but most of the bright minds are attracted to financial institutions with wages four times higher than in other engineering fields.)
After a few years as a low-paid financial consultant, Don is promoted as assistant to a trader who by now, has forgotten how to use statistical modeling or has no time for this task, and rely of the freshly hired consultants. Don was again gratified to the rank of supporting trader and then to full fledged trader working in the “Hall of trading”. Don is set to earning large bonuses after doing his penitence in the background, envying traders and yearning for years to earning big bucks.
Now Don sits behind a 1.2 meter desk studded with a computer, a monitor, a keyboard, a mouse… Don is sitting in a supermarket of lined desks, raws after raws. He is clicking on two important keys or icons “buy” or “sell”. The more successful Don is, the more confident are his clients in his ability for maintaining his “fiduciary” duty of acting on their behalf (for their best interest).
Note 1: Paul Krugman, another Nobel laureate for economics, wrote: “The ratio of financial profit to the GNP jumped from 4% to 8% in the last two decades but it resulted in no economic real growth. The economy was rendered less stable and less performing due to financial deregulation.” All indicates that even Europe has not experienced any real growth in that period.
Note 2: This story was inspired by the French book “Foul Express” written by Marwan Muhammad. He was an “engineer in financial mathematical modeling” and worked for a French multinational bank and resigned after learning the immoral and unethical procedures for generating profit at the expense of suffering and humiliation of the poorer nations.
Note 3: How developing nations remain poor? The rich developed States subsidize their agriculture and dump the foodstuff products on the open market of the poorer nations at lower prices that local peasants can compete with. Consequently, the unsubsidized peasants of the poor nations leave their fields and transfer to urban centers lacking running water, electricity, and opportunities for work. They end up living in the poorest quarters and shantytowns and are used and abused as menial workers. They join the lower classes, kept at 20% of the population, in order to maintaining and up keeping the daily running economy.
Once the sovereign debt of a developing State is high enough requiring 50% of the budget to be earmarked for servicing the interests on loans then, the powerful nations instruct their multinational agribusinesses to purchase fertile lands (or renting for 99 years) at ridiculous low prices in the former colonial countries. Fertile lands are transformed to harvesting products for “green” alternative sources of energy like sugar cane … The natives lack the ingredients for their staple daily meals and famine is frequently rampant (blamed on environmental conditions by the western States). You may read detailed cases in my category “Africa/Agriculture”
Any reforms applied to the capitalist financial institutions?
Almost 3 years to the onset of the financial crash of the century and we have the firm conviction that no reforms to the financial institutions have been applied so far.
The International Regulatory Bank has issued a report in June 2010 and proposed a “moderate” attitude to reforms stating: “Instead of attempting to eradicate financial crisis, which is impossible, we have to reduce the frequency and severity of crisis.”
What that means?
How frequently must crisis take place for mankind to suffer and support; and how level of severity is quantified?
Are there any indicators and measuring sticks to appropriate number of crisis and corresponding severity?
Who is supposed to be bearing the brunt of the impending crisis?
Barack Obama wanted to downsize multinational financial institutions that are “too big to allow them to fail” so that the tax payers should not be obligated to maintain systemic dangerous institutions.
Congress was not pleased with the suggested reforms: The financial lobby engaged over 1,500 professionals (lawyers, financiers, and politicians) and spent $350 million to “redirect” the project law under discussion.
That amount earmarked for lobbying congress represents less than one per thousand of the 400 billion profit generated in the last semester of 2009. This profit accounts for 38% of the total profit of the USA in that semester.
Let us put things in perspective:
1. First, the four largest banks in the US has 42% of all the assets in 2009 and held 96% of the 300 billion of the derivative products.
2.Second, every day witnesses financial transactions amounting to 5 trillionwhile the total saving for all the nations is less than 4 trillion per year.
Nobel laureate Joseph Stieglitz reminded us that
“Larry Summers and Timothy Geithner (finance minister) were the same individuals who impose deregulation during Clinton and prohibited any interventions in regulating market derivative products. It is the multinational financial institutions that are “lending” their experts to governments: Government is claiming to being helpless faced with the shortage of financial experts willing to working for the government”
Paul Krugman, another laureate, wrote: “The ratio of finance profit to the GNP jumped from 4% to 8% in the last two decades, but the resulted in no economic real growth. The economy was rendered less stable and less performing due to financial deregulation.”
Paul Volcker, ex-chief of the Federal Reserves during Reagan, said: “You don’t find a single American graduating with superior diploma in engineering, math, or physics. Wall Street has drained all the bright minds into the financial world.”
Paul Volcker is the same guy who predicted that his financial policies during Reagan will let “blood flow knee-deep” in Latin America. Indeed, most of the Latin States were ravaged by civil wars and internal unrest and upheaval for two decades.
You might think that the financial crisis and its everyday repercussions on unemployment and lower standard of living has dissipated the illusion that “increased financial transactions can be counted as increase in internal market trade“; this illusion is still maintained by the media at the sold of the multinationals.
There was no real economic growth in the US and Europe in the last 10 years: Just a big bubble of the illusion of growth.
Adonis Diaries 