Paul Krugman thinks it is. Yesterday I wrote about the Right Hand seemingly not having a clue about what the Left Hand was doing.So here I am blessed yet another example of the same thing, in this case the IMF. It’s own economics department is slaughtering the concept of austerity to the point where even MMT force majeure Bill Mitchell would be purring approval. Yet onwards and upwards (or backwards and downwards) goes the IMF proposing the same failed austerity policies over and over again, you know, those very same ones being panned by their own economists. Do these guys do anything such as talk to each other?
So what is austerity and what it is good for? I should warn you now I’m the very worst sort of economist ever. I’m self taught, have no training but I’m well aware that a little knowledge is a dangerous thing. I have always understood austerity as a part of the automatic stabalisers, it kicks in when the economy is overheating. The opposite of austerity happens in a downturn, welfare payments increase, the tax take goes down and deficits are highly likely, indeed desirable. That at least is what i thought the autumatic stabalisers meant.
In this it seems I’m not alone, MMT agrees, heterodox and orthodox economists agree, hell even the Austrians seem capable of grasping these self evident facts. The Libartrians don’t, obviously, but they were only put on earth for the rest of us to laugh at. Sorry to be a bit harsh there.So how has this astonishing, it is after all truly astonishing, reversal of economic reality somehow get turned on its head? How did something so established, tried and tested, suddenly become reversed? When did austerity become a thing we do during downturns when, by definition, it was designed to rein in booms? You can bet your bottom dollar the culprits will wear these two badges, neoliberal and expert. I intend to write about both these cohorts this week.
As luck would have the verifiably wonderful Simon Wren-Lewis has a paper out A general theory of austerity which is frankly shocking in its attack from the abstract onwards.
Austerity is defined as a fiscal contraction that causes a significant increase in aggregate unemployment. For the global economy, or an economy with a flexible exchange rate, or a monetary union as a whole, an increase in unemployment following a fiscal consolidation can and should be avoided because monetary policy can normally offset the demand impact of the consolidation. The tragedy of global austerity after 2010 was that fiscal consolidation was not delayed until monetary policy was able to do so.
That is the opening to the abstract and I’m covering no more than that because I’d end up writing a book rather than a short blog post. A non economist would be forgiven for thinking that rising unemployment was an unfortunate consequence of doing the Right Thing, the Right Thing of course being to reduce the deficit because it is a Big Scary Number. That’s certainly how austerity was sold to us in the UK in 2010 and there was no mention of unemployment. As austerity failed miserably, again as widely predicted, we were sold an equally ludicrous theory, that of Expansionary Fiscal Contraction
a concept not unlike the Higgs bosun, nobody has seen it yet, merely theorised it.
There can be no doubt we were sold a pup. Whilst, according to official figures, we never suffered the truly appalling unemployment inflicted on Eurozone, according to official figures, the collective price for this gross policy error has been massive. wages have barely recovered, over 50% of the population have less than £100 in savings (and therefore QE is of no benefit to them) house prices and rents are out of control and the jobs that are available are increasingly grottier. Needless to add no-one will be held accountable for this utter fiasco especially in the absence of anything remotely resembling an oppostion. We don’t even have a shadow cabinet or even the near prospect of one, such is the three ring circus called Labour.
It is at this point I wish to touch upon central bank independence, what a farce that is becoming. Central banks are coming up with increasingly esoteric solutions that are bordering on the insane, such as the abolition of cash the better to foist the equally iniquitous and odious zero interest rate policy. Now call me pernicitty or boring Mr Normal but don’t we have already tried and trusted methods to stimulate the economy? You know the ones we did to get out of Depression in the 30’s like build stuff. MMT suggests the Job Guarantee, Positive Money has QE for the people and the Green Party is the first to start discussing the concept of a Universal Basic Income. We have so many great ideas so why the hell is some bunch of unelected technocrats in Charge?
I have to be fair the BoE seems almost embarrassed about the economic clout they wield and frequently point back to government asking “what are you doing?”. I hope you’ll read Simon’s paper so I’ll link to it one more time
I would carry on but the rules of this blog are one hour to write, 1000 words tops.
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