[Reprinted from Echidne of the Snakes, with Echidne’s kind permission.]
This European opinion piece on the need for austerity politics has the usual stuff:
That’s fine as far as it goes. But how should full employment be defined? Should we be aiming for a return to conditions as they were before the crisis unfolded in 2007 and 2008? Or should we accept that the boom which preceded the bust was, itself, undesirable and that no policymaker with a reasonable grip on reality should be hoping to see its return?
If so, we need to adjust our expectations of what can be achieved by Keynesian policies. The economic world isn’t composed of simple binary choices along the lines of full employment versus unemployment or recovery versus recession. If we’re coming out of recession, but we don’t want a return to the conditions that preceded the recession, we have to accept that, pre-recession, we were probably living beyond our means.
To that extent, Keynesian policies have limitations. They have certainly helped to prevent a Great Depression Mark II. But they cannot take us back to where we were before the crisis because, at some point, we need to get a grip on the excessive debts which led to the crisis in the first place.
…
Keynesian policies may prevent the worst from happening, but they cannot take us back to a world of leverage where creditors are forever dipping into their pockets to provide money for the profligate to spend on all sorts of madcap ventures. Eventually, debtor nations need to adjust their spending habits. The US, the UK and others have been living beyond their means for many years and will probably have to accept that the level of output and its growth rate are now permanently lower than they appeared to be before the crisis began.The case for austerity rests on accepting this new reality. Austerity is hardly pleasant, but it might just prevent a repeat of the problems which, two years ago, culminated in the worst Western recession since the 1930s. That, in itself, would be some achievement.
What the author discusses are various economic theories, and that is fine. But do try to find the Man Behind The Curtain because he is there. Notice how “we were living beyond our means” where the “we” is left undefined but intended to cover everybody. Notice also “a world of leverage where creditors are forever dipping into their pockets to provide money for the profligate to spend on all sorts of madcap ventures.” Finally, notice how “austerity” is introduced as the proper response to the profligate spending on madcap ventures and to, yes, full employment!
But I very much doubt that the author of this piece is going to now live an austere life. Most likely not a singly yacht needs to be sold nor a caviar dinner canceled. Austerity is intended for the Little People, because it always means cutting back on government spending and unraveling the safety nets on which the less affluent rely in all daily market acrobatics.
And who benefits from that? The rich, because they will then not have to pay higher taxes! They don’t need safety nets and they don’t want to pay higher taxes. Indeed, austerity for us means a comfy lifestyle for them.
Neither are we going to focus on the true profligate who caused the problems! Those tend to belong to the rich and will not suffer from the cutbacks in public spending. Indeed, austerity will be mostly enforced on those who probably never were big spenders at all and who didn’t cause the problems to begin with. Little People. This applies whether a particular Little Person bought too much house or saved carefully and never splurged on anything.
This class aspect or fairness aspect of economic policies is almost always buried underground and its grave made pretty. But you must dig it up, because these policies are not just dry economic theories which we can safely skip.
For instance, the author of this opinion piece tells us that inflation is worse than unemployment and that we must curb inflation, even if that means higher rates of unemployment. What he is really saying is that the wealthy suffer more from inflation (which reduces the value of money) than from unemployment (which doesn’t affect the rich).
Inflation has other negative consequences, of course, such as the problems it causes for people living on fixed incomes, and writing about the question how to control it is perfectly fine. But never take your off the Man Behind The Curtain when reading these stories. He has his hand in your pocket.
I’m pretty sure most journalists working for The Independent, even those in the fairly lucrative opinion-column-writing business, don’t routinely eat caviar or own yachts.
It’s not either inflation or unemployment. It’s both, which is called stagflation. It happened in the 1970ies…
The poor lose a lot from inflation anyway. If you lose a couple of 1.000 dollars in real value (as a result of money printing) when you’re poor, that will affect your life a lot more than if you lose a couple of 10.000 when you’re rich. Also, the rich can buy property and gold to defend themselves.
People in Germany understand that. They have experienced hyperinflation before WWII. People in the US have suffered from deflation then and are more now open to accept devaluation of money. They make a grave mistake though. Falling prices (also wages) or necessary to offer hope for future growth.
Also see:
http://dailycapitalist.com/downloads/inflationdeflation.pdf
Summary
1. Inflation or deflation is a monetary phenomenon. An increase in money supply causes inflation. A decrease in money supply produces deflation. (Ceteris paribus.)
2. Price increases are a result of inflation, not inflation itself.
3. The Fed has been trying to inflate the money supply to end the credit crunch.
4. The Fed’s inflation efforts have been mixed. Most banks are still not lending and credit
and money supply have been declining.
5. Banks are not lending because their balance sheets are loaded with bad CRE debt which
has caused them to be concerned about their financial viability.
6. The government has enabled banks to postpone the inevitable write-downs of bad debt
which has drawn out the credit crunch and has impeded economic recovery.
7. Monetary stimulus has been achieved by the Fed’s Open Market Operations which has
injected almost $1.25 trillion of new money into the economy.
8. The impact of such stimulus has served to benefit the large money center financial
institutions, and does not appear to have aided liquidity or to have stimulated
economic growth other than the financial markets.
9. Government fiscal stimulus has had little positive economic impacts on the economy,
and, as the effect of government spending winds down, we are left with wasteful
spending of no lasting economic benefit and high public debt.
10. Recent increases in consumer spending and consumer lending are temporary blips
caused by government stimulus programs and are having no lasting effect.
11. Money supply has increased since the October, 2008 crash, but there are signs that it is
beginning to decline again.
12. While the CPI has been increasing, increases are modest and are a result of the Fed’s
less inflationary OMO purchases of MBS.
13. The current trend of the CPI seems to be declining.
14. It appears that economic activity is slowing down as stimulus runs out and money
supply declines, and that we are headed for a double-dip recession or decline.
15. Until banks’ balance sheets are cleaned up by resolving the overhang of bad CRE debt,
they will continue to restrict credit and thus constrain the growth of money supply.
16. The deflationists’ analogy to Japan’s experience from 1989 to 2003 is only partially
applicable. The American tradition is to allow banks and businesses to fail.
17. This cleansing process is ongoing but is slow because the government has given banks
incentives to delay the process.
18. The deflationists have yet to show that deflation has occurred as they say. While asset
values are declining, mainly real estate assets, money supply has not crossed the
deflation Rubicon yet.
19. The deflationists seem to conflate the concepts of deflation and deleveraging, which
aren’t the same things.
20. A double-dip recession will put political pressure on the government to take any steps
they can to thwart the decline.
21. An inevitable increase in unemployment will be politically unacceptable to the
Administration and Congress.
22. The government will renew attempts at fiscal stimulus on a grander scale.
23. The Administration and Congress will put pressure on the Fed to counteract the
decline. All politicians and most Keynesians and even Monetarists believe that price
inflation is preferable to price deflation.
24. Inflation destroys real capital which will limit future economic growth.
25. The Fed has limited options to create inflation but they will attempt to do so by
injecting money into the system through OMO.
26. One option is to buy Treasury paper, thus monetizing federal debt, which will ultimately
create price and monetary inflation.
27. Another option is to buy CRE debt from smaller banks to clean up their balance sheets
and allow them to resume lending activities and expand money supply which will result
in inflation.
28. The problem will these alternatives is that they will serve to reduce economic growth
while at the same time create inflation, which is called stagflation.
29. If inflation gets out of hand, it is probable that the government will impose temporary
price and wage controls while they counteract inflation through increased interest
rates.
The writer is referring to debt incurred by government – and to austerity in cutting back government policy.
It’s a neat trick to switch the onus of those awful financial decisions onto “the rich” and the private sector.
Doesn’t the burden lie with the folks who borrowed the money in all our names – the politicians who borrowed money to pay for lollipops – excuse me, “social safety nets” – to keep themselves in office?
But no no no, big government is good. That connection, as you say, must be obscured. So we’ll shift the blame onto the private sector.
You’re not so bad at this man-behind-the-curtain stuff, yourself…
Define “rich”. The majority of the tax money that pays for government services and activities and to service the public debt comes from the middle class. It’s the middle class that will benefit from tax cuts, not the rich, and it’s the middle class that will be punished by tax increases. Tax cuts won’t go towards paying for yachts and caviar, they’ll go to make car and mortgage payments.
Notice how “we were living beyond our means” where the “we” is left undefined but intended to cover everybody.
If someone is spending more money than they make, then they are living beyond their means. That means that the people getting government services were living beyond their means. Ever remember the old Bible story about Joseph interpreting Pharoh’s dream to the 7 fat years and the 7 lean years? Expansion and contraction of the economy for whatever reason is thousands of years old. We expanded social services in the fat years and now wonder why we can’t pay for them in the lean years.
I don’t believe that the middle class actually benefits from reductions in vital services like police, education, fire, road & bridge maintenance, and so on.
What? People who had children in the public school system were living beyond their means? People using public roadways were living beyond their means? People making use of emergency services were living beyond their means?
I can’t be understanding you correctly.
RonF, I’m not following your leap from “most tax money comes from the middle class” (suggesting, by the way, that the upper class isn’t paying a proportionate share) to “most tax cuts will benefit the middle class”.
RonF,
Responding to
And who benefits from that? The rich, because they will then not have to pay higher taxes! They don’t need safety nets and they don’t want to pay higher taxes. Indeed, austerity for us means a comfy lifestyle for them.
with
The majority of the tax money that pays for government services and activities and to service the public debt comes from the middle class. It’s the middle class that will benefit from tax cuts, not the rich, and it’s the middle class that will be punished by tax increases.
is pretty weird.
The tax burden in the US shifted onto the middle class back in 2001 because of the Bush tax cuts, which massively favored the rich. If we need to raise more money for the government, raising taxes on the rich seems like the pretty obvious solution (and indeed, there is no one in the political system advocating for increased taxes on the middle class). Taxes on the rich in the US are at a historically very low level for the modern US.
The middle class would only benefit from tax cuts if the tax cuts were directed at the middle class. They would only be harmed by tax increases if the tax increases were on the middle class. The rich benefit from cutting government programs instead of increasing taxes because the rich are the natural target for tax increases right now (even beyond the historically low tax rates on the rich, while 55% of the country has seen declining wages during the recession, the rich have on average gotten richer). The middle class benefit from not seeing government programs cut, and are not harmed by tax increases on the rich.
For the moment, I’ll define rich as > $250,000 household income, but I’d accept a slightly higher or lower cutoff, or even a variable cutoff based on region. What is your definition?
CharlesS, my definition is nearly the same as your – 260k instead of 250k. As everyone knows and agrees, rich is anyone who makes twice as much as you do.