Home > Economics - General > Blogging the Zombies: Austerity (revised)

Blogging the Zombies: Austerity (revised)

November 20th, 2011

Update 21 November I’ve revised this as a result of thinking about the comments, though I haven’t yet had time to take all the comments on board. The main change has been to focus specifically on the idea of “expansionary austerity”. As Keynes said in 1937, public sector austerity is desirable if the economy as a whole is booming. And, later in the chapter, I’ll talk about whether austerity is sometimes the least bad response to problems of foreign debt. The claim that is implicit in the current policies of the ECB, the UK Tories and the US Republicans is not merely that austerity is necessary as a response to debt but that it makes sense as a response to a deep recession. This idea is commonly described as “expansionary austerity” End Update note

I’m working on a paperback edition of Zombie Economics and adding a new chapter on austerity. Like last time, I plan to blog it in sections and take advantage of comments and criticisms from readers. I’m opening up with the intro, but plan to serve up something more substantive soon.

 

“The boom, not the slump, is the right time for austerity at the Treasury.” – Keynes 1937
Keynes, John Maynard. 1937/1983. Collected Writings of John Maynard Keynes, vol
21. London: Palgrave Macmillan

Most of the zombie ideas discussed in the first edition of this book flourished in the late 20th century, and were killed, at least as defensible theories, by the evidence of the Global Financial Crisis. By the time I began writing in 2009 it was evident that these ideas, so recently declared dead and buried by virtually all observers, were clawing their way back to a zombie life. I hoped that economists and policymakers would have the good sense to lay them to rest once and for all.

In reality, the opposite has happened. The zombie ideas I criticized continue to walk the earth and do immense damage. Worse still, the long-buried corpse of an idea discredited ever since the Great Depression have re-emerged. The zombie economics of ‘expansionary austerity’ now threatens to turn what is already the worst slump to afflict North American and Europe since 1945 into a new, and global, Great Depression.
The advocates of expansionary austerity make two claims. The first is that our current problems are the result of governments living beyond their means. The claim is absurd on the face of things – there is no plausible link between government budget deficits and the speculative bubble and bust that produced the Global Financial Crisis – but it resonates with deeply imbued beliefs about the virtues of thrift and the need for sacrifice as a response to adversity.

The second, even less plausible, claim is that the way to secure a sustainable economic recovery is for governments to spend less[1] thereby making room for the private sector. The painfully evident fact that there is already plenty of room for private expansion, in the form of unemployed workers and idle factories, is simply ignored.

As Keynes observed during the depths of the Great Depression, austerity (that is, tight control over public expenditure, and measures to put government budgets into balance or surplus) makes sense when the economy is booming, and there is excess demand for resources of all kinds. Surpluses built up in good times can be used to repay debt or create ‘fiscal space’ for an expansionary stimulus in response to an unexpected contraction. But the use of austerity measures at a time when the economy is already depressed will only make matters worse. The contractionary effects of austerity will reduce government revenues and undermine attempts to balance the budget.

Just as zombies are grim and distorted versions of their living selves, so the ideology of expansionary austerity is a grim and menacing version of the ideology of market liberalism. In the triumphalist 1990s, Thomas Friedman’s metaphor du jour was the ‘Golden Straitjacket’. The idea was that, while governments now had no choice but to adhere to the dictates of market liberalism, their citizens would be richly rewarded when they did so. Now the claim is that we need to suffer the pains of austerity, but that the eventual reward will be nothing better than to return the economy to the more-or-less normal functioning that has delivered little or nothing to most of the population over the decades of market liberalism.

This zombie idea is at least as powerful as any of those I attacked in the first edition of this boo. As I write this, it has already defeated any hopes for a rapid recovery from the long slump that has followed the Global Financial Crisis. It is on the verge of destroying the common European currency and, quite possibly, the European Union itself. In the United States, Republican demands for austerity have repeatedly brought the political system to the brink of collapse. The shutdown of the government, and even default on US public debt, have been averted only at the last possible moment, and may yet occur.

Nor is the rest of the world immune. Even countries that avoided the worst impacts of the Global Financial Crisis would find it difficult to navigate through a new crisis, with a likely further contraction in global trade and disruption of capital flows. Yet this seems to be the inevitable outcome of the policies being pursued in the US and, even more, in Europe. Expansionary austerity is the deadliest of zombie ideas.


[1] Some advocates of expansionary austerity also advocate higher taxation as a route to budget balance. More commonly, the “austerians” favor a shift in the tax burden, away from corporations and the wealthy, and on to workers, the middle class, and (via hihger sales taxes) the poor.

“The boom, not the slump, is the right time for austerity at the Treasury.” – Keynes 1937
Keynes, John Maynard. 1937/1983. Collected Writings of John Maynard Keynes, vol
21. London: Palgrave Macmillan
Most of the zombie ideas discussed in the first edition of this book flourished in the late 20th century, and were killed, at least as defensible theories, by the evidence of the Global Financial Crisis. By the time I began writing in 2009 it was evident that these ideas, so recently declared dead and buried by virtually all observers, were clawing their way back to a zombie life. I hoped that economists and policymakers would have the good sense to lay them to rest once and for all.
In reality, the opposite has happened. The zombie ideas I criticized continue to walk the earth and do immense damage. Worse still, the long-buried corpse of an idea discredited ever since the Great Depression have re-emerged. The zombie economics of ‘expansionary austerity’ now threatens to turn what is already the worst slump to afflict North American and Europe since 1945 into a new, and global, Great Depression.
The advocates of expansionary austerity make two claims. The first is that our current problems are the result of governments living beyond their means. The claim is absurd on the face of things – there is no plausible link between government budget deficits and the speculative bubble and bust that produced the Global Financial Crisis – but it resonates with deeply imbued beliefs about the virtues of thrift and the need for sacrifice as a response to adversity.
The second, even less plausible, claim is that the way to secure a sustainable economic recovery is for governments to spend less[1] thereby making room for the private sector. The painfully evident fact that there is already plenty of room for private expansion, in the form of unemployed workers and idle factories, is simply ignored.
Just as zombies are grim and distorted versions of their living selves, so the ideology of expansionary austerity is a grim and menacing version of the ideology of market liberalism. In the triumphalist 1990s, Thomas Friedman’s metaphor du jour was the ‘Golden Straitjacket’. The idea was that, while governments now had no choice but to adhere to the dictates of market liberalism, their citizens would be richly rewarded when they did so. Now the claim is that we need to suffer the pains of austerity, but that the reward will be nothing better than to return the economy to the more-or-less normal functioning that has delivered little or nothing to 80 per cent of the population over the last decade.
This zombie idea is at least as powerful as any of those I attacked in the first edition of this boo. As I write this, it has already defeated any hopes for a rapid recovery from the long slump that has followed the Global Financial Crisis. It is on the verge of destroying the common European currency and, quite possibly, the European Union itself. In the United States, Republican demands for austerity have repeatedly brought the political system to the brink of collapse. The shutdown of the government, and even default on US public debt, have been averted only at the last possible moment, and may yet occur.
Nor is the rest of the world immune. Even countries that avoided the worst impacts of the Global Financial Crisis would find it difficult to navigate through a new crisis, with a likely further contraction in global trade and disruption of capital flows. Yet this seems to be the inevitable outcome of the policies being pursued in the US and, even more, in Europe. Expansionary austerity is the deadliest of zombie ideas.


[1] Some advocates of expansionary austerity also advocate higher taxation as a route to budget balance. More commonly, the “austerians” favor a shift in the tax burden, away from corporations and the wealthy, and on to workers, the middle class, and (via hihger sales taxes) the poor.

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  1. John Quiggin
    November 22nd, 2011 at 22:37 | #1

    I’ve started a new sandpit, and would ask that discussions of MMT/Chartalism be taken there. As with nuclear power, I think we’ve been over all the arguments on this one, or at least I have.

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