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. Robert
    November 20th, 2011 at 10:57 | #1

    Are you planning to discuss whether austerity can make sense as a ‘least bad option’ for countries which actually do risk much higher interest payments or later default if they continue running very large deficits (i.e. Spain as a possible example)? Obviously you don’t want to get into that situation in the first place, but if you are.

    “were killed, at least as defensible theories, by the evidence of the Global Financial Crisis”

    I appreciate the rhetorical value of this line, but I found it somewhat grating in the hardcopy version. Few ideas, or at least sophisticated versions of them, can or should be laid to rest by a single event. If anything you are underselling your arguments by emphasising a black swan event like the GFC, especially as its ultimate causes and ‘solutions’ are widely disputed. If ideas like austerity or privatisation are to be rejected, surely we would want decades of experience leading us in that direction rather than an outlier event!

  2. Fozzy
    November 20th, 2011 at 11:31 | #2

    Whilst I support the general thesis of what you’re arguing regarding Austerity, I think it’s wrong to say it has vanished since the Great Depression. There are many countries of the 2/3rds world who have had Austerity measures imposed on them since the 1930′s.

    Is it a case of we are now seeing a sense of equality prevailing where bad policies are being equally applied to the rich west as well as the poor “south”?

    I’d be also interested in how you see your zombie theories mesh with Naomi Klein’s hipothesis of Disaster Capitalism. It seems to me that her theory is the justification for the reanimation of the zombie theories you have written about.

  3. Ikonoclast
    November 20th, 2011 at 12:37 | #3

    I am amused when people (usually neoliberals in economics) use the “black swan event” defence for their theories. A black swan event refutes the general hypothesis. Let’s see how it works.

    “The Titanic is unsinkable.” – Hypothesis.
    “An iceberg gashes the whole side of the Titantic breaching many of its tranverse bulkheads and sinking it. – Black Swan event which refutes the hypothesis.

    “The Great Moderation shows the modern global capitalist economy has achieved the permanent equilibirum predicted by Monetarism and Neoclassical Economics.”- Hypothesis

    “The Global Financial Crisis hits with deleveraging and severe recessions around most of the globe.” – Black Swan event which refutes the hypothesis.

    The WHOLE point of any black swan event (from an empirical point of view) is that it is an unforeseen but nevertheless comprehensive real world refutation of the applicable general theory.

    The ignorance of our modern political and economic classes (with rare exceptions) is staggering. The notion that governments (with a fiat currency) have to borrow and pay interest is just a nonsense. In a time of recession of depression, governments with a sovereign fiat currency can run a deficit. The extra counter-cyclical spending will usually revive the economy. There is no danger of inflation unless the stimulus is excessive and goes beyond the shortfall of aggregate demand caused by the private economy downturn. How can Keynes be forgotten? It as bad and as ridiculous as if physics and physicists forgot Einstein. Milton Friedman’s work is ideological nonsense with no grounding in empirical reality.

    The problem with the Euro is the member nations gave up the right to produce their fiat currency. At a stroke, the lost sovereign control over their money system and economy and handed that power to bankers and financiers.

  4. Tim Dymond
    November 20th, 2011 at 12:49 | #4

    ‘If ideas like austerity or privatisation are to be rejected, surely we would want decades of experience leading us in that direction rather than an outlier event!’

    Margaret Thatcher was elected in 1979. We’ve had over thirty years of privatisation policies and austerity because it’s good more us budgeting. How much more experience do you want?

  5. Robert
    November 20th, 2011 at 15:12 | #5

    “The WHOLE point of any black swan event (from an empirical point of view) is that it is an unforeseen but nevertheless comprehensive real world refutation of the applicable general theory.”

    A single event only clearly refutes X only if the claim was that it would never occur, which is a prediction rarely made. In any case it would be nicer to have a body of evidence larger than one event.

    “The notion that governments (with a fiat currency) have to borrow and pay interest is just a nonsense. In a time of recession of depression, governments with a sovereign fiat currency can run a deficit. ”

    Sure but running large levels of seigniorage has its own problems and as you point out is not an option open to many countries today. It’s an issue that should be addressed I think.

    “Milton Friedman’s work is ideological nonsense with no grounding in empirical reality.”

    But Friedman advocated monetary expansions during downturns, which is what you’re saying we should do.

    Tim: I was just saying that 1980-2007 is more important than 2007-2010.

  6. Robert
    November 20th, 2011 at 15:29 | #6

    And any mention of Klein’s Disaster Capitalism prompts me to link to this classic: http://www.tnr.com/article/books/dead-left?page=0,1

  7. KB Keynes
    November 20th, 2011 at 16:05 | #7

    ahh the irony.

    Austerity should have been practiced by most countries as Keynes stated (and John showed sometime ago.)

    They didn’t and produced in some instances excessive debt. now they are using Austerity at the wrong time it is making the position (debt) worse.

  8. Freelander
    November 20th, 2011 at 16:09 | #8

    Interesting that ‘Robert’ doesn’t seem to understand the meaning of a ‘black swan’ event. Talk of an ‘outlier’ is a very Greenspanian approach. “The problem is not with ‘our’ theories, the problem is with the data.”

    The effects of the GFC appear to be persisting for quite some time. One horribly large ‘outlier’ to attempt to sweep under the carpet!

  9. November 20th, 2011 at 16:53 | #9

    Virtually free energy will last forever.

    There will always be enough for everyone.

    Humans will always prey on each other.

    Blog comments will always be a waste of time.

    All swans are white.

    pop

  10. Ikonoclast
    November 20th, 2011 at 17:18 | #10

    Let’s look at these statements by Robert.

    “A single event only clearly refutes X only if the claim was that it would never occur, which is a prediction rarely made.”

    “In any case it would be nicer to have a body of evidence larger than one event.”

    In classical science, predictions of theory are precisely of the nature “given these preconditions this event will never occur or that event will always occur”. The discovery or invention of a perpetual motion machine would refute the 2nd Law of Thermodynamics. Claims were made in some quarters that the Great Moderation was permanent and extreme economic cycles were a thing of the past. These claims are now clearly refuted.

    We do have a body of evidence greater than one event. The following depressions and major recessions are part of the historical record.

    “Great Depression – The best-known depression was the Great Depression, which affected most national economies in the world throughout the 1930s.

    Starting with the adoption of the gold standard in Britain and the United States, the Long Depression (1873–1896) was indeed longer than what is now referred to as the Great Depression, but shallower.

    Panic of 1837 – The Panic of 1837 was an American financial crisis, built on a speculative real estate market. The bubble burst on May 10, 1837 in New York City, when every bank stopped payment in gold and silver coinage. The Panic was followed by a five-year depression.

    Regional depressions in the 1970s, 1980s, and 1990s – Several Latin American countries had severe downturns in the 1980s: by the Kehoe and Prescott definition of a great depression as at least one year with output 20% below trend, Argentina, Brazil, Chile, and Mexico experienced great depressions in the 1980s, and Argentina experienced another in 1998–2002.

    This definition also includes the economic performance of New Zealand from 1974–1992 and Switzerland from 1973 to the present, although this designation for Switzerland has been controversial.

    Over the period 1980–2000, Sub-Saharan Africa broadly suffered a fall in absolute income levels.” – Wikipedia.

  11. trout
    November 20th, 2011 at 17:31 | #11

    Robert,

    Many of the ‘zombies’ in the book were shown to be untrue prior to the GFC. Just look at the tech boom and Asian financial crisis. The GFC was merely (what should have been) the final nail in the coffin. But even so, the events following Lehman’s collapse are more than enough to kill ideas such as the great moderation, given what happened directly contradicts their central premise. Also, suggesting the collapse of the global banking system is an “outlier event” and shouldn’t change our views on policy is, to be blunt, bad economics.

  12. Rob
    November 20th, 2011 at 18:41 | #12

    Let’s keep this focused – I’m not trying to focus on Quiggin’s conclusions in ZE, I’m asking how convincing the GFC alone is regarding them.

    “In classical science, predictions of theory are precisely of the nature “given these preconditions this event will never occur or that event will always occur”.

    But economics is not some pure physics. Any theory which said the GFC could not occur is dead in the water, but we’re doing social science here, so the theories are more likely to say ‘X will be uncommon given A, B, C and D’. There’s a lot of wiggle room that allows you to say your ideas are not invalidated by one event. The conditions weren’t met, it was just an unlikely event which occurred, etc. That’s why in social science the broader the evidence base the better. Other explanations become progressively less plausible with more evidence.

    “We do have a body of evidence greater than one event. The following depressions and major recessions are part of the historical record.”

    Right, and Quiggin goes into that history well in the book, but then in the rhetoric focuses excessively on the GFC for my taste.

    “Also, suggesting the collapse of the global banking system is an “outlier event” and shouldn’t change our views on policy is, to be blunt, bad economics.

    Sure would be, lucky I didn’t say that. The problem with changing policy based on the GFC is that the causes and how to prevent them are hard to determine when you have only one data point because so much is going on. How should we change banking regulations after the GFC? A hard question. We need to look over as many financial crises as possible to answer that question and not give excessive weight to the most recent one.

  13. Rob
    November 20th, 2011 at 18:47 | #13

    “But even so, the events following Lehman’s collapse are more than enough to kill ideas such as the great moderation, given what happened directly contradicts their central premise.”

    Agree in that case – but for others (privatisation, GSGE, austerity, trickle down, weak efficient markets etc) the GFC is not the only, or best thing, you want to look at.

  14. Quentin R
    November 20th, 2011 at 18:49 | #14

    It might be difficult to argue against “deeply imbued beliefs about the virtues of thrift and the need for sacrifice as a response to adversity.” Perhaps it needs to be put that these are admirable qualities in a society of individuals – those who are better off make some sacrifice for the less fortunate to avoid unrest or general social decline.

    But governments are set up by societies to carry out social projects. Governments collect money and spend it for the benefit of their society. When a society faces adversity, how should its government respond? Collect less from its constituents? That sounds thrifty. And what sort of sacrifice could a government provide? It could spend more than it had been, to provide more assistance and/or projects for constituents.

    For a government to respond to some societal adversity by increasing its collections and/or cutting its expenditure is the exact opposite of “thrift and the need for sacrifice as a response to adversity.”

  15. Rob
    November 20th, 2011 at 18:55 | #15

    I think it does play to the idea of the virtue of thrift, but I’d also get in early on that many non-economists understandably make the fallacy of composition.

  16. Dan Kervick
    November 21st, 2011 at 01:10 | #16

    @Robert

    But Friedman advocated monetary expansions during downturns, which is what you’re saying we should do.

    Not really. He was advocating a fiscal expansion with monetary support.

    The problem with monetarists is that they seem to think everything comes down to the money supply rather than the use of the money supplied. They seem not to understand the difference between the government’s baking a million loaves of bread and distributing them to a million hungry people and the government’s baking a million loaves of bread and placing them in the freezers of nation’s reserve bread bank, where they sit waiting for the day the bread bankers find paying customers among the hungry millions.

  17. November 21st, 2011 at 01:41 | #17

    First, a general point and then a specific point regarding Greece.

    I start from the premise that somewhere each state has a natural limit to the amount of debt it can take up. I wouldn’t want to speculate how big this limit is but somewhere out there it is. Maybe it’s the 60% as per Maastricht or the 200% as in Japan but, again, somewhere it is. Let me call it the “borrowing capacity of a state”.

    Once a state has reached that borrowing capacity, say 200% of GDP, then it can incur additional borrowing only to the extent that GDP grows.

    Suppose a state starts at zero utilization of borrowing capacity. If it goes in one generation from zero to 200%, only one generation has used up the entire borrowing capacity. This generation will have had a ball but following generations have to limit their borrowings to the growth rate in the economy.

    Question: is it fair to future generations if one generation alone uses all the borrowing capacity of a state?

    Specifically regarding Greece. Total government expenditures of Greece (including full interest) are around 50% of GDP. That is by all European standards not at all out of whack (Austria is 53%; France is 56%). So the claim that Greece’s spending is out of control is simple not true. True is that Greece’s government spending is characterized by irrational distortions and unfairness (one Greek may collect pensions of 10.000 EUR per month for being retired and a doctor at the Health Care Service may earn 900 Euro per month for working).

    Two things which were not done would appear logical to do. First, overall government expenditures will NOT be reduced (particularly not in the presence of recession) but they will be dramatically restructured in order to increase fairness in society.

    And two: government revenues are only 39% of GDP (compared to 48% in Austria and 49% in France). Thus, government revenues will be increased in order to close the budget gap but the increase will come as little as possible from the “usual suspects” (salaried employees and pensioners) because they have been paying taxes all along. Instead, the new tax revenues will come from “the others”, those who have not made contributions to society in the past.

    And, finally, let us please remember Keynes altogether and not just one side of him. Yes, increase state expenditures when the private sector recedes but, by golly, build up reserves when the private sector blossoms!

    http://klauskastner.blogspot.com/2011/10/greek-tax-evasion-possible-solution.html

  18. November 21st, 2011 at 04:17 | #18

    I m already looking forward to reading the paperback edition. Best from Zurich.

  19. jrbarch
    November 21st, 2011 at 10:28 | #19

    Dear John,

    Yeah – the Aztecs sacrificed human lives (austerity) because they believed the world would stop; others in human history have thought the earth to be flat, or at the center of the (168 billion light years in effect) universe. It took a while to work out where rain comes from – and that the water supply is constant!

    John, the biggest ZOMBIE WALKING is that Govt. has to tax or borrow ‘money’ from nongovt. in order to spend. That is one huge zombie that deserves a place in the hall of human stupidity.

    The fundamental and exquisitely simple insight is that Govt. can never run out of its own currency – it’s essentially just magnetic imprints on HDD’s. You cannot talk about Govt. ‘debt’ or ‘savings’ or ‘deficits and surpluses’ or ‘balances’ in any other context than that sovereign reality. The Govt. ‘deficit’ (as MMT tirelessly reminds us) is $-for-$ private sectors ‘savings’ – taxes ‘destroy’ money and regulate aggregate demand.

    Why do economists assume (just because some idiot in Econ 101 told them and nobody ever bothers to question it) Govt. can never ever ever – ‘cross my heart and hope to die absolute under the shining sun and blue sky’ – run continuous ‘deficits’: (not saying it should in the wider context of sectoral balances (G-T)+(I-S)+(X-M) = 0.

    Deficits do not have to ‘cost’ anything other than keystrokes. America has run a deficit for most of its existence – who does Govt. have to pay back if it tells the bond markets to jump in a lake – just Itself!!! Numbers on a scoreboard. And what is so deserving of corporates they they need risk free welfare with no C’Link style ‘pathway plan’ anyway? If Govt. wants to balance its budget for some weird reason all it needs is the above sectoral equation: but that doesn’t necessarily address unemployment and insufficient aggregate demand as you have written.

    So Yes, completely agree about deficit spending and stimulating aggregate demand in an environmentally and socially responsible way, whenever and wherever there is spare capacity in the economy – people need their dignity and work. And the modern version of austerity is only different in degree to the Aztecs. But the only reason your ‘zombies’ are still walking is that the mother of all ZOMBIES still keeps popping them out! Like snake heads on the hydra, we need to pick up the right weapon and aim for the right head (a Herculean task)!

    How that power to create ‘money’ and the power to tax (destroy money) is used in allocating resources between command by Govt. and command by the private sector, is the real social and environmental issue; and who controls the monetary system – banks or the Govt. You may as well try balance the atmosphere as balance Govt. debt.

    Cheers,
    jrbarch

  20. David Irving (no relation)
    November 21st, 2011 at 11:23 | #20

    Robert @ 1, I take issue with your characterisation of the GFC as a black swan event. In fact, it was entirely predictable by anyone who’s been paying attention, Steve Keen being a prominent example.

  21. Chris Warren
    November 21st, 2011 at 11:36 | #21

    @jrbarch

    Deficits do not have to ‘cost’ anything other than keystrokes. America has run a deficit for most of its existence – who does Govt. have to pay back if it tells the bond markets to jump in a lake – just Itself!!!

    Ratcheting deficits end up costing workers their wages, and finally their jobs.

    The public looses services, and pensioners loose incomes.

    Society as a whole suffers future inflation.

    Crime increases and in general, crisis tendencies explode out of control as shown here;

    http://www.tinyurl.com/capitalist-crisis

  22. Chris Warren
    November 21st, 2011 at 11:36 | #22

    @jrbarch

    Deficits do not have to ‘cost’ anything other than keystrokes. America has run a deficit for most of its existence – who does Govt. have to pay back if it tells the bond markets to jump in a lake – just Itself!!!

    Ratcheting deficits end up costing workers their wages, and finally their jobs.

    The public looses services, and pensioners loose incomes.

    Society as a whole suffers future inflation.

    Crime increases and in general, crisis tendencies explode out of control as shown here;

    http://www.tinyurl.com/capitalist-crisis

  23. November 21st, 2011 at 11:42 | #23

    @jrbarch

    In my model world there is a valley that is dedicated to growing rice.

    Around the field there is a small population of rice growers and consumers. Every year the rice grows and the farmers harvest the rice. The local “government” (actually just a “head man” and a fellow who, when he is not tending his own rice paddy, doubles as the local policeman with typical roles of rounding up stray dogs and dropping them off at the gate of the temple so the monks can care for them) collects a portion of the rice (tax) and puts it into storage for bad years or for those few members of the village who are too ill or old to grow rice and who have no family to support them.

    One year the rice crops fail. But that’s ok because there’s enough rice in the taxed store to see them through.

    The next year the rice crop fails again and though there is enough to see everyone through the store is depleted.

    If the rice crop fails another year then what?

    According to those who believe the government can run a deficit forever all will be well because they will just go into negative rice storage – they can distribute rice indefinitely because it is after all just numbers in a ledger.

    I wonder how long those villagers will last eating negative rice.

    pop

  24. Dan
    November 21st, 2011 at 13:06 | #24

    POP: While no advocate of MMT myself, I am interested to see how your model changes when you account for the possibility of the government being able to print rice.

  25. gerard
    November 21st, 2011 at 13:26 | #25

    Wow Robert, do you actually think that New Republic review of The Shock Doctrine is a “classic”? Or did you accidentally link to the wrong review?

  26. socrates
    November 21st, 2011 at 13:34 | #26

    First, I think it is worth pointing out that the adherence to zombie economics in the west threatens to plunge the western world into depression, but perhaps not the globe. Asia and South America (and Australia) continue to grow. The difference is signifcant. Their governments did effectively stimulate their economies during the GFC, and their outcome has been far superior. Thus we have proof not only that economic liberalism failed, (in the GFC) but that the opposite worked (in the aftermath). Hence it is important to clarify that the recession and depression are in the western world, not global.

    Second, I think the possibility also needs to be considered that, post the GFC, these ideas are not so much zombies as trojan horses. That is, the current supporters of economic liberalism and austerity know they are false. They are not arguing in good faith. They know that their ideas are discredited, but choose not to admit it. They retain “support” for economic liberalism because it serves their purpose in other ways. Those purposes do not relate to improving economic performance of their nation.

    I think several plausible reasons can be posited that might support this. Wealthy investors would prefer austerity to inflationary stimulus, so that the (absurdly inflated) value of their existing financial assetts is not diminshed. They do not care about growth in (the rest of) the economy, only controlling inflation. That is dishonest, and unethical, but still ratonal self interest. Banking regulators who have become captive to those they regulate might also fall into this category.

    Some may act for non-economic motives. Politically partisan agents may see austerity as an opportunity to dismantle aspects of the State they oppose. One rarely hears an “economic liberal” arguing for defence to be cut, more often health, education or social welfare. This sounds more like an exercise in political ideology, not economics.

    Finally there is ego and vanity. Some professional economists have made their careers arguing in favour of economic liberalism. Admitting it is wrong now would take some humility and self-honesty. and any chance at a Nobel prize in economics will be gone if you admit your theories are wrong.

    In summary, I am suggesting that some economic “commentators” might have an adherenece to the zombie ideas that resembles the professed adherence of most right wing politicians to religeon. Deep down they may have no belief whatsoever, but it would hurt their careers to ever admit it publically. So they cling to their “faith”, at least publically.

  27. November 21st, 2011 at 13:36 | #27

    @Dan

    :-)

    Actually, in my little village there is a little old man who spends his retirement years staring through a huge magnifying glass writing the village history on grains of rice. His grandson who has been to the big city is trying to get him to move into mass production with modern 3D printing technology but the old man thinks it’s just a passing fad and will never last.

    pop

  28. Dan
    November 21st, 2011 at 14:28 | #28

    @POP – that’s wonderful, but are you going to address the question? (No probs if not, but it suggests that your example is of very limited relevance.)

  29. socrates
    November 21st, 2011 at 14:55 | #29

    Further to 25, I wasn’t just being flippant about defenders of economic liberalism not wanting to admit they were wrong. One of the fathers of financial market deregulation was Eugene Fama, of Efficient Markets Hypothesis fame. He was given an award by Deutsche Bank in 2005, just before the crash. Three years later DB made their first loss in history and wrote off 7 billion Euro in 2008.
    http://www.guardian.co.uk/business/2009/feb/05/deutsche-bank-loss-dividend

    Fama is still defending his hypothesis, now saying it never guaranteed stability, and blaming government regulation for the failure:
    http://www.chicagobooth.edu/news/2011-10-28_fama.aspx

    To admit economic liberalism has failed would negate most of Fama’s career. He can’t do it.

  30. Dan
    November 21st, 2011 at 14:59 | #30

    Subedit – second last paragraph, first line: boo -> book.

    Apols for pedantry.

  31. jrbarch
    November 21st, 2011 at 15:06 | #31

    @Chris Warren

    Why would any sane Govt. spend beyond the economy’s capacity if price stability is their mandate? Am not daft enough to be advocating racheting up deficits ad infinitum, which I had hoped to have written clearly enough?

    Besides, as you know – workers in the US have lost wages, jobs, services, pensions, not because Govt. deficit spending is too large; but largely because of the crimes of the 1% and their tendency to create GFC’s, strip assets, create debt peonage and buy Govt.

    The only spender left at the moment that could support aggregate demand and make a difference is Govt. – and the Govt. deficit is too small for the real economy. ‘Austerity’ is on the horizon for Main St.; the fraudulent banks have been nicely bailed out. Great!!!!

    There is actually no inflation in sight so that is not an issue.

    Sorry Chris, I still think the BIG ZOMBIE is very few people understand ‘fiat money’ and how to safely use it. Govt. can deficit spend up to capacity. I wish I could buy the Peak Oil Poet’s house with a packet of basmati!!

    Cheers …
    jrbarch

  32. Tom
    November 21st, 2011 at 15:07 | #32

    @Dan

    Printing money don’t solve foreign debt problems because the currency is floated and any inflationary money printing measures will just significantly depreciate the exchange rate (see Zimbabwe) or foreign creditors charging higher interest rate to recover their value. While hyper-inflationary money printing method can help solving foreign debt issues in the long run, it will have the worst possible outcome for the lower/middle class workers of the economy as their welfare transfers and wage level does not always follow inflation.

  33. Dan
    November 21st, 2011 at 15:33 | #33

    @Tom

    No doubt. I was simply pointing to things being more involved than POP’s example suggested.

  34. November 21st, 2011 at 15:38 | #34

    @Dan

    Dan

    think about what it means when you suggest that a government can print rice.

    Sorry, but they can’t. Rice has to be grown. Wealth has to be produced before you can tax and spend.

    Now of course, if my little model village was not isolated but a part of a larger group of villages then between them they might be able to survive longer spells of isolated crop failure through those villages suffering failures borrowing rice from those that do not.

    What happens though when you scale up the failures?

    You see the bottom line is that you can not print wealth – you can only print currency – hence you can only achieve limited success through such policy – typically you in effect reduce the amount of rice each person gets to consume – both during failures and during good times when borrowings must be paid back.

    Too many people forget that the real market is a market of wealth and that if the market becomes so swamped with promises to repay wealth that can not be repaid then the end result is, for somebody, starvation.

    Yes, maybe right now there’s enough wealth for everyone to borrow and yes maybe there’s enough faith in the future wealth that debts can be restructured this time.

    Maybe.

    But what happens when/if we his a patch where there just is not enough now or in the future?

    What are the results then?

    pop

  35. Dan
    November 21st, 2011 at 15:44 | #35

    I don’t think you understand what’s being argued here – or you’ve deliberately missed my point.

  36. November 21st, 2011 at 15:47 | #36

    @Dan

    Maybe you should explain then – assume you are talking to a ten year old.

    pop

  37. Dan
    November 21st, 2011 at 15:54 | #37

    I don’t know that I can go quite that far, but I’ll give it a shot, with the caveat that MMT bends my brain as well. I certainly haven’t properly teased out the consequences.

    This works better if you consider finance capital in isolation and forget about wealth – yes, we all agree there’s a finite amount of that.

    Say a government borrows from a bank in its own currency. Rather than deferring the debt, the government can simply print more money (after all, it owes something that is has as much of as it likes, because it can print it). Therefore, when a government “owes” money, that’s actually just a semantic game.

    In short, the true corollary of government spending is not debt; it’s inflation. Government debt is just a game we play, which may be useful for keeping inflation under control but isn’t an accurate descriptor.

  38. Dan
    November 21st, 2011 at 15:55 | #38

    The important thing to note is that money has different properties from commodities like rice.

  39. Robert
    November 21st, 2011 at 16:22 | #39

    “Not really. He was advocating a fiscal expansion with monetary support.”

    Friedman advocated that at the zero interest rate lower bound: http://macromarketmusings.blogspot.com/2011/06/brad-delong-jim-grant-and-milton.html

    “Wow Robert, do you actually think that New Republic review of The Shock Doctrine is a “classic”?”

    It makes Klein look like a fool for producing internally incoherent conspiracy theories and not knowing basic facts about the people she claims are the conspirators.

    “I take issue with your characterisation of the GFC as a black swan event. In fact, it was entirely predictable by anyone who’s been paying attention, Steve Keen being a prominent example.”

    Some people will always predict an event by chance – it’s hard to know which ones deserve credit and which ones get lucky. But regardless, we can agree that a large majority of years countries do not facing financial crises. So a) the experience of financial crises is not the only thing that matters to determining policy and b) the GFC is just one example of a financial crisis and is an unusually severe one.

  40. November 21st, 2011 at 16:26 | #40

    @Dan

    The important difference as far as I can see is that the nature of money confuses people no end whereas the nature of real things is something everyone can grasp.

    People confuse the following terms: money, currency, wealth.

    Money as far as I believe is no different to wealth. It’s an abstract universal wealth – ie it might be in rice or in gold or in currency that is backed by rice or gold.

    If what you think can be reduced to “printing rice” then you do not understand money or wealth or currency.

    We all wish we could print rice or gold or Bentlys or iPads but we can’t really (though yes i know about 3D printing)

    like, you can’t print oil

    and maybe the bottom line for the GFC is that we hit that ceiling and that we’ll keep hitting it until it ceases to constrain us.

    pop

  41. gerard
    November 21st, 2011 at 16:42 | #41

    more like a classic FAIL Robert. Of course, you could always try reading the book yourself, something you obviously haven’t done.

  42. jrbarch
    November 21st, 2011 at 17:16 | #42

    @jrbarch
    Oops – link to source material: Can taxes and bonds finance Govt. spending? Stephanie Bell (Kelton)

    ” …it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of high-powered money.”

  43. Dan
    November 21st, 2011 at 17:18 | #43

    POP: Nope, you’re still missing it. Fiat currency isn’t wealth at all. It’s related but has quite different properties.

  44. November 21st, 2011 at 17:30 | #44

    @Dan

    Then i’m not missing it.

    In fact that is the whole point. If it’s currency that people borrow and repay and it is not tied to anything concrete then there is nothing much to stop the issuers printing as much as they think they need.

    I’ve some good books on the subject of money and currency etc though most are from the evil von Mises institute :-)

    pop

  45. Dan
    November 21st, 2011 at 17:49 | #45

    But you said: “Money as far as I believe is no different to wealth. It’s an abstract universal wealth – ie it might be in rice or in gold or in currency that is backed by rice or gold.”

    What if it’s backed by itself?

  46. November 21st, 2011 at 18:50 | #46

    @Dan

    Money is not backed by itself. Money is money just as rice is rice. It might be that money is rice and rice money. If people can trade for goods in rice they are trading in money.

    Even fiat currencies are not backed by themselves – they are backed by the faith of everyone who holds them that they can be exchanged for something.

    The problem with rice is twofold – you can’t lug much of it around and you can’t pay taxes in it (except in my little village).

    If we had a magic shrinking gun that could shrink and unshrink bags of rice to be the same size as coins we would have a nice form of money that would work well as a currency. It would still have a floating value relative to how much people wanted rice at any particular time but it would always have worth.

    In days gone by when you could buy the favours of women with nice shiny heavy things you could exchange gold for bags of rice no problem.

    And in times gone by when it was difficult to lug a lot of gold around you could find someone who had cousins in another city and exchange your gold for a promise that you could collect the same amount of gold at another location. Or rice.

    But the issue of austerity is not one of currencies really – it is the issue of bags of rice.

    The suggestion is that you can just issue currency that everyone will honor and accept for bags of rice.

    I suggest that first there has to be enough bags of rice.

    Otherwise whatever you offer people for rice they will simply turn down.

    Fiat currency, gold, whatever – if the village thinks your currency is not worth bags of rice you’ll starve and if they think it is worth bags of rice you’ll eat.

    Even if you printed the currency yourself.

    pop

  47. Dan
    November 21st, 2011 at 19:25 | #47

    So… the debasement effect you’re talking about is inflation. Which was my point.

  48. November 21st, 2011 at 19:40 | #48

    @Dan

    Debase is a transitive verb which suggests an agent who debases the currency. But currencies can decrease in value without any agent – a glut of rice will lower the purchasing power of rice. That’s inflation (by definition an increase in the money supply and/or credit).

    Debasement is something that someone purposefully does to achieve some goal – eg to reduce the burden of debt or to try and stimulate an economy by giving everyone the impression they have more to spend – a game that can end badly.

    The problem with “printing money” to prevent the need for austerity is a false one because really all it does is make everyone equally poorer.

    Well not everyone. Just the poor sods who are paying all the taxes.

    pop

  49. sdfc
    November 21st, 2011 at 19:45 | #49

    Robert

    To suggest that Steve Keen predicted the GFC by chance betrays a complete misunderstanding of the drivers behind the crisis and what Steve Keen has been saying all these years. You make the mistake of assuming economics boils down to neoclassical theory or the bastardised Keynesianism of the neoclassical synthesis.

    The concern over inflation is misplaced. A burst of higher inflation is exactly what those high debt economies need if they are to avoid years of stagnation.

  50. jrbarch
    November 21st, 2011 at 19:53 | #50

    The Peak Oil Poet :
    @Dan
    The suggestion is that you can just issue currency that everyone will honor and accept for bags of rice.

    Easy for Govt. – just impose a tax liability in the unit of account! Back it up with the law and the military …..

  51. November 21st, 2011 at 19:57 | #51

    @sdfc

    What’s more, dozens of people predicted the GFC. I was reading many blogs right through that period and I remember warning people at work back in 2005 that many top economists and financial experts were predicting a housing crash and worse.

    Though most of those predicting it seemed to be as much taken by surprise as the ones talking things up. Ie they did not make money on it. Even some of the really well known ones who predicted it did not make money out of it.

    I guess it’s always about timing and faith in your words.

    pop

  52. Dan
    November 21st, 2011 at 19:58 | #52

    pop@45 – Fine! But I don’t understand why you’re not able to acknowledge the possibilty of inflating debt out of existence.

    sdfc@46 – much as I love Steve’s work, he also predicted a recession in Aust in the second half of 2010. If you’re always banging on about how there’s just about to be an economic crisis, you’re bound to right some of the time – but let’s not forget the other times.

  53. sdfc
    November 21st, 2011 at 20:10 | #53

    POP

    The timing is pretty much impossible to predict but that doesn’t mean it is just dumb luck when the forecaster proves to eventually be correct. You need pretty deep pockets to bet against the market.

    Dan

    I think Keen’s problem is that he misunderstood the determination of the government and the RBA to keep a floor under house prices. With household debt to disposable income still over 150% I for one don’t think we are out of the woods by any stretch of the imagination.

  54. Robert
    November 21st, 2011 at 20:59 | #54

    “To suggest that Steve Keen predicted the GFC by chance betrays a complete misunderstanding of the drivers behind the crisis and what Steve Keen has been saying all these years.”

    I hardly read Keen so I wasn’t making any particular claim about him. But hasn’t he been predicting a housing collapse here for a long time? Now maybe Keen made more specific predictions that are less likely to happen by chance (and Australian housing will collapse too), I’m sure you’ll find others with their own models who made specific prediction and disagree (e.g. the Austrians claim vindication too, etc). All I’m saying is it’s hard to tell.

    “You make the mistake of assuming economics boils down to neoclassical theory or the bastardised Keynesianism of the neoclassical synthesis.”

    How on Earth can you read such a level of detailed assumptions into my brief comment about the challenges of macroeconomics?

    “The concern over inflation is misplaced. A burst of higher inflation is exactly what those high debt economies need if they are to avoid years of stagnation.”

    I don’t claim to know much macro, nor do I trust anyone who claims to be very sure about macro, but what I have read suggests that’s right.

  55. Chad Satterlee
    November 21st, 2011 at 21:59 | #55

    @Rob

    “But economics is not some pure physics. Any theory which said the GFC could not occur is dead in the water, but we’re doing social science here, so the theories are more likely to say ‘X will be uncommon given A, B, C and D’. There’s a lot of wiggle room that allows you to say your ideas are not invalidated by one event.”

    The neo-classical model, underpinned by Walrasian general equilibrium theory, is in the same league as the great breakthroughs of theoretical physics. It is the only systematic and ‘Newtonian’ framework neo-classicists have to understand political-economic phenomena, even if most economics students only understand it in a half-baked kind of way (I am curtly dismissing the business of trying to explain a state of the world x by showing x is a function of the arbitrarily picked variables A, B and C because that’s entirely ad hoc and arbitrary).

    All you have, if you’re a neo-classicist, is Walrasian general equilibrium theory. According to this the GFC is impossible (and thus ‘dead in the water’ by Robert’s assessment): the system reaches the point at which supply equals demand and nothing moves. That’s just the mathematics of it. Neo-classicists must hold that the Great Depression was in fact the Great Vacation, since involuntary unemployment is impossible. The only possible explanation is that workers were asking too much for their labour.

    I will now launch a pre-emptive strike. You might accuse me of being too dogmatic here. In response a comparison with religion is in order. Even if some or all aspects of your religion seem silly, if you are truly religious you really have no choice but to be a fundamentalist. There is a tendency for some followers to cherry pick elements from their holy doctrines that seem sufficiently civilised while conveniently sweeping the ugly elements under the carpet. In this case they cease to be loyal followers by definition. In economics a similar sort of ‘buffet neo-classicism’ occurs. Free marketeers raucously proclaim their philosophy demands less taxes and regulation but refuse to accept the fact it also mandates zero profits, for example. Either you have the set menu or you don’t; you’re a neo-classicist or you’re not. You can’t have it both ways.

  56. Robert
    November 21st, 2011 at 22:11 | #56

    Is all you do in life go around reposting the same boilerplate objections to what you imagine neoclassical economists believe Chad? I’m not about to have the same tedious semantic argument that we had 6 months ago, in which you define neoclassical economics to be some absurd caricature believed by no one and then proceed to demolish it.

    I haven’t made any arguments that could be regarded as neoclassical. My comments have all been general observations about the challenges of empirical macroeconomics and social science in general given small samples and our inability to do controlled experiments. This is not revolutionary stuff.

  57. Dan
    November 21st, 2011 at 22:38 | #57

    Chad – as much of a critic of neoclassical economics as I am, you’ve characterised it very inaccurately indeed.

  58. Chad Satterlee
    November 21st, 2011 at 22:52 | #58

    Empirical macroeconomics and the activities of econometricians are fundamentally ad hoc. To know the variables A, B and C were the most important or relevant in explaining state of the world X requires a comparison of A, B and C to all the other variables in the world. You’ll die before that process is ever completed. I reject this dubious approach in favour of systematic general theories, of which Walrasian general equilibrium is one (that I greatly admire, by the way) and the most important for neo-classical economists.

    How have I mischaracterised neo-classicism in relation to crises?

  59. John Quiggin
    November 21st, 2011 at 23:00 | #59

    Chad’s caricature version is, pretty much, the research program of Real Business Cycle theory, and the crisis showed that although outright advocacy of RBC was only prominent for a few years in the 1980s, quite a few Chicago economists still believed it.

    The difficulty really is with the term “neoclassical”. Typically, this is used very loosely, sometimes referring to extreme absurdities like RBC and sometimes to apply to mainstream economics in general.

  60. November 22nd, 2011 at 00:23 | #60

    Two important equations in economics:

    Gross Domestic Product = Federal Spending + Private Investment + Private Consumption + Net exports

    Federal Deficits – Net Imports = Net Private Savings

    Based on these equations, here is a simple question:

    How do federal tax increases and/or spending cuts (aka deficit reduction) reduce unemployment or grow the economy? If you can’t answer, then there clearly is something wrong with the whole debt-reduction movement.

    Those who do not understand Monetary Sovereignty (http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/) do not understand economics.

    Rodger Malcolm Mitchell

  61. Freelander
    November 22nd, 2011 at 00:49 | #61

    socrates :
    …. Fama is still defending his hypothesis, now saying it never guaranteed stability, and blaming government regulation for the failure:
    http://www.chicagobooth.edu/news/2011-10-28_fama.aspx
    To admit economic liberalism has failed would negate most of Fama’s career. He can’t do it.

    According to market worshipers like Fama the market is perfect, omniscient even, but the terminally stupid govt. can pull the wool over the market’s eyes so easily. Yes it is all the government’s fault. The big bad government wearing Grandma’s bonnet and Grandma’s clothes fooled little red riding hood market into investing not simply unwisely but downright ridiculously stupidly. Of course, truth is, the money invested wasn’t their’s, that is, wasn’t the money of those who invested it for the most part, and those that spruiked the whole process got incredibly rich from commissions, bonuses and other ill gotten gains. And after the whole thing went bung, they got to keep all those ill gotten gains. And no body in power wishes to hold them to account.

    Yes, of course. The market still as perfect as ever. Government to blame. And who can say what would have happened if the Aztecs hadn’t sacrificed all those people in years gone by? Where is the counterfactual?

  62. Freelander
    November 22nd, 2011 at 00:50 | #62

    Oh no. moderation again.

  63. Freelander
    November 22nd, 2011 at 05:02 | #63

    I was thinking that a chapter on how ‘zombie economists’ have ‘helped’ various economies, and how balefully wrong their pronouncements and predictions, and the results of their handiwork have been would be good. This might require some data-mining of newspapers etc. but I imagine that some great quotes should be available. (Pronouncements on the wonderful future of that Pacific Economic Miracle that never was, the one across the Tasman, might also be worth including.)

    One of the reasons for the abject pain in the former soviet empire I am sure was due to the army of self-appointed and IMF-World Bank anointed libertarian ‘experts’ who recommended extreme laissez-faire ‘shock therapy’ as the optimal transition to market economies. There ought to be some great quotes there. And I remember that the Economist magazine (or is that comic) which was quite gung-ho in support of the libertarian remedies was constantly predicting significant growth for Russia, in the ’90s, every year, yet every year Russia’s economy was shrinking, most years quite dramatically. Finally the Economist even stopped predicting Russia’s annual growth rate. A good one also, of course, would be the MPS Iceland 2005 Conference website where the MPS was taking credit for its wonderful ‘impact’ on Iceland, yet in 2006 their economy came close to disintegrating (nothing to do with the GFC) and, of course, blew up in a big way when it was stressed by the GFC. The MPS inspired radical transformation of Iceland doesn’t look so great in retrospect. Similarly there ought to be great zombie quote for Ireland and the UK. For both Ireland and the UK I am not so sure that even handed economic analysis would conclude that gaining temporary growth by turning themselves into tax havens for companies which by moving there demonstrate that they are not good corporate citizens was either a global or local net benefit.

    By the way, the Iceland MPS conference website has been removed. I imagine someone must have thought it embarrassing. Luckily, I know someone who copied that site before it disappeared.

  64. Freelander
    November 22nd, 2011 at 06:49 | #64

    Some unintended humour from a pre-Murdoch Wall Street Journal – January 29, 2004
    Miracle on Iceland By HANNES H. GISSURARSON (Courtesy of the MPS Iceland website)

    “… As Oscar Wilde once quipped, the Icelanders had discovered America, but that they had had the good sense to lose it again.

    Over the past century, Icelanders have discovered not America but the free market. A hundred years ago this Sunday, when Iceland gained home rule from Denmark, the island was the poorest country in Western Europe. Now, after a radical and comprehensive course of liberalization that mirrors similar reforms in Thatcher’s Britain, New Zealand and Chile, Iceland has emerged as one of the world’s most prosperous countries.

    Much of the credit goes to Prime Minister David Oddsson. The leader of Iceland’s conservative party is now the longest serving leader in the Western world, having formed his first government in 1991. ….

    … Having stabilized the economy with monetary and fiscal restraint, the Oddsson government started privatizing. It began with small companies, later turning to large fish-processing plants, factories and financial companies. All the commercial banks are now in private hands. Altogether, the sales brought in $1 billion, not a bad haul for a country of 280,000. Only one large company remains, Icelandic Telephone, but it will soon be put on the sales block.”

    Just one success story after another! Yes, and New Zealand is “one of the world’s most prosperous countries” as is Chile. And Britain? Well, its Sterling old chap!

  65. jrbarch
    November 22nd, 2011 at 07:26 | #65

    @Rodger Malcolm Mitchell
    Good explanation Rodger and the discussion afterwards reveals the gamut: to ignore = Ignorance.
    People understand the sky is ‘blue’ but they do not understand or simply ignore monetary sovereignty: sacrificing the power to the markets????
    Can only happen where there is both ignoring and confusion. Like ‘turkeys voting for thanksgiving’ (recent comment at Mosler’s).

  66. Freelander
    November 22nd, 2011 at 07:31 | #66

    @jrbarch

    Looking at the avatar, my question is which one is Rodger and which one is Malcolm?

  67. Dan
    November 22nd, 2011 at 09:27 | #67

    @Rodger Malcolm Mitchell

    Good explanation.

    I guess the question then becomes, what can governments do while keeping a lid on inflation? (The answer may be: quite a lot, especially in recessions).

    I’d comment that, okay, great, we’ve decided that money is an abstraction – but there are simple resource constraints to face up to (which I think is what pop was trying to get at, although he kept tripping up on his conception of money). Although I think throughout most of the OECD it’s pretty obvious that the labour market (for instance) isn’t exactly stretched.

    But the doozy for me is: supposing policymakers start thinking about money like this, won’t interest rates just move to match the expectations of lenders of additional money being created, and won’t this lead to an inflationary spiral?

  68. Chris Warren
    November 22nd, 2011 at 11:47 | #68

    @Rodger Malcolm Mitchell

    I think people are starting to get sick and tired of economists who present such simplistic formula that just reflect their own definitions of categories and with no units.

    Each of the categories: Federal Spending, Private Investment, Private Consumption, Net exports consist, in part, of real value, but in increasingly large part in debt.

    Silly equations as are too often peddled have no greater analytical power than writing:

    Height of building = length of shadow.

    This is true if the length of shadow is not inflated (by height of sun or slope of ground) but is false if the length of shadow is inflated.

  69. Freelander
    November 22nd, 2011 at 12:02 | #69

    @Dan

    That ‘explanation’, by Rodger Malcolm, is pure bunkum. Zimbabwe is a simple recent example that the idea that governments can just print money and never go bankrupt is nonsense. As has happened time and again if a government doesn’t engage is some self restraint with seigniorage then trouble follows rapidly. The avatar reminds me of the picture American Gothic sans the pitchfork (and with the wife on the other side).

    I guess I don’t understand economics. (Something I’ve always suspected.)

  70. Dan
    November 22nd, 2011 at 12:08 | #70

    Look, I agree there’s something that doesn’t sit right but I’d love to actually specify what it is, rather than just dismiss it out of hand.

  71. Dan
    November 22nd, 2011 at 12:12 | #71

    Is it hyperinflation? Is it not possible for governments to run down their debt by increasing the money supply without triggering this?

  72. Julie Thomas
    November 22nd, 2011 at 12:56 | #72

    I don’t understand economics either. I thought I knew enough back in 1966 when I did economics at high school. It was easy then to conclude that it wasn’t worth bothering about economics; both socialism and free market capitalism would always fail because of ‘human nature’ and so human nature was the place to start to do anything about making the world a better place.

    So I’m intersted in those “deeply imbued beliefs about the virtues of thrift and the need for sacrifice as a response to adversity” that John talks about above.

    Apparently in Western societies the idea of thrift as a virtue was popularised by the newly emerging middle class who were mostly Protestants. Catholics were amazed and disgusted at the selfishness and they argued that this was God’s way of destroying protestants. Catholics thought the protestants would become so mean and frugal that they would destroy themselves.

    POP does your non Western society value thrift?

  73. jrbarch
    November 22nd, 2011 at 13:03 | #73

    @Dan

    Scott Fullwiler: What If the Government Just Prints Money?

    In sum, whether or not a deficit is accompanied by bond sales is irrelevant for understanding the potential inflationary effects of the deficit. Under normal Fed operating procedures in place until fall 2008, the operational function of bond sales was to support the interest rate target, not to “finance” a deficit. A government bond sale does not somehow reduce funds available for non-government agents to borrow as presumed in the loanable funds market approach, while the absence of a bond sale does not somehow mean there is a greater amount of liquid financial assets, income, or “funds available” for borrowing or spending than without the bond sale. Instead, a government deficit always adds to the non-government sector’s net financial wealth whether or not a bond sale occurs. Both the Treasury’s bond sales and the Fed’s operations affect only the relative quantities of securities, reserve balances, and currency held by the non-government sector; the total sum of these is set by the outstanding government debt. With or without bond sales, it is the non-government sector’s decision to spend or save that matters in regard to the potential inflationary impact of a given government deficit. [My emphasis] Indeed, to be more precise, a deficit accompanied by bond sales is actually the MORE potentially inflationary option, as the net financial assets created by the deficit will be increased still further when additional debt service is paid.

    Scary thought huh – politicians with an open cheque-book? All spending has the potential to cause inflation. Govt. sets the ‘price’ of money as monopoly supplier and should use taxation, monetary and fiscal policy, regulation and law to sustain aggregate demand and full employment; without cooking the economy or toasting the environment.

    @Chris Warren
    I guess you didn’t try the previous link Chris at #42 – but anyways – if you dearly love complexity and formulae:
    Scott Fullwiler: Interest Rates and Fiscal Sustainability
    Scott Fullwiler: Sustainable Fiscal Policy and Interest Rates under Flexible Exchange Rates

    @Freelander
    A ‘Gentleman’ or ‘Lady’ would not make personal comments about RMM or his wife. Am sure they are both very beautiful human beings, and passionate about engaging minds with their own. As for the Zimbabwe bit, that one is always the first objection, the second is Weimar – LOL …… Zimbabwe for hyperventilators

    [JohnQ - hope I am not breaking any 'providing too many links policy here' - am keeping in sight relevance to your post and the ensuing discussion !!]

  74. Gaz
    November 22nd, 2011 at 13:06 | #74

    Peak Oil Poet @23.

    The village should have a central bank with a rice stability objective.

  75. critical tinkerer
    November 22nd, 2011 at 13:21 | #75

    Right does not believe in “expansionary austerity”. They preach it only when Democrats control the White house, and do not preach it when it comes to military spending. They use it for two purposes. First to prevent Democratic president to reward their donors and voters and with it secures reelection. Second, to ruin social programs so they can privatize it easier and then give more tax cuts to their voters and donors – wealthy. Also if Democrats spend less there will be more for Repubs when they get back in power.

  76. Dan
    November 22nd, 2011 at 13:44 | #76

    @critical tinkerer

    So austerity could be more a vampire idea than a zombie one…

  77. Chris Warren
    November 22nd, 2011 at 13:51 | #77

    @Dan

    The problem at one level, is the general trend of capitalism towards increasing macroeconomic instability (CPI, CAD, PSBR, Ue).

    The real problem at a deeper level, is the underlying cause of this instability (or structural source of macroeconomic contradiction).

    If the government was to ‘increase the money supply’ by employing workers to dig for gold to produce gold coins, then these money-fanatics may have an arguable case.

    Anything else is Zimbabwe and Weimar stupidity. But it may be the only option for our capitalists now.

    Tough.

  78. November 22nd, 2011 at 13:52 | #78

    @Julie Thomas

    Yes Julie – and if it’s at all possible – far more than any “Westerners” I know other than maybe those of my mother’s generation who spent their childhood years in the Great Depression.

    My wife’s generation and her parents generation (and theirs) are so “stingy” that they will scowl at any expenditure that is not absolutely necessary – it’s a problem for me because I am trying to raise our two girls well – who need such frivolities as tutoring and braces – but their mum is very hard to convince and i often have to just ride rough shod over her opinion on such things. It’s not unusual for a family to earn less than 10K per year and prosper (with care).

    I can tell you from first hand experience, from having spent a fair amount of time in said countries, where thrift is highly valued and respected:

    Romania (everyone)
    France (older ones mainly)
    Italy (! – older ones only)
    Mexico (everyone i met)
    Thailand (everyone except the new middle class children)
    Korea (ditto)
    Japan (ditto)
    Israel (ditto plus the newcomers from eastern Europe)

    and believe it or not

    USA (older ones and ones from various locations)

    I also suspect it is the same for every other country in the world – if people have lived through very tough times they will be more careful with money than if they have been raised in plenty and without the influence of generations who have live tough times.

    If you look at some of our traditions – we used to eat tripe, we used to always turn all roast juices into gravy, throwing away food was always seen as bad. Some of our famous bush era stories are about financial hardship.

    I find it hard to believe that thrift is a middle class attribute – rather I suspect that it would be hard to gain middle class status without a foundation of thrift.

    but that’s me

    pop

  79. November 22nd, 2011 at 13:53 | #79

    @Dan

    yes

    Vampire Squids

    pop

  80. November 22nd, 2011 at 13:56 | #80

    @Gaz

    :-)

    Yes.

    But what happens in a real village is that people freely provide rice to each other in times of need. I’ve never seen it when everyone is in need but i do know that the central government does a lot to cover such cases through carrying a large stock surplus – in fact the government “trades the basis” on rice and other products very astutely.

    pop

  81. critical tinkerer
    November 22nd, 2011 at 13:59 | #81

    @ Dan
    Yep, vampires show up only periodically, nightly, just as austerity idea show up only when Dems are in power.

  82. Dan
    November 22nd, 2011 at 14:05 | #82

    To be fair, Cameron in the UK is waving the same tattered flag.

  83. Freelander
    November 22nd, 2011 at 14:08 | #83

    @Dan

    If there is spare capacity in an economy that capacity might be brought into production by government spending financed by expansionary monetary policy but once people cease to be scared (as they can become scared after something like the GFC) they will start to use their money as they do in ordinary times and prices will start to go up. In that case it would be expansionary monetary policy used to finance a fiscal stimulus. Depending on whether that approach works and how much inflation results the outcome could be good, or not so good.

    In ordinary times you cannot just expand the money supply willy-nilly without expecting to end up with hyperinflation. In ordinary times people use their money to buy things. In scary times they might hoard their money because having the money provides some sense of security in an uncertain world. With a lot of cash on hand you are better able to handle the unexpected. The expansionary monetary policy that has been used in the US and in the UK and some other places has been to buy financial assets. It has not been used to finance fiscal policy. Because those selling the financial assets haven’t spent (or lent) the money they received, little stimulus has been provided so far. Some are worried that if the liquidity that has been provided finally starts to get spent (or lent to others who spend) there could be significant inflation. That might be better than the current situation if the inflation doesn’t get out of hand. Fiscal policy would have been more effective and safer.

    However, expansionary monetary policy of the Quantitative Easing type can be used to prop up the financial system by buying financial assets. As far as the sovereign debt panic goes, buying some of those assets is probably best at the moment to quell the panic. Also, a bit of inflation reduces the relative size of the debt. Inflation is a legal way of giving debt holders a ‘haircut’. In the Eurozone the ECB should really have been engaging in Quantitative Easing to save their financial system. They shouldn’t have let things get as bad as they have. That said, the situation is very difficult and doing things exactly right would not be easy.

    However, what is clear is austerity is the last thing governments should be trying to do. And if there are cutbacks they should not be on the poor who tend to spend most of the income they get. If they are going to do cutbacks, better to cutback aid to, or increase taxes on the rich who spend less out of each additional dollar of income anyway. Also, that would be somewhat fairer because the poor were hardly the ones responsible for the GFC anyway, and never benefited from the ‘good’ times either.

    At the moment the Australian government is planning to ‘balance’ the budget which is silly. There is no need to and the contractionary fiscal policy that it represents is not what is wanted at the moment. The government was exceedingly brave after the GFC in implementing an excellent stimulus policy which saved Australia from a recession. They ought to show similar bravery again. And simply ignore the bleating of an idiot like
    Tony Abbott. And the occasional zombie who thinks austerity is a good idea.

  84. Dan
    November 22nd, 2011 at 14:15 | #84

    Freelander – I agree with everything that you’ve written, and emphasise that we’re not in ordinary times.

    As for the MMT stuff – I’m certainly not convinced by it, but I want to understand it (as least so I can feel like I’ve rejected it from a stable platform. Not unlike why I read Zombie Economics.

  85. Freelander
    November 22nd, 2011 at 14:17 | #85

    @Dan

    Cameron is an idiot too. Though at least he is giving Merkel the right advice. Unfortunately Merkel is ignoring it. The UK three stooges in a row. Blair, Brown, and now Cameron.

  86. Freelander
    November 22nd, 2011 at 14:20 | #86

    @Dan

    I find life too short to try to ‘understand’ some things. I try to save the effort for things that can be understood and that are worth understanding.

  87. Tom
    November 22nd, 2011 at 14:23 | #87

    @Dan

    Hyperinflation can not be avoided in a mass money printing scheme, if you didn’t look much at Zimbabwe, alternatively you can check what happened in Germany after World War I and the massive compensation Germans have to pay to the victors of WWI. It did use mass money printing, but the effects on the local economy is so bad that citizens literally carry a cart of money to the local bakery. Also mass money printing will significantly depreciate the exchange rate and it will force the creditor nations to charge 1000% if not million percent of interest rate to recover for that loss in the value of the loan.

  88. Mel
    November 22nd, 2011 at 14:25 | #88

    I’m guessing Prof Quiggin is in broad agreement with Paul Krugman on macro. Is this true or are there some points of difference?

  89. Freelander
    November 22nd, 2011 at 14:29 | #89

    @Tom

    Except, of course, if they loan in their own currency (which they will). Then the debtor nation has their currency collapsing and is unable to make payments on even a modest interest rate on the loan in the other currency.

  90. Dan
    November 22nd, 2011 at 14:35 | #90

    @Tom

    Yes, I’m perfectly aware of hyperinflation in Weimar Germany and Zimbabwe, no one with any passing knowledge of 20th c. history or current world affairs is unaware of these examples.

    What I’m asking is whether this is an unavoidable outcome of treating money like this, ie. is the hyperinflationary process inherently runaway? No one has answered this yet, they’re just pointing to anecdotal (albeit important) cases.

  91. Freelander
    November 22nd, 2011 at 14:54 | #91

    Hyperinflation usually happens because a government cannot get enough revenue through taxation and tries to get it by ‘printing’ money. Unfortunately the impact on an economy is likely to destroy whatever ability the government had to get revenue via taxation and finally because the currency is going down in value so fast people spend it really quickly and then turn to barter avoiding the worthless currency completely. The process is not necessarily runaway. Usually there are problems, even if only incompetence, that lead a government to trying this unwise approach to raising revenue. In Germany War ‘reparations’ and in Zimbabwe a failing economy and an incompetent corrupt government (I’m guessing).

  92. Dan
    November 22nd, 2011 at 15:02 | #92

    So that actually sounds pretty MMT to me; where taxation is recast as not a revenue-raising exercise but as something that creates or maintains the demand for fiat currency (ie. gives it value).

  93. Freelander
    November 22nd, 2011 at 15:20 | #93

    Taxation is to raise revenue to spend. If the government did nothing it wouldn’t need any money to spend but people would still use the currency because the currency is useful and the currency is ‘legal tender’.

  94. Julie Thomas
    November 22nd, 2011 at 15:53 | #94

    POP I wasn’t saying that thrift is now a middle class value; I believe from my limited knowledge of history – that in medieval times no-one was thrifty. If you had wealth, you spent it on buying power and/or prestige. But when a middle class emerged as a significant group, they could see the benefits of having spare money and their idea was so useful and worked so well, that it took over. A simplistic analysis for sure.

    My point is that ‘culture’ has a great deal of influence on how much a society values ‘thrift’; defined as ‘restrained spending’. As you have noticed, it is usually only older people in western cultures that seem to still value this characteristic.

    The younger generation that I see, the ones who are not doing well in this society have no concept of saving, credit is all they know. What they call saving is paying off the credit card. All the marketing of stuff as a substitute for character, and the social engineering by the capitalist media – particularly the creation of the airhead celebrity cult – re-inforces the message to our kids that consuming is good and thrift and austerity are totally uncool.

    And then, they are blamed for not valuing thrift; but it is the capitalist system – in it’s current form – that has brought about the destruction of the values that are essential for succeeding. Am I ranting?

  95. Dan
    November 22nd, 2011 at 16:08 | #95

    “Taxation is to raise revenue to spend.”

    That’s certainly the conventional interpretation, but you’re showing a remarkable unwillingness to consider further possibilities, if only to dismiss them from an informed rather than ignorant position.

    Bear in mind, Keynes wrote positively about the Chartalists. And James Galbraith is one. I’m not myself, but I want to understand this thing.

    (Incidentally, under the present ‘interesting times’ circumstances, Chartalists and pos-Keynesians are saying the same thing.)

  96. November 22nd, 2011 at 16:58 | #96

    @Julie Thomas

    :-)

    but of course you are!

    Welcome to blog comment world.

    pop

  97. November 22nd, 2011 at 20:02 | #97

    Pr Q said:

    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….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.

    I would be the last economist to disagree with Keynes, Pr Quiggin or our dearly departed late Treasurer, Rt Hon Peter Costello, on the need for governments to follow counter-cyclical fiscal policy. Surplus in boom and deficit in bust, particularly, as in the case of EU and US, when monetary policy faces a liquidity trap due to a collapse in business and consumer confidence.

    My problem with Keynsian economics is that it may be necessary, but not sufficient, to restore growth. The early nineties Japanese bubble and bust resulted in a prolonged economic slump, despite continuing massive fiscal stimuli. Its possible that when private balance sheets (households and firms) receive a big enough hit from a collapsed financial system they may not recover for a generation, not matter how much fiscal compensation is applied. Just as a person may not recover from a big accident even if they receive the best intensive care.

    This is not merely a rehash of conservative pessimism. In his darkest moments Krugman has expressed dismay at the failure of Keynsian policy to revive Japan’s prolonged slump. TNR reviews Krugman’s reservations about the efficacy of orthodox Keynsianism in the light of Japenese resarch into the disappointing effects of two decades of deficit pump-priming:

    Writing in a special 2003 issue of the journal World Economy, Japanese scholars Toshihiro Ihori, Masume Kawade, and Toru Nakazato summarize the debate as follows:

    “One hypothesis is that the effects of fiscal policy were very large and hence recession would have deepened without fiscal expansion. Alternatively, it may be that fiscal policy did not have enough of an expansionary effect to push up macroeconomic activity, and hence unlimited public expenditures simply made the fiscal crisis worse.”

    Using quarterly economic data, which enabled them to track the effects of successive stimulus packages, they concluded that the second hypothesis is far more plausible than the first: “[I]ncreasing public investment in the 1990s crowded out private investment to some extent and did not increase private consumption much. … The overall policy implication is that the Keynesian fiscal policy in the 1990s was not effective.” The problem wasn’t that the stimulus packages weren’t big enough; it was that they were mistaken in principle, because they rested on the incorrect assumption that sustained deficit spending would stimulate aggregate demand.

    I would still support a strong Keynsian response to depression. But I am not confident that it would work without substantial command and control collectivism. Remember in the last great Keynsian crisis, during the thirties, it took rearnament and war to pull the industrialised economies out of the slump.

    In short, to recover from this depression the EU and US need to declare war on some great evil. My suggestion would be to declare war on death, but thats just me talking.

  98. Robert
    November 22nd, 2011 at 20:32 | #98

    @Chad Satterlee

    “I reject this dubious approach in favour of systematic general theories,”

    Reject a mixture of theoretical and empirical work in favour of pure theory from first principles? That way surely lies ruin.

    The weaker the empirical data the more we should emphasise theory, and the stronger the data the more we can be guided by empirics. But empirical work on macroeconomics doesn’t look futile to me. And theoretical macro untethered from observations suffers from its own problems. The world is too complex for humans to capture effectively in their minds. As a result there are many many models of how the world works from first principles, all capturing only a small aspect of it (at best). The Austrians for example would take the same theory-only approach and probably reach diametrically opposite conclusions to you. Without observation how do you propose to choose between them?

  99. Freelander
    November 22nd, 2011 at 21:22 | #99

    ‘The weaker the empirical data (as opposed to the non-empirical data) the more we should rely on speculation.’ I suppose an alternative of recognising you don’t know is just out of the question! Certainly would be out of the question for an Austrian a Randian or some other assorted true believer. Nothing like faith-based ‘science’. But enough of that.

    More unintended humour from the pre-Murdoch Wall Street Journal – January 29, 2004
    Miracle on Iceland (continued) By HANNES H. GISSURARSON (Courtesy of the MPS Iceland website)
    [Yes, the article goes on. And it gets even better!]

    “… and, more importantly, allowed the free transfer of capital in and out of the country …

    … Last but not least, tax cuts propelled an economic boom. … ….Interestingly, revenue from the corporate tax in fact has gone up
    over the past decade — which proves that a smaller slice of a bigger pie is preferable to a big slice of a small one. …

    … Why did Iceland turn this way? The international trend toward economic liberalization played a role. Free-market economists like Friedrich von Hayek, Milton Friedman and James M. Buchanan all visited the country in the 1980s, influencing not only Mr. Oddsson but many of his generation. In the battle of ideas here, the right won. There was also a common recognition that the old methods did not work. …

    … But much remains to be done. The health and education systems are publicly operated, and so are the utilities, some broadcasting stations, and the hydro-electric power system. People close to Mr. Oddsson believe that two priorities are cutting the individual income tax and clarifying and strengthening private property rights, both to capital and natural resources. For example, many companies in Iceland, especially in agriculture, have no clearly defined owners, having initially been established as cooperatives. Also, while the pension funds were successfully restructured to ensure their financial health, the public has neither much say in their operations nor a choice about them.

    Yet some Icelandic intellectuals still believe the country’s future lies with membership in the European Union. Why? Iceland enjoys a bilateral defense deal with the U.S. and full access to the European market through the European Economic Area. What’s more, EU membership is no key to prosperity. As Mr. Oddsson notes, the richest countries in terms of GDP per capita are Luxembourg,Switzerland, the U.S., Norway and Iceland, in that order. Of these countries, only Luxembourg belongs to the EU. All are small, except the U.S., which is a federation of fifty smallish states.

    Small states tend to be more affluent than big ones when they maintain open and flexible economies. Smallness is not only a challenge; it is also an opportunity. Iceland has seized this opportunity and is becoming an attractive place for international corporations and capital.

    Mr. Gissurarson is professor of politics at the University of Iceland and a vice president of the Mont Pelerin Society.”

    What a clincher “is becoming an attractive place for international corporations and capital”? Well that was a success story. Good thing the MPS had a quarter century project of ‘fixing’ Iceland. Well and truly ‘fixed’, it was.

    So everyone can become rich by turning their country into a Cayman Islands and using such natural resources of being far away from everything with next to nothing substantive that anyone would want but otherwise having ‘flexible’ corporate friendly tax and other laws? (Iceland, a good base for pirates to operate from. Or Vikings.) But would parasitic activities that are carried out in tax havens be so successful if those countries that they were stealing from were not producing goods and services in the first place? Or if those countries took effective action against them? (Would being a robber be worthwhile if no one actually produced anything and everyone else was a robber as well? Or if there was adequate protection from robbers?)

  100. Robert
    November 22nd, 2011 at 21:59 | #100

    @Freelander

    “I suppose an alternative of recognising you don’t know is just out of the question!”

    Relying more on theory (relative to empirical work) doesn’t mean you are forming strong beliefs. And I certainly agree we should be very cautious about forming strong conclusions in macro.

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