Blogging the Zombies: Expansionary Austerity – Birth

Another instalment in the new  draft chapter on Expansionary Austerity, which I’m writing for the paperback edition of Zombie Economics. Comments and criticism much appreciated


Austerity measures of various kinds have been advocated, and implemented, in a wide variety of contexts. The term is used particularly in contexts like that of the present day, where government budget deficits arise as a result of (or at least in the context of) a recession, and where  it is proposed to return to budget balance through some combination of lower expenditure and higher taxes, usually with an emphasis on the former.

‘Austerity’ can also be used more generally, to apply to any situation where governments seek to reduce levels of public debt by running budgeted surpluses.  A notable example, with which the term ‘austerity’ is particularly associated, was that of Britain in the years after 1945. Victory in World War II had come at a huge cost. Britain was heavily indebted, particularly to the United States, and much of its overseas wealth had been destroyed. In these circumstances, there was little alternative to a policy designed to reduce imports, through rationing of a wide range of goods including food, and to maintain budget surpluses.

Nevertheless, the austerity of the 1940s and early 1950s was combined with policies that laid the foundation for widely-shared postwar prosperity. For the first time since the early 20th century, full employment was achieved and maintained for several decades. The National Health Service, which provided free medical and dental care to all was established, along with many other programs of the postwar welfare state.

The critical difference between these policies and the austerity programs now being adopted in Britain and elsewhere was the fact that they were introduced at a time of full employment, sustained by demand that had been suppressed during the war years and by expansionary monetary policy.  The result was that austerity policies, combined with devaluation succeeded in restoring external balance and reducing the ratio of public debt to national income. By contrast, under conditions of high unemployment, austerity measures reduce aggregate demand, and lead to further waste of resources through unemployment.

From the viewpoint of believer’s in Say’s Law, this distinction is meaningless. According to Say’s Law, unemployment can never arise through a deficiency in demand. It follows that, whenever government budgets are in deficit and public debt is excessive, austerity is the appropriate response. By reducing public demands on capital markets, it is claimed, austerity will make it easier for provide firms to investment. Thus, austerity is presented as an expansionary policy that will promote economic growth.

This idea of expansionary austerity can be traced at least as far back as the ‘Treasury View’ which determined the official policy response to the Great Depression in Britain. The most famous statement of the Treasury view is that of Winston Churchill, then Chancellor of the Exchequer, who defended

the orthodox Treasury doctrine which has steadfastly held that, whatever might be the political and social advantages, very little additional employment, and no permanent additional employment can, in fact, and as a general rule, be created by state borrowing and state expenditure” (House of Commons 1929, p. 54).

In his Budget speech of that year

“The orthodox Treasury view … is that when the Government borrow[s] in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise, and in the process raises the rent of money to all who have need of it.” 

The Treasury view, stated in this way, is a restatement  of Say’s Law, or, in more modern terminology, the claim that public expenditure, by driving up interest rates (the “rent of money”) will always crowd out an equal amount of (typically more productive) private investment or private consumption.

There was, in a sense, nothing new in the Treasury view except the need  to offer an explicit statement of what had been, for most of the 19th century, an unchallenged orthodoxy.  As the chronic unemployment of the 1920s deepened into the Great Depression in 1929, the Liberal Party, supported by John Maynard Keynes advocated public works to stimulate the economy. 

The Treasury opposed these policies. This was partly because of their adherence to the classical model of macroeconomics, now described as the Treasury view, in which sustained unemployment could only arise as a result of problems specific to labor markets, such as minimum wages or recalcitrant unions. 

Underlying their opposition to fiscal stimulus, however, was a fear, entirely justified in its own terms, that an interventionist macroeconomic policy would pave the way for intervention in other areas and for the end of the liberal economic order based on the gold standard, unregulated financial markets and a minimal state. These fears were to be realised in the decades after 1945, when the combination of full employment and Keynesian macroeconomic management provided supported for the expansion of the welfare state, tight control of the financial sector and extensive government intervention in the economy.

61 thoughts on “Blogging the Zombies: Expansionary Austerity – Birth

  1. @John Quiggin
    John, I gave you an answer this morning but am still sitting in moderation (?) – probably doesn’t matter anyways judging from your comments and others responding to Ikonoclast … it always amazes me how difficult it is for one mind to communicate with another!

    I think that is all to do with the ability to focus and isolate an Idea without memory and ego interfering. In my view MMT ‘knows’ something that everybody else thinks is mis-information or upside-down silly. Time, I guess will tell. Just like tribal, slave, and feudal economies – capitalism cannot last forever (OWS cracks in the super-structure)?

    I think a huge part of the real problem is conceptual baggage – force fed at uni’s with no discussion allowed; there is absolutely no logical reason that I have seen to date (that stands up to MMT scrutiny) why Govt. should fund itself through the bond market; and taxation is definitely not understood. But I do not believe people with the orthodox view should be ‘sand-pitted’. Nor do I believe it is intellectually honest to dispense with 20 years of work of your peers in so cavalier a fashion. What if someone treated your work in the same way – publication dependent upon some lay reader somewhere answering an ill-conceived question that reveals straight away the core material has not been read.

    Over and out on MMT.

  2. Ikonoclast, apologies for my typo. I also contributed to the derailment of the thread. I’ve replied to 2 of your questions in the sandpit.

  3. Quiggy:

    Why don’t you cite some economic evidence to back up your ideas. You just make stuff up, which your undiscerning readers just accept.

    Although this violates the comment rules against pointless snark, I’ll leave it up as evidence of the intellectual depth(s?) of the opposition. Since you’ve recently been reanimated Leon, you may not quite understand this blog thingy. Individual posts typically don’t have the self-contained structure of a book. Fortunately, as the post indicates, there is a book already available, in which BTW, the real Leon Walras is cited quite favorably, along with lots of evidence – JQ

  4. is this chapter going to discuss the IMF’s “Structural Readjustment” programs of the 80s and 90s in the Third World?

  5. Actually, could be worth talking about the totally harmful austerity that was advised and forced on Asian countries after the Asian Currency Crisis. As well as the austerity ‘solution’ post the currency collapses, although their were real problems that precipitated the collapses, the problems and devastation were greatly exacerbated by hedge funds and others who took advantage of the panic to try to make things worse and make a profit in the process.

  6. Of course it was. Europe’s leaders are doing an utterly hopeless job of heeding the lessons of history.

    I wonder exactly who is advising them. I’m sure it’s a total coincidence that under austerity conditions public assets get sold at often fire-sale prices.

  7. Having just ducked into this discussion: I know the general topic has been moved to the sandpit, but in answer to John’s question, as an MMT devotee, I estimate the Australian government could create approximately $10 billion of high-powered money annually without causing an inflationary breakout, or slightly over 1% of GDP, provided that this money was spent on employing the otherwise unemployed. The unemployed represent a wasted or underutilised resource. According to standard Keynesian principles, if I understand correctly, expanding the money supply to mobilise otherwise unused resources will not cause inflation.
    I get the figure of 10 billion by multiplying the unemployment number by the average wage, which assumes that the value they will produce is approximately equal to what they are paid. Of course “Full” employment is usually about 2%, not 0%, but I’m assuming that full employment would draw current non-participants into the job market too.
    The cost of their training, equipment, management, etc would still need to be offset by taxes so as to prevent competition for these resources driving inflation. Taxes wouldn’t need to rise as the cost would probably be offset by the savings on unemployment benefits, crime, violence, mental health care, etc caused by people no longer being unemployed on starvation benefits. Furthermore, tax receipts would rise substantially from both taxes on wages and consumption.
    There would be a risk, due to the economy’s structure, of the new money flowing too rapidly from the newly employed into the hands of our rent-seeking classes and causing a boom at the top of the market (shares, real estate, etc). This would best be offset by a hefty tax on rents and capital gains.

  8. @James Haughton Thanks for this James. I think this is a reasonable statement of the MMT position, and leads directly to the conclusion I’ve been arguing, namely that if you want to run large deficits during recessions, and avoid explosive growth in debt, you need to run surpluses during booms. That’s true even if you can use money creation to finance expenditure equal to 1 per cent of GDP, which is about 3 per cent of total public expenditure. The other 97 per cent has to come from current taxes or from debt services by future taxes. And of course, the job creation programs don’t reduce the need for other kinds of public spending, so the MMT position doesn’t in any way imply a reduction in the aggregate need for tax revenue.

    If the other MMT commentators agree with you on this, I think we are not far apart.

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