Austerity is Dangerous...

[Havet]

Short and simple explanation of the title:

FmsjGys-VqA

I agree with this view and with the forecast of the bad consequences that are going to come to the rest of society. You?

Discuss

[RGacky3]

Yeah, I agree with what this guy is saying.


I love how right wingers blame working class people for doing what was absolutely logical, knowing what they knew, whereas the banksters, knew exactly what was going on, and essencially lied for profit.

There is an easy way to fix this, simply take over the banks, the state bailed them out anyway, why not take their profits, take their bonuses (throug taxes), and restructure the banks as public, non-profit, entities whos purpose is public service?

Well we know why, but in Europe I think its good that people are fighting these austerity measures, I hope the people win.

[inyourhouse]

The problem with that video is that it ignores the role of monetary policy. I don't think fiscal policy is expansionary in an economy with flexible exchange rates (http://www.nber.org/papers/w16479.pdf), but supposing it was, there is no reason why monetary policy cannot pick up the slack caused by fiscal contraction. This is true even when interest rates are at the zero bound because quantitative easing is always possible. Monetary policy alters aggregate demand much more quickly (immediately, vs. a lagged multiplier effect in fiscal policy) and comes with much lower long run costs (higher price level vs. crowding out of private investment), so in my view it makes sense for countries to be engaging in austerity and offsetting any negative effects with monetary policy. There should be no negative effects on short run growth when doing this, but there should be positive effects on long run growth caused by lower government expenditure.

[RGacky3]

So are you saying to drop interest rates?

[Dimentio]

The interest rates are already approaching zero. The solution doesn't lie there.

[RGacky3]

Low interests rates arn't gonna do a damn thing except encourage bloated lending and speculation (the banks will keep their interest rates high, so its not gonna help working class people or even small buisinesses), lower real wages with inflation, and end up making a huge disaster by just giving more unnacountable power to the banks.

Are you out of your mind inyourhouse?

[Havet]

Monetary policy alters aggregate demand much more quickly (immediately, vs. a lagged multiplier effect in fiscal policy) and comes with much lower long run costs (higher price level vs. crowding out of private investment), so in my view it makes sense for countries to be engaging in austerity and offsetting any negative effects with monetary policy. There should be no negative effects on short run growth when doing this, but there should be positive effects on long run growth caused by lower government expenditure.

But the thing is, austerity is tackling those who cannot be streched any further. The "bottom 40%" mentioned in the video. How much do you expect to be able to "milk" out of them? And for what? To keep in place a corrupt system that promotes and rewards boom cycles that profit a select few (those wealthy enough to afford corruption)?

Countries like Portugal, Spain and Greece cannot do that "monetary policy" because they are part of the Euro. If those three go down, Germany also goes down because it needs a strong euro.

If there was only one 'european debt emission', it would benefit all countries, but it would not benefit germany.

This is not the case with the USA. If you look at California, its much more broken than any of those european countries. But nobody looks at California like that, they look at the USA as a whole.

[inyourhouse]

So are you saying to drop interest rates?

Interest rates are already near the zero bound in most countries, so further monetary expansion will probably have to come from quantitative easing. Central banks should also be given an explicit level targeting mandate, such as 2% growth in the price level each year. Level targeting means that if they undershoot the target one year (e.g. 1% growth in the price level), they will overshoot the next year (e.g. about 3%) in order to get back on the target path. That makes quantitative easing more powerful because the central bank is credibly committing itself to keep expanding the monetary base until it reaches its target. I would actually prefer a nominal GDP target rather than a price level target (the two are identical in the case of a negative aggregate demand shock, but a price level target is contractionary in the case of a negative aggregate supply shock), but any level target would be better than the current predominant target of 2% inflation with the central bank given wide discretion to deviate from that. The recent recession was so severe because central banks allowed such a massive contraction in aggregate demand and then made little attempt to get it back on its original growth path (see here (http://yglesias.thinkprogress.org/wp-content/uploads/2010/04/g98023400023204535364355490620732-1-11.gif) for the US case).


The interest rates are already approaching zero. The solution doesn't lie there.

Correct, although long term rates are nowhere near the zero bound, so central banks could lower those by changing the riskiness of its balance sheet (while holding its size constant), which is sometimes called qualitative easing. The primary method of monetary expansion should be quantitative easing (ie. increasing the size of its balance sheet), though.


Low interests rates arn't gonna do a damn thing

Low interest rates increase aggregate demand and in turn increase real growth, but as I've said, the interest rate mechanism cannot go much further, so it is necessary to engage in quantitative easing.


Are you out of your mind inyourhouse?

I don't think so.

[inyourhouse]

But the thing is, austerity is tackling those who cannot be streched any further. The "bottom 40%" mentioned in the video. How much do you expect to be able to "milk" out of them? And for what? To keep in place a corrupt system that promotes and rewards boom cycles that profit a select few (those wealthy enough to afford corruption)?

That's an ethical argument against a regressive fiscal contraction, but it's not an economic argument against fiscal contraction (like the one made in the video), nor is it an ethical argument against a progressive fiscal contraction. You could achieve a progressive fiscal contraction by cutting corporate welfare and military expenditure, making universal benefits mean-tested, raising the top marginal rate of income tax, etc.


Countries like Portugal, Spain and Greece cannot do that "monetary policy" because they are part of the Euro. If those three go down, Germany also goes down because it needs a strong euro.

Yes, this is the big problem with the Euro. Monetary policy in the Eurozone is geared towards German interests, which invariably means a policy far too expansionary for countries like Ireland, Portugal, Greece, etc., during the boom phase of the cycle and a policy far too contractionary during the bust phase. To put that in perspective, from 2002 to 2007 nominal GDP in Ireland grew at an average rate of 7.7% per annum, while in Germany it grew at a rate of 2.6%. From 2007 to 2010 (estimated), NGDP fell at an average rate of 6.5% in Ireland and fell/grew at an average rate of 0% in Germany. In other words, NGDP fell an average of only 2.6 percentage points below expectations in Germany, compared to a massive 14.2 percentage points in Ireland. It's no surprise that a painful reallocation of resources is necessary after such a volatile monetary policy, but it could be mitigated substantially if Ireland left the Euro and then devalued its new national currency.

[Havet]

That's an ethical argument against a regressive fiscal contraction, but it's not an economic argument against fiscal contraction (like the one made in the video), nor is it an ethical argument against a progressive fiscal contraction. You could achieve a progressive fiscal contraction by cutting corporate welfare and military expenditure, making universal benefits mean-tested, raising the top marginal rate of income tax, etc.

So, then, we need to compare if the "austerity" proposed by most countries will achieve better results than that alternative "austerity"


but it could be mitigated substantially if Ireland left the Euro and then devalued its new national currency.

Sure, but remmember, Ireland's debts are still in euros (Ireland contracted debt from the European Union). If it left, devalued its currency, it would still have to pay debt in euros. If it devalued its currency, it would cost more to pay (in their national currency) the same amount of debt (in international currency). This means: more debt!

Doesn't sound a very smart solution in the long run. I don't mean this as an insult, I just mean that this is an extremely complex problem, and nobody can just come up and claim they have an easy solution. This goes for you, me and every communist here. Of course, we should still debate this issue. But we must agknowledge its complexity.

[RGacky3]

easing. Central banks should also be given an explicit level targeting mandate, such as 2% growth in the price level each year. Level targeting means that if they undershoot the target one year (e.g. 1% growth in the price level), they will overshoot the next year (e.g. about 3%) in order to get back on the target path. That makes quantitative easing more powerful because the central bank is credibly committing itself to keep expanding the monetary base until it reaches its target.

You can't see how that is wildly unsustainable? You can't have purpetual growth, eventually your gonna have to make due without growth. This is what makes bubbles.


Low interest rates increase aggregate demand and in turn increase real growth, but as I've said, the interest rate mechanism cannot go much further, so it is necessary to engage in quantitative easing.


They aggregate demand through credit, you see the problem with that? You can't just lend your way out of this problem and make a bigger bubble.

Putting money in the system will help, but doing it through credit and giving it to the banksters is insane, you give it directly to the working class, support unions, fund coops, you socialize industry.

But again you can't have purpetual growth without bubbles.

[Sir Comradical]

Cheers.

[IcarusAngel]

The problem with inyourhouse is that his ideas have been tried over and over again in early America and early Britain. Neoclassical economics did not work and in the words of one political scientist the countries were built at over the protests of the workers. There were numerous riots and rebellions against capitalism which culminated in public hearings and committees (such as the Saddler committee) and so on and so forth. The neoclassical experiments failed in Latin America as well, with millions of people in poverty after the reforms and with starving countries like Haiti shipping more food out of the country than they consumed.

inyourhouse is the "textbook economist" and textbook economics has failed (Fannie and Freddie for example were privatized in the 70s, the energy crisis hit only utilities that had been privatized, etc.). I think all right-wingers should be Austrian economists, the center represented by Keynesianism and social democracy, the left represented by left-economics.

[inyourhouse]

So, then, we need to compare if the "austerity" proposed by most countries will achieve better results than that alternative "austerity"

Yes, that is a debate worth having. The main issue is that high income earners are more mobile than low income earners, so a progressive fiscal contraction may have a more negative effect on growth if it causes those high income earners to leave the jurisdiction. Having said that, I would prefer a progressive fiscal contraction simply on equity grounds.


Sure, but remmember, Ireland's debts are still in euros (Ireland contracted debt from the European Union). If it left, devalued its currency, it would still have to pay debt in euros.

This is a good point (I remember reading it in the Economist, actually). I think Ireland could change the denomination of its domestic debt to its new currency. That occurs with all currency transitions and is, I think, quite legal. It's overseas debts would still have to be paid in Euros, but not all of its debt is overseas, so there would be a net decrease in debt.


If it devalued its currency, it would cost more to pay (in their national currency) the same amount of debt (in international currency). This means: more debt!

The cost of its debt in Euros would remain unchanged. The cost in national currency would increase as they devalued, but that doesn't make it anymore difficult for them to pay because the point of the devaluation is that it increases growth. The Euro denominated debt as a share of GDP should remain unchanged. As the domestic debt would be converted into the new currency, the total debt as a share of GDP should decline.


Of course, we should still debate this issue. But we must agknowledge its complexity.

I agree.


You can't see how that is wildly unsustainable?

It is, to some extent, unsustainable. A cyclically neutral monetary policy would be nominal GDP growth equal to the rate of real factor input growth, which would imply a rate of deflation equal to growth in total factor productivity. However, shifting to such a policy would have huge negative effects on growth in the short term because wages and prices are sticky, and have been set in the expectation of a much higher level of nominal GDP growth. I think on balance it's best to go to something like a target of 2% growth in the price level and shift to a less expansionary policy over time.


The problem with inyourhouse is that his ideas have been tried over and over again in early America and early Britain.

In my view, the results of monetary expansion in that era were overwhelmingly positive. Let's take the US and FDR's devaluation of the dollar as an example. Christina Romer wrote a famous study (papers.ssrn.com/sol3/papers.cfm?abstract_id=226730) on the effects of fiscal policy and monetary policy during the Great Depression in the US. The point of Romer's article is that monetary policy (rather than fiscal policy) was the cause of the sharp recovery. Romer estimates output with actual fiscal policy (expansionary) and "normal" fiscal policy, and finds that "fiscal policy contributed almost nothing to the recovery from the Great Depression". From the accompanying figure (img17.imageshack.us/img17/7274/fiscalg.png), you can see that without expansionary fiscal policy, real GNP would have been slightly higher from 1937 to 1940, but slightly lower from 1941 to 1942. Romer also estimates of output with actual monetary policy (expansionary) and "normal" monetary policy. Her conclusion is that "the paths for actual GNP and GNP under normal monetary policy are tremendously different". The accompanying figure (img43.imageshack.us/img43/8517/monetary.png) shows this very clearly. From 1933-1934, real GNP would have been higher under normal monetary policy, but after that, it is clear that expansionary monetary policy provided a massive boost to output. I don't consider that a failure!


inyourhouse is the "textbook economist" and textbook economics has failed

I disagree, but it's besides the point. This topic is about monetary and fiscal policy, not about wider aspects neoclassical economics.

[RGacky3]

It is, to some extent, unsustainable. A cyclically neutral monetary policy would be nominal GDP growth equal to the rate of real factor input growth, which would imply a rate of deflation equal to growth in total factor productivity. However, shifting to such a policy would have huge negative effects on growth in the short term because wages and prices are sticky, and have been set in the expectation of a much higher level of nominal GDP growth. I think on balance it's best to go to something like a target of 2% growth in the price level and shift to a less expansionary policy over time.


I wish you would respond to the rest of my posts about credit bubbles and giving banks much more power and how it hurts workers through attacking real wages.

The problem is'nt growth, the problem here is class power, you can't lend and borrow your way out of this, monetary policy can help, but just throwing more money to the banks won't help at all.

Austerity measures should be entirely thought of as class warfare.

A much much more pressing issue is economic power inequality.


The main issue is that high income earners are more mobile than low income earners, so a progressive fiscal contraction may have a more negative effect on growth if it causes those high income earners to leave the jurisdiction. Having said that, I would prefer a progressive fiscal contraction simply on equity grounds.


Where are they gonna go? There are ways of avoiding this, income tax is one way, it encourages buisinesses to keep money in their companies rather than the executives just keep paying themselvs.

Strait up nationalization is another way to avoid this. heavy taxation on money leaving the country is another way to avoid this.

Also if the working class in a country is better off, the market will be bigger, demand will be bigger (based on actual money, not credit), which will actually attract capital.

A wealthy upper class won't do shit for a collapsed economy if theres no money to be made other than dispossesing the economy.

Economies are only good if they actually work for society.


I disagree, but it's besides the point. This topic is about monetary and fiscal policy, not about wider aspects neoclassical economics.

No, this topic is about austerity measures.


In my view, the results of monetary expansion in that era were overwhelmingly positive.

Almost all economists would put getting out of the great depression to the government spending and the social-democratic reforms.

However monetary policy is not black and white, its a balancing act, and one problem in todays crisis the Federal banks giving all this money to banks and letting them run wild with it. All your doing is creating bubbles and empowering banks.

Now if you nationalize the banking system and make them non-profit and publically accountable thats a different story. But giving free credit to for profit institutions is a disaster. Its a balencing act.

Growth is not the most pressing issue at hand here.

[inyourhouse]

I wish you would respond to the rest of my posts about credit bubbles and giving banks much more power and how it hurts workers through attacking real wages.

I don't really know how to respond because you've just made an assertion, not an argument. By what mechanism does quantitative easing "attack" real wages? Do you have any evidence for this?


The problem is'nt growth, the problem here is class power, you can't lend and borrow your way out of this, monetary policy can help, but just throwing more money to the banks won't help at all.

Austerity measures should be entirely thought of as class warfare.

A much much more pressing issue is economic power inequality.

Okay, but that's a political argument. I'm only really interested in the economic argument presented in the video, which suggested that a fiscal contraction will have a negative effect on growth. My argument is that, to the extent fiscal policy does affect growth, any negative effects can be offset by monetary policy. Given that monetary policy is more efficacious and has lower long run costs, it makes sense to engage in fiscal contraction and concurrent monetary expansion.


No, this topic is about austerity measures.

Austerity generally refers to contractionary fiscal policy.


Almost all economists would put getting out of the great depression to the government spending and the social-democratic reforms.

I don't think that's correct. Most economists would certainly attribute part of the recovery to expansionary fiscal policy, but as far as I know, most economists attribute most of the growth to monetary policy. I mentioned Christina Romer earlier, and she's generally seen as a strong advocate of fiscal policy, yet she shows that monetary policy was much more significant. Do you know of any economists who say that fiscal policy was the primary factor in driving the recovery?


But giving free credit to for profit institutions is a disaster.

They don't simply get money for nothing. The central bank purchases bonds from the regular banks and in doing so expands the monetary base. It's essentially a swap of two assets of equivalent value, but the banks give up a less liquid asset (bonds) in exchange for a more liquid one (money). That leads to an increase in total nominal expenditure and in turn an increase in real GDP.


Growth is not the most pressing issue at hand here.

It's the issue that was raised in the video.

[Dimentio]

The point is that they have kept the interest rates very low for most of last decade, and more so during the recession. The theory is that it would increase consumption and thus bring the economy out of the recession.

The problem is either that the consumption doesn't increase at all (as in Japan), or that the people are consuming products imported from other countries.

[inyourhouse]

The point is that they have kept the interest rates very low for most of last decade, and more so during the recession.

Yes, hence why further monetary expansion must come from quantitative easing.


The theory is that it would increase consumption and thus bring the economy out of the recession.

The problem is either that the consumption doesn't increase at all (as in Japan), or that the people are consuming products imported from other countries.

It should increase all components of total nominal expenditure (NGDP), not merely consumption. The reason NGDP didn't increase in Japan despite large scale quantitative easing is because the Bank of Japan was (and still is) committed to a 0% CPI inflation target. They are credibly committing to contracting the money supply if inflation rises above that target, so monetary expansion only has any effect up until that point is reached. This is what Ben Bernanke argued in his famous paper (http://people.su.se/~leosven/und/522/Readings/Bernanke.pdf) on Japan in 1999. The empirical evidence (this (http://www.nber.org/papers/w15565.pdf) and this (http://halshs.archives-ouvertes.fr/docs/00/45/93/84/PDF/DT-GREQAM-2010-02.pdf) are the best studies I've seen so far) seems to support that view.

I don't think this problem exists in the US because the Fed's target inflation rate is 2%, while expected inflation is currently only around 1.6% (based on the 5 year TIPS spread (http://tinyurl.com/2vnk2en)). So there is still room for expansion even assuming the Fed religiously sticks to its inflation target. More realistically, the Fed can allow inflation to go above target because it has a dual mandate, so there is quite a lot more room for expansion. Still, an explicit level target (as I argued in a previous post) would make QE much more powerful because the Fed could commit to very high short run inflation in order to get the price level up to its pre-recession path, while still credibly committing to low long run inflation. Having said all that, is expansionary monetary policy working? It certainly looks like it (http://tinyurl.com/35m798t).

[Dean]

The only way for these nations to get out of their crises is to gain control of their currencies (as in Ireland, Greece) and devalue them and take other protectionist, expansionist measures for economic growth.

The capitalist model demands a certain return given a certain investment. Capitalists will not invest in production if derivatives or CDOs provide stronger returns. However, with financial capital to compete with, only the most expansive models of production-capital will experience strong and diverse investment (competition). The most efficient models of production are government-backed.

This is why, in the U.S., most of your technological progress has been underwritten by the government (Chomsky gives the figure at about 85% in Understanding Power). But more lucid to this point is the specific investments of the New Deal and WWII. These were basically handouts to private companies in the form of purchases, which spurred production (and hence employment).

The point of all of this is that private corporations have a few options: invest in financial capital or invest in production. Within the latter, there are barriers of entry to industries which don't provide significant enough return to justify a new firm's entry (or expansion of production). This is roughly akin to the marginalist theory of production.

Further, the presence of industries which enjoy government subsidies and handouts disincentivizes production in certain situations:
-the reduction of said handouts
-the absence of handouts in certain industries

The free market by itself is rather impotent when it comes to production.

[Havet]

Yes, that is a debate worth having. The main issue is that high income earners are more mobile than low income earners, so a progressive fiscal contraction may have a more negative effect on growth if it causes those high income earners to leave the jurisdiction. Having said that, I would prefer a progressive fiscal contraction simply on equity grounds.

That is indeed a problem. Some people propose to make some sort of worldwide ban to offshores and such, preventing that tax evasion crated by high income earner mobility.


This is a good point (I remember reading it in the Economist, actually). I think Ireland could change the denomination of its domestic debt to its new currency. That occurs with all currency transitions and is, I think, quite legal. It's overseas debts would still have to be paid in Euros, but not all of its debt is overseas, so there would be a net decrease in debt.

The cost of its debt in Euros would remain unchanged. The cost in national currency would increase as they devalued, but that doesn't make it anymore difficult for them to pay because the point of the devaluation is that it increases growth. The Euro denominated debt as a share of GDP should remain unchanged. As the domestic debt would be converted into the new currency, the total debt as a share of GDP should decline.

But here is where we need data. How can you more or less accurately predict the benefit in returning to an old currency, and compare it with the increased cost of paying the debt in a non-euro currency? Do you have any sort of strong data to support your stance?

[RGacky3]

By what mechanism does quantitative easing "attack" real wages? Do you have any evidence for this?


Inflation, which means their wages are worth less.


My argument is that, to the extent fiscal policy does affect growth, any negative effects can be offset by monetary policy. Given that monetary policy is more efficacious and has lower long run costs, it makes sense to engage in fiscal contraction and concurrent monetary expansion.


You can't look at Monetary policy in a bubble, when your giving free money to banks, the ONLY way its gonna posetively effect growth is if there is demand, which there is'nt if the money does'nt get out there through wages. OR it will positively effect if through credit, which creates a bubble.

In a stable economy with a strong labor force a good regulatory framework and not so much class warfare monitary policy could work because the money goes towards buisinesses and people who produce things that sell to a market. But this is not that type of economy.


They don't simply get money for nothing. The central bank purchases bonds from the regular banks and in doing so expands the monetary base. It's essentially a swap of two assets of equivalent value, but the banks give up a less liquid asset (bonds) in exchange for a more liquid one (money). That leads to an increase in total nominal expenditure and in turn an increase in real GDP.


THey they are getting the money at 1% interest and lending it out for 20% interest, its free money, no matter how you explain it.


It's the issue that was raised in the video.

The video was much more about a funtioning economy.