Economists are finally turning against austerity

[Blart]

http://www.economist.com/blogs/democracyinamerica/2012/02/debating-economic-policy

(snip a bunch of stuff about a book & Obama)... the entire argument that governments should engage in austerity appears to be collapsing.

Item 1: Over the past month, Paul Krugman (http://krugman.blogs.nytimes.com/2012/01/04/the-nonsense-problem/), Brad DeLong (http://delong.typepad.com/sdj/2012/01/understanding-the-chicago-anti-stimulus-arguments-a-response-to-kantoos.html), and Simon Wren-Lewis (http://mainlymacro.blogspot.com/2012/01/mistakes-and-ideology-in-macroeconomics.html) engaged in an interminable duel with Tyler Cowen, Scott Sumner (http://www.themoneyillusion.com/?p=12596), sort-of Karl Smith (http://modeledbehavior.com/2012/01/21/cochrane-krugman-lucas-wren-lewis-and-sumner-a-very-short-interpretation/) (occupying as usual an esoteric position not easily placed on the ideological grid), and probably some other people I'm forgetting—over an old argument by John Cochrane (http://faculty.chicagobooth.edu/john.cochrane/research/papers/stimulus_rip.html) claiming that the multiplier effect of government stimulus spending probably ought to be zero. The argument by Mr Cochrane was a critical document in the stimulus debate, because it was an articulation in more-or-less public discourse by a well-respected economist of a mechanism through which increased government spending could fail to raise GDP or increase employment at all. Essentially every working practical economist and forecaster believed that the stimulus, like any other government spending, would raise aggregate demand, GDP, and employment. Republican politicians were arguing that it would not, and Mr Cochrane backed them up.

Two weeks ago, Mr Cochrane responded to the argument (http://johnhcochrane.blogspot.com/2012/01/stimulus-and-etiquette.html) in a fashion that suggested that either he has changed his mind, or he never thought what the expansionary-austerity people claimed he did in the first place. "Let's be clear what the "fiscal stimulus" argument is and is not about.

It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons, just as governments should finance wars with debt. That doesn't justify all deficits—one can still argue that our government used the recession to radically increase permanent spending. But disliking "stimulus" is not the same thing as calling for an annually balanced budget.

Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it... Stimulus [is] still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work."Okay. There's a lot of nuance here. But as Noah Smith (http://noahpinionblog.blogspot.com/2012/01/cochrane-just-dont-call-it-stimulus.html) pointed out in response, if the basic gist is that governments should run deficits in recessions to smooth consumption, deliver social insurance, and take advantage of low interest rates to invest in infrastructure...then the policies Mr Cochrane is recommending here are to the left of anything Congress is contemplating passing right now.


Item 2: Niall Ferguson has spent the last three years arguing, contra Paul Krugman, that America is courting disaster by allowing deficits to balloon its national debt to such high levels, and will have to reign in spending or face a crippling rise in interest rates. Last week, in an interview with Henry Blodget (http://articles.businessinsider.com/2012-01-30/news/31004691_1_debt-problem-greece-defaults-niall-ferguson), he admitted defeat.

BLODGET: That is a shockingly optimistic view of the United States from you. Are you conceding to Paul Krugman that over the near-term we shouldn't worry so much?

FERGUSON: I think the issue here got a little confused, because Krugman wanted to portray me as a proponent of instant austerity, which I never was. My argument was that over ten years you have to have some credible plan to get back to fiscal balance because at some point you lose your credibility because on the present path, Congressional Budget Office figures make it clear, with every year the share of Federal tax revenues going to interest payments rises, there is a point after which it's no longer credible. But I didn't think that point was going to be this year or next year. I think the trend of nominal rates in the crisis has been the trend that he forecasted. And you know, I have to concede that.

I could go on. This comes on top of criticisms of austerity policies from the IMF, intense pressure at Davos on the German government to countenance increased spending by northern European countries and looser monetary policy at the ECB, and so forth. To some extent what we're seeing here is the backwash from the euro-zone crisis hitting the American economic debate. If you think that the German-led European solution to the euro-zone crisis is deeply confused, and a lot of Americans do, then you have to be troubled by the ways in which it resembles what austerity proponents would have liked America's response to the financial crisis to have been. Americans are starting to recognise that our recovery is further along than other advanced countries' in part because the way we handled the financial crisis wasn't really so awful. And that includes the stimulus.

The presidential election this year is in large measure a referendum on Barack Obama's economic policies. In the broad terms in which it is seen by the electorate, it's a debate over Keynesian deficit spending versus expansionary austerity. The 2010 elections took place at a moment when people seemed to have lost faith in Keynesianism. The 2012 elections are taking place at a moment when people have lost faith in expansionary austerity.

-------------------



TL;DR version:

Obama's handlers won't let him talk about the stimulus, which - despite some horrible decisions (putting too much into single companies and green industry which will likely end up in China, etc.) - still held together our infrastructure and saved an estimated 2 million jobs. But instead of discussing what did and didn't work in the stimulus, our country had a major ideological debate of whether we should respond to an economic crisis with stimulus and deficit spending, or tighten our belts with austerity.

Austerity won the debate in 2010.

Two years and a lot of Eurozone studies later,

what's happening is that the entire argument that governments should engage in austerity appears to be collapsing.The article concludes that the eurozone crisis is causing people to lose faith in austerity.

[Blart]

Austerity bonus link!

As a crisis solution for Spain and Italy, austerity is an abject failure. Until the voices that matter in this crisis change their tune to place much less emphasis on austerity, it is bound to continue.Of course, this is not mostly a crisis of ignorance. It is a crisis of institutions. Which is a shame, in a way. Hard as it is to change minds, it's harder still to change institutions.


http://www.economist.com/blogs/freeexchange/2012/04/euro-crisis-1

[That One Guy]

Wowzers... I tried to read this but it's way over my head. Kudos to those that can process it all.

[DenverBrit]

Austerity has never been the answer.

A balanced approach of cuts and selective tax increases is the proven way to respond to a recession.

The Economist has been preaching the balanced approach, but the 'no taxes' idiots have held this country hostage and ensured a slower recovery.

[Blart]

Wowzers... I tried to read this but it's way over my head. Kudos to those that can process it all.

It all boils down to the same thing as any other economy thread, saving vs spending. But with bigger words.

[Rohirrim]

I think Europe already proved that austerity measures during an economic crisis are a form of collective suicide. Too bad the Republicans are more concerned with their adherence to ideology, not to mention their pledge to Grover Nordquist, than they are to the well being of their nation.

[L.A. BRONCOS FAN]

L0L!

Cochrane was against fiscal stimulus before he was for it.

[El Minion]

http://www.economist.com/blogs/democracyinamerica/2012/02/debating-economic-policy

(snip a bunch of stuff about a book & Obama)... the entire argument that governments should engage in austerity appears to be collapsing.

Item 1: Over the past month, Paul Krugman (http://krugman.blogs.nytimes.com/2012/01/04/the-nonsense-problem/), Brad DeLong (http://delong.typepad.com/sdj/2012/01/understanding-the-chicago-anti-stimulus-arguments-a-response-to-kantoos.html), and Simon Wren-Lewis (http://mainlymacro.blogspot.com/2012/01/mistakes-and-ideology-in-macroeconomics.html) engaged in an interminable duel with Tyler Cowen, Scott Sumner (http://www.themoneyillusion.com/?p=12596), sort-of Karl Smith (http://modeledbehavior.com/2012/01/21/cochrane-krugman-lucas-wren-lewis-and-sumner-a-very-short-interpretation/) (occupying as usual an esoteric position not easily placed on the ideological grid), and probably some other people I'm forgetting—over an old argument by John Cochrane (http://faculty.chicagobooth.edu/john.cochrane/research/papers/stimulus_rip.html) claiming that the multiplier effect of government stimulus spending probably ought to be zero. The argument by Mr Cochrane was a critical document in the stimulus debate, because it was an articulation in more-or-less public discourse by a well-respected economist of a mechanism through which increased government spending could fail to raise GDP or increase employment at all. Essentially every working practical economist and forecaster believed that the stimulus, like any other government spending, would raise aggregate demand, GDP, and employment. Republican politicians were arguing that it would not, and Mr Cochrane backed them up.

Two weeks ago, Mr Cochrane responded to the argument (http://johnhcochrane.blogspot.com/2012/01/stimulus-and-etiquette.html) in a fashion that suggested that either he has changed his mind, or he never thought what the expansionary-austerity people claimed he did in the first place. "Let's be clear what the "fiscal stimulus" argument is and is not about.

It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons, just as governments should finance wars with debt. That doesn't justify all deficits—one can still argue that our government used the recession to radically increase permanent spending. But disliking "stimulus" is not the same thing as calling for an annually balanced budget.

Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it... Stimulus still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work."Okay. There's a lot of nuance here. But as Noah Smith (http://noahpinionblog.blogspot.com/2012/01/cochrane-just-dont-call-it-stimulus.html) pointed out in response, if the basic gist is that governments should run deficits in recessions to smooth consumption, deliver social insurance, and [I]take advantage of low interest rates to invest in infrastructure...then the policies Mr Cochrane is recommending here are to the left of anything Congress is contemplating passing right now.


Item 2: Niall Ferguson has spent the last three years arguing, contra Paul Krugman, that America is courting disaster by allowing deficits to balloon its national debt to such high levels, and will have to reign in spending or face a crippling rise in interest rates. Last week, in an interview with Henry Blodget (http://articles.businessinsider.com/2012-01-30/news/31004691_1_debt-problem-greece-defaults-niall-ferguson), he admitted defeat.

BLODGET: That is a shockingly optimistic view of the United States from you. Are you conceding to Paul Krugman that over the near-term we shouldn't worry so much?

FERGUSON: I think the issue here got a little confused, because Krugman wanted to portray me as a proponent of instant austerity, which I never was. My argument was that over ten years you have to have some credible plan to get back to fiscal balance because at some point you lose your credibility because on the present path, Congressional Budget Office figures make it clear, with every year the share of Federal tax revenues going to interest payments rises, there is a point after which it's no longer credible. But I didn't think that point was going to be this year or next year. I think the trend of nominal rates in the crisis has been the trend that he forecasted. And you know, I have to concede that.

I could go on. This comes on top of criticisms of austerity policies from the IMF, intense pressure at Davos on the German government to countenance increased spending by northern European countries and looser monetary policy at the ECB, and so forth. To some extent what we're seeing here is the backwash from the euro-zone crisis hitting the American economic debate. If you think that the German-led European solution to the euro-zone crisis is deeply confused, and a lot of Americans do, then you have to be troubled by the ways in which it resembles what austerity proponents would have liked America's response to the financial crisis to have been. Americans are starting to recognise that our recovery is further along than other advanced countries' in part because the way we handled the financial crisis wasn't really so awful. And that includes the stimulus.

The presidential election this year is in large measure a referendum on Barack Obama's economic policies. In the broad terms in which it is seen by the electorate, it's a debate over Keynesian deficit spending versus expansionary austerity. The 2010 elections took place at a moment when people seemed to have lost faith in Keynesianism. The 2012 elections are taking place at a moment when people have lost faith in expansionary austerity.

-------------------



TL;DR version:

Obama's handlers won't let him talk about the stimulus, which - despite some horrible decisions (putting too much into single companies and green industry which will likely end up in China, etc.) - still held together our infrastructure and saved an estimated 2 million jobs. But instead of discussing what did and didn't work in the stimulus, our country had a major ideological debate of whether we should respond to an economic crisis with stimulus and deficit spending, or tighten our belts with austerity.

Austerity won the debate in 2010.

Two years and a lot of Eurozone studies later,

The article concludes that the eurozone crisis is causing people to lose faith in austerity.

In bold, that in a nutshell!

[pricejj]

1. I thought you guys said the recession was over?
2. If the recession is over, why is Obama running a $1.1T deficit?
3. The costs for Spain's (5.94%) and Italy's (5.66%) governments to borrow are spiralling out of control. At what bond rate do you think it MIGHT be a good idea for Spain and Italy to finally cut spending enough to balance the budget? 7%? 10%? 20%?
4. Your claim that borrowing more money would get the Europe/U.S. out of a debt-fueled economic death spiral, is the most ridiculous, preposterous, asinine, illogical, hellish, unfounded, and outright maniacal thing that I have ever heard.

[Blart]

1. I thought you guys said the recession was over?
2. If the recession is over, why is Obama running a $1.1T deficit?
3. The costs for Spain's (5.94%) and Italy's (5.66%) governments to borrow are spiralling out of control. At what bond rate do you think it MIGHT be a good idea for Spain and Italy to finally cut spending enough to balance the budget? 7%? 10%? 20%?
4. Your claim that borrowing more money would get the Europe/U.S. out of a debt-fueled economic death spiral, is the most ridiculous, preposterous, asinine, illogical, hellish, unfounded, and outright maniacal thing that I have ever heard.

To most people, it feels like the recession is still here. As the old saying goes, a recession is when your neighbor is out of work, and a depression is when you're out of work. Academically, a recession means a period during which economic output shrinks. It was the longest recession since WWII, but yes, it's officially over, and we're in a (long) recovery period.

As for Spain and Italy, the point of the article is not that they need to borrow more. The point is that the ECB has a tight monetary policy. Read the link in the second post,

With monetary policy set in Frankfurt for a currency area that includes a booming Germany, the multiplier on fiscal cuts is quite high (an independent Spain would cushion austerity with dramatic fiscal easing, a la Britain, but the ECB does not). Growth has therefore been hammered out of existence, leaving the periphery chronically short of fiscal goals and in need of, you guessed it, more assistance. Forward looking markets observed the dynamic for a while then decided to give up on the whole thing. On the verge of a massive cascade of bank and sovereign defaults, the ECB brought out its trillion-euro bank plan.

What are the euro zone's problems? Primarily:

• Peripheral workers are uncompetitive and easy routes to devaluation are off the table. Nominal wage declines and import compression will be the routes back to surplus, but that means years of disinflation or deflation which increases the burden of debt.

• Markets therefore question the ability of sovereigns to make good on their debts. In the absence of a lender of last resort to governments, yields rise and fears of insolvency are self-fulfilling.

• Because governments are individually responsible for domestic banking systems, this leads to fears of banking collapse, which feedback into the growth and debt problems. Without a printing press, governments can't credibly promise to be bank-lender of last resort without further undermining solvency. The ECB has temporarily—but only temporarily—dampened this problem by itself becoming bank-lender of last resort.

[Play2win]

I think Europe already proved that austerity measures during an economic crisis are a form of collective suicide. Too bad the Republicans are more concerned with their adherence to ideology, not to mention their pledge to Grover Nordquist, than they are to the well being of their nation.

Its not just that, it seems they are against advancement, innovation, progress, and technology. You know, all the things that are intrinsically American.

[orinjkrush]

it seems like we are in the midst of a worldwide margin call on debt. bondholders better chill out or defaulting everywhere will be in season..

[L.A. BRONCOS FAN]

Its not just that, it seems they are against advancement, innovation, progress, and technology. You know, all the things that are intrinsically American.

Hammer --> nail --> head. :thumbsup:

[alkemical]

http://www.dangerousminds.net/comments/what_comes_after_the_end_of_capitalism

What comes after the end of Capitalism?


http://www.dangerousminds.net/images/uploads/capitalismisntworkinghjjfd.jpg

Noam Chomsky has long advocated simply reading the Wall Street Journal if you wanted to understand the mindset of the ruling class. No special detective work is necessary to divine the attitudes and intentions of the rich and powerful. In the pages of their house organ you could find what you were looking, often with unvarnished bluntness.

It’s good advice, but today, the WSJ isn’t the only place to look for hints of ruling class attitudes. In a column published today at Huffington Post, Dr. Klaus Schwab, the founder and executive chairman of the World Economic Forum poses a salient question: If this is the end of Capitalism, then what’s next?

One of the criticisms of capitalism centers on the widening gap between winners and losers due to the so-called turbocapitalism that is a result of global competition. In this context, the so-called Nordic model demonstrates that a high degree of labor market flexibility and social welfare systems do not have to be mutually exclusive—indeed, they can actually be combined to very good effect. This type of economic policy also enables countries to invest in innovation, childcare, education and training. The Scandinavian countries, which underwent a similar banking crisis in the 1990s to that which we are now experiencing in other Western economies, have shown that by reforming regulation and social welfare systems, flexible labor and capital markets really are compatible with social responsibility. So it is no coincidence that these countries are now among the most competitive economies in the world. [Emphasis added]

Other aspects of the criticism of capitalism that are worthy of serious consideration are excessive bonuses, the burgeoning market in alternative financial instruments and the imbalance that has emerged between finance and the real economy. However, we do see some progress in these areas thanks to mounting pressure from the general public, governments and also the market.

So even though capitalism was not laid to rest in Davos, it is fair to say that capital is losing its status as the most important factor of production in our economic system. As I outlined in my opening address in Davos, capital is being superseded by creativity and the ability to innovate—and therefore by human talents—as the most important factors of production. If talent is becoming the decisive competitive factor, we can be confident in stating that capitalism is being replaced by “talentism.” Just as capital replaced manual trades during the process of industrialization, capital is now giving way to human talent. I am convinced that this process of transformation will also lead to new approaches within the field of economics. It is indisputable that an ideology founded on personal freedom and social responsibility gives both individuals and the economy the greatest possible scope to develop.


If this is the sort of intellectual currency that was circulating around Davos this year, I think this is a pretty strong indication that the Occupy backlash is having a big effect. You’d hope that by now the elites must know that the natives are restless!

Obviously a worldwide group-mind consensus is demanding, if not exactly the end of Capitalism, certainly a major rethink/reformation of the way it is practiced in the 21st century. The world is a different place than it was before the Industrial Revolution, it’s high time we updated the operating system to reflect those changes.

[DenverBrit]

Its not just that, it seems they are against advancement, innovation, progress, and technology. You know, all the things that are intrinsically American.

Some are still struggling understanding gravity and the Earth being round.

The GOP have gone backwards.....before enlightenment.

http://czechmeout.files.wordpress.com/2008/05/557px-spiezer_chronik_jan_hus_1485.jpg

[Tombstone RJ]

OK fine if austerity is wrong and running a deficit actually prolongs the life blood of the economy, how does inflation factor in? The shrinking value of the US dollar affects everything and hits the middle class and the lower class the hardest.

The price of gas is a perfect example. The price of bread is another example. When it takes more money to buy stuff that the average citizen needs then it inevitably affects everyone and there is less spending. Less spending equals less tax income.

[alkemical]

OK fine if austerity is wrong and running a deficit actually prolongs the life blood of the economy, how does inflation factor in? The shrinking value of the US dollar affects everything and hits the middle class and the lower class the hardest.

The price of gas is a perfect example. The price of bread is another example. When it takes more money to buy stuff that the average citizen needs then it inevitably affects everyone and there is less spending. Less spending equals less tax income.

Careful...now you're running gov't like a business. :)


I'm not really arguing for/against. I just want people to understand or look at the larger picture of biz. What's happening in PA with HBG being bankrupt (well, all the plotiticians are) - and the Fraking laws make it interesting. the collusion between gov't & biz for austerity is one to pay close attention too. Same way that Gov't & Biz collusion for legislation (Medicare part D, Corporate Socialism/Welfare,etc).

I laugh when I hear plotiticians talk about "running gov't like a biz". To me that means finding more "revenue streams" (ala - new taxes/charges/laws).

[Rohirrim]

Bernie Madoff is the metaphor of our zeitgeist. The majority just don't see it. Yet.

[Odysseus]

Austerity has never been the answer.

A balanced approach of cuts and selective tax increases is the proven way to respond to a recession.

The Economist has been preaching the balanced approach, but the 'no taxes' idiots have held this country hostage and ensured a slower recovery.

You mean the real conservatives?

[Odysseus]

Its not just that, it seems they are against advancement, innovation, progress, and technology. You know, all the things that are intrinsically American.

One of surest ways to fight change is going backwards.

[Odysseus]

I think Europe already proved that austerity measures during an economic crisis are a form of collective suicide. Too bad the Republicans are more concerned with their adherence to ideology, not to mention their pledge to Grover Nordquist, than they are to the well being of their nation.

Europe is proposing further austerity measures.

Americans have a unique advantage in that they can INNOVATE their way and lead the world. Conservatives have an opportunity to provide real leadership with this business based issue but are refusing.

[DenverBrit]

You mean the real conservatives?


Although the Economist is closer to 'Classic Liberal,' they are much closer to being 'real conservatives' than the GOP has been in decades. :)

At a time when rational opposition is needed, the GOP is pretty much the opposite.

[Odysseus]

Although the Economist is closer to 'Classic Liberal,' they are much closer to being 'real conservatives' than the GOP has been in decades. :)

At a time when rational opposition is needed, the GOP is pretty much the opposite.

:)

I miss when conservatives were smart. When did the GOP become the party of retards?

[DenverBrit]

:)

I miss when conservatives were smart. When did the GOP become the party of retards?

Around the time of Reagan and the "Morale Majority" (an epic oxymoron). :)

[Blart]

OK fine if austerity is wrong and running a deficit actually prolongs the life blood of the economy, how does inflation factor in? The shrinking value of the US dollar affects everything and hits the middle class and the lower class the hardest.

Deficits are not always inflationary, historically (at least in the US) it's somewhat rare. You need a mix of low unemployment and a large deficit - the USA after Vietnam is a good example.

http://en.wikipedia.org/wiki/Deficit_spending

As for the evils of inflation or deflation - I'd say deflation is the worse of the two.

http://www.economist.com/node/13610845

[Play2win]

Some are still struggling understanding gravity and the Earth being round.

The GOP have gone backwards.....before enlightenment.

http://czechmeout.files.wordpress.com/2008/05/557px-spiezer_chronik_jan_hus_1485.jpg

Let alone the Heliocentric nature of our universe ;D