Except that it flubs the single most important piece, why austerity was imposed in the first place. Not willing to take a side, the article quotes some Labour-identified people as saying austerity was a political choice and a bad one, while Conservative politicians get to argue that it was a simple matter of arithmetic.
“It’s the ideology of two plus two equals four,” says Daniel Finkelstein, a Conservative member of the upper chamber of Parliament, the House of Lords, and a columnist for The Times of London. “It wasn’t driven by a desire to reduce spending on public services. It was driven by the fact that we had a vast deficit problem, and the debt was going to keep growing.”These are presented as equally valid perspectives, and the matter is set aside as an unresolved dispute.
But the economics of the situation is one-sided: governments facing a slump always have the option to borrow, at least if they can borrow in their own currency and have a central bank to support their bond issuance. Both of these boxes are checked for England, so there is no validity at all to the Conservative position: it’s a pseudo-argument, good enough only for those who lack an introductory comprehension of economics. Granted, that’s a large mob and obviously includes quite a few journalists, but we’ll never make progress unless we hold journalists accountable for a higher standard of performance.
Of course, just because a government can borrow doesn’t mean it should. There are judgments to be made about the benefits of public programs, how much national income can be sustained through deficit spending (fiscal multipliers), and how large government debts can be before their sustainability is threatened (fiscal space), so I’m not saying economics mandates only one set of policies. But not every argument is sound, and the argument that denies the very possibility of debt finance in the face of a recession doesn’t make the cut. False equivalence is just bad journalism.
7 comments:
Austerity and the political games Progressives play
Comment on Peter Dorman on ‘Some Say the Earth Is Flat, British Austerity Edition’
There is the political sphere and there is the scientific sphere. For well-known reasons, both spheres have to be kept apart but economists violate this elementary methodological principle since 200+ years. Economics started as Political Economy and never rose above the level of a cargo cult science.#1
As a result, economic policy guidance never had sound scientific foundations. Economists do not know how the price- and profit-mechanism of the monetary economy works. Because of this, economists do not deal in earnest with the economy but inevitably get lost in meta-communication = gossip: XY, conservative member of the upper chamber of Parliament, the House of Lords, said this; the large mob which includes quite a few journalists, believes this; but economists know that the “argument that denies the very possibility of debt finance in the face of a recession doesn’t make the cut” and so on and on.
The issue of austerity/government deficit spending/public debt is framed for the general public a.k.a. the little man as a moral tale. This applies to the New York Times article on “the effect of almost a decade of austerity on economic and social conditions in England”.
It is a sad story, indeed. Political economics always starts with a sad story. But fortunately, one has not to wait long and some smart economists are presented with their genial solution.#2 And then the political fraud begins.
This time, the fraud comes in the incarnation as MMTers who call themselves Progressives. Their message is, the bad state of the economy is a sadistic political choice of the current government and can easily be overcome with money creation/deficit spending. There is no such thing as a budget restriction and public debt does not matter for a sovereign country.#3
The lethal defect is NOT in the political program as such but lies in the fact that it has NO sound scientific foundations. Any crank is entitled to produce any policy proposal out of thin air, that is what freedom of speech means, but a scientist can not. The decisive argument against MMTers is that their policy proposals have NO sound scientific foundations.#4
To make the argument short, the axiomatically correct Profit Law for the economy as a whole is given as Qm=Yd+(I−Sm)+(G−T)+(X−M) which reduces to Qm=G−T for Yd, I, Sm, X, M = 0. The reduced Profit Law says that the monetary profit of the business sector Qm is equal to the deficit G−T of the public sector, in a nutshell: Public Deficit = Private Profit.#5
From the standpoint of simple self-interest, the one-percenters and their useful academic spokespersons should consistently argue FOR deficit spending and the ninety-nine-percenters and their academic spokespersons should consistently argue AGAINST it.
Accordingly, whoever calls himself a Progressive and argues for deficit spending and assures that debt does not matter is a political fraudster. Fact is that nobody has done more for the one-percenters than deficit-pushing economists.#6
Egmont Kakarot-Handtke
#1 Economics: a science without scientists
https://axecorg.blogspot.de/2016/10/economics-science-without-scientists.html
#2 How MMT enlightens Washington
https://axecorg.blogspot.de/2018/05/how-mmt-enlightens-washington.html
#3 Austerity and the utter scientific ignorance of economists
https://axecorg.blogspot.de/2015/12/austerity-and-utter-scientific.html
#4 MMT: No sound basis
https://axecorg.blogspot.de/2017/06/mmt-no-sound-basis.html
#5 Profit and the decline of labor’s nominal share
https://axecorg.blogspot.de/2017/08/profit-and-decline-of-labors-nominal.html
#6 Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.de/2017/12/keynes-lerner-mmt-trump-and-exploding.html
"But the economics of the situation is one-sided: governments facing a slump always have the option to borrow, at least if they can borrow in their own currency and have a central bank to support their bond issuance."
Yeah, the UK could have really used a British version of John Maynard Keynes.
“It wasn’t driven by a desire to reduce spending on public services. It was driven by the fact that we had a vast deficit problem, and the debt was going to keep growing.”
Indeed. If only, once a recession is officially over, there were some way to collect additional revenues from the rentier class. Titanic intellects such as Baron Finkelstein have wrestled mightily with this conundrum, but have been unable to find a way around the inexorable laws of arithmetic.
Robert Barro wrote an interesting paper on the long-term issue of government debt back in 1979. He looked at both US and UK data to show that while the debt/GDP ratio often spiked during major wars or when major recessions hit, both nations had long-run fiscal policies that tend to pay down debt over time. Of course his 1979 paper pre-dated St. Reagan. But this is about the UK. I'm not the expert that Simon Wren Lewis is with respect to UK macroeconomic data but I did find this ala a Google search:
https://tradingeconomics.com/united-kingdom/government-debt-to-gdp
Before the Great Recession the UK debt/GDP ratio was below that of the US. As of 2016, it was still less than 90% as compared to our debt/GDP ratio over 100%. So they are better off than we are.
Of course I have had my issues with John Cochrane - no debt issues when passing tax cuts for the rich but then debt mania afterwards as a call for slashing Social Security and Federal health expenditures. Same issue across the pond. If the Brits fear higher debt/GDP ratios - pass some tax increases.
Oh, Egmont, do you realize how hypocritically hilarious you have made yourself/
So, there might be grounds for arguing, as you have repeatedly done, that the science of economics should kept apart from the cargo cult of political economy. Oh, but it turns out you have no problem yourself indulging in cargo cult political economy with your silly theory, actually coming up with a definite policy recommendation: rich people should like deficit spending while poor people should like balanced budgets (or at least smaller deficits).
Of course you have always simply ignored actual facts and data as being unscientific. Only pure theory, especially yours, is scientific. But in the real world how deficit spending impacts income distribution depends on things you deem unimportant, such as whether it is due to tax cuts for the rich or higher spending that helps the poor. So, higher deficit spending under FDR and LBJ clearly was associated with greater income equality while higher deficit spending under Reagan and George W. Bush did just the opposite for very obvious reasons, although ones you deem to be unimportant.
How do you reconcile these hard facts with your ridiculous theory, Egmont?
Barkley Rosser
You say: “Oh, but it turns out you have no problem yourself indulging in cargo cult political economy with your silly theory, actually coming up with a definite policy recommendation: rich people should like deficit spending while poor people should like balanced budgets (or at least smaller deficits).”
This is what I actually said: “From the standpoint of simple self-interest, the one-percenters and their useful academic spokespersons should consistently argue FOR deficit spending and the ninety-nine-percenters and their academic spokespersons should consistently argue AGAINST it.”
So, if they had (i) the correct profit theory and (ii) could think logically, the ninety-nine-percenters and their academic spokespersons should consistently argue against deficit-spending because it is always a bad deal for them.#1
The curious fact is that they don’t. Fact is that (iii) MMTers claim to promote the cause of the ninety-nine-percenters, and (iv) argue without exception for money creation/deficit spending.
Because Public Deficit = Private Profit the academic spokespersons of MMT are either committing a logical error or a political fraud. De facto, that is, independently of what they think and say, MMTer are pushing the agenda of the one-percenters.
So, MMTers are either stupid or corrupt or both. In any case, they are NO scientists. This characteristic they share with Walrasians, Keynesians, Marxians, Austrians and Barkley Rosser.
You argue: “So, higher deficit spending under FDR and LBJ clearly was associated with greater income equality while higher deficit spending under Reagan and George W. Bush did just the opposite for very obvious reasons, although ones you deem to be unimportant. How do you reconcile these hard facts with your ridiculous theory, Egmont?”
The axiomatically correct macroeconomic Profit Law as stated above consists exclusively of measurable variables and is therefore readily testable. So you could easily refute me by applying the Profit Law to the macroeconomic data from FDR over LBJ over Reagan to GWB. This is what a scientist would do.
Note that there are two issues here (i) the classical macroeconomic issue of the relative magnitudes of profits and wages [To determine the laws which regulate this distribution, is the principal problem in Political Economy (Ricardo)] and (ii) the issue of the distribution of wages among workers and of profits among firms.#2
It is pretty obvious that economists from Smith/Ricardo via Keynes to MMT and finally to Barkley Rosser never understood what macroeconomic profit is and by consequence thoroughly messed up Distribution Theory.
However, as MMT clearly demonstrates, the lack of the true theory never stopped economists from agenda pushing a serving as useful political idiots.
I wonder how it could escape your attention that the sectoral balances equation MMTers proudly present on any occasion#3 is proto-scientific garbage and that macroeconomics is provably false since Keynes.#4
Egmont Kakarot-Handtke
#1 MMT is ALWAYS a bad deal for the 99-percenters
http://axecorg.blogspot.com/2017/12/mmt-is-always-bad-deal-for-ninety-nine.html
#2 Essentials of Constructive Heterodoxy: Profit
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575110
#3 Down with idiocy!
https://axecorg.blogspot.com/2017/12/down-with-idiocy.html
#4 The demise of phony experts: macroeconomics is provably false
https://axecorg.blogspot.com/2018/05/the-demise-of-phony-experts.html
No, Egmont, you have a basic problem with being completely unscientific. You attempt to turn every test into something you can analytically prove with your vacuous "profit law," when in fact you used your idea to make an empirically testable hypothesis. You always propose tests, but you never do them, and when somebody does them, you pretend they are irrelevant, that if somehow you could magically redefine everything it would turn out how you like. But, sorry, Egmont, that is not how either science or the world itself works.
So, in fact, your claim that that top income people always gain (or "should" do so) when deficit spending increases, is simply empirically false: under the budget policies of the 1930s-40s and 1960s, exactly the opposite happened. You are just plain wrong.
See? You are just as bad of a cargo cult political economist as the rest of us: worse actually, since you refuse to actually deal with any scientific testing of the supposed implications of your non-law.
Barkley Rosser
You say: “So, in fact, your claim that that top income people always gain (or ‘should’ do so) when deficit spending increases, is simply empirically false: under the budget policies of the 1930s-40s and 1960s, exactly the opposite happened. You are just plain wrong.”
This is what I actually said: “To make the argument short, the axiomatically correct Profit Law for the economy as a whole is given as Qm=Yd+(I−Sm)+(G−T)+(X−M) which reduces to Qm=G−T for Yd, I, Sm, X, M = 0. The reduced Profit Law says that the monetary profit of the business sector Qm is equal to the deficit G−T of the public sector, in a nutshell: Public Deficit = Private Profit.”
For anyone who can read an equation it is obvious that the positive effect of a government deficit G−T on macroeconomic profit Qm can at any time be counteracted by negative effects of the other variables, i.e. Yd, I, Sm, X, M.
Whether this has been the case in the 1930s-40s and 1960s can be established by testing the complete equation. There is no way around it, in order to refute the Profit Law you or some qualified econometricians have to do the testing. This is how science works: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)
Fact is that you do not have realized in your whole career as cargo cult scientist that the MMT balances equation (X−M)+(G−T)+(I−S)=0#1 and the Keynesian I=S#2 are logically inconsistent and that, by consequence, all IS-LM models are false from Hicks to Krugman.#3 Macro is proto-scientific garbage for 80+ years.
You have not realized either that your academic colleagues, the MMT money printers and deficit spenders, are deceiving the general public by obfuscating the profit effect of public deficit spending.#4
Macroeconomics is provably false since Keynes, academic economists push the agenda of Wall Street by telling people that public debt does not matter#5, and Barkley Rosser, an economist who never understood what profit is, entertains the audience with the Happiness Curve, how the Saudi crown prince tortures fellow princes, with the assassination of MLK and JFK, the death of Yeshua bin Yusuf, and the infighting of the Bolsheviks back in the 1920s.
Whatever you are doing, it is NOT economics and NOT science.#6
Egmont Kakarot-Handtke
#1 Rectification of MMT macro accounting
https://axecorg.blogspot.com/2017/09/rectification-of-mmt-macro-accounting.html
#2 How Keynes got macro wrong and Allais got it right
https://axecorg.blogspot.com/2016/09/how-keynes-got-macro-wrong-and-allais.html
#3 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856
#4 MMT and the magical profit disappearance
https://axecorg.blogspot.com/2017/08/mmt-and-magical-profit-disappearance.html
#5 How MMT enlightens Washington
https://axecorg.blogspot.com/2018/05/how-mmt-enlightens-washington.html
#6 Economics: communication without content
https://axecorg.blogspot.com/2018/02/economics-communication-without-content.html
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