Blogging the Zombies: Expansionary Austerity – After the Zombies

by John Quiggin on December 23, 2011

This is the final draft section of the new chapter of my Zombie Economics book, on Expansionary Austerity. 

As before comments are welcome. That includes everything from typos and suggestions for better phrasing to substantive critiques of the argument.  If I can get organized, I will try to post the edited version of the entire chapter and invite another round of comments.

As an aside, I just got an email link to the Journal of Economic Literature (behind a login screen), which contains Stephen Williamson’s review of my book, including his claims that both the Efficient Markets Hypothesis and DSGE macro are devoid of any implications. I bet that if I had submitted an article to any publication of the American Economic Association making such claims, it would have been shot down in flames by the referees. But, now it’s been published – anyone keen on a radical critique of mainstream economics can now cite the JEL to the effect that the whole enterprise (at least as applied to finance and macroeconomics) is irrelevant to reality.

Expansionary Austerity – After the Zombies

failure of expansionary austerity is already evident. Predictions that, once the state got out of the way, the private sector would come roaring back, have proved laughably false. After more than a year of austerity in the US and Europe, there is no sign of any recovery. Rather, the risk of another crash looms larger than ever. 

Expansionary austerity is not simply a zombie economic idea. It forms the basis of a political strategy of class war, undertaken by the financial and political elite (the “1 per cent”) to hold on to the wealth and power they accumulated during the decades of market liberalism, and to shift the costs of their own failure on to the rest of the population. An effective response must similarly combine an economic analysis with a policy program and a political movement to mobilise resistance to the push for austerity.

In economic terms, the primary need is to relearn the basic lessons of Keynesian economics. Government intervention can help to stabilise aggregate demand and, when monetary policy is ineffectual because of a liquidity trap, expansionary fiscal policy is the optimal choice.

This lesson has been reinforced in both positive and negative ways since the beginning of the crisis. Fiscal stimulus was successful, most clearly in countries like Australia and China, where governments had advance warning of an externally-generated shock.  But even in the US and Europe, notably including Germany, fiscal policy softened the impact of the crisis.

That lesson, sadly, was not learned. Instead, we are receiving a much harsher lesson that goes the other way. Just as expansionary fiscal policy works to stimulate economic activity, contractionary fiscal policy (that is, austerity) works to depress it.  

Experience has discredited the zombie idea of expansionary austerity, but the lessons of the slump go much further. According to the claims of classical economics (new old) and of Real Business Cycle theory, a long slump like the one that has been going on since 2008 should not happen, except as a result of a failure in labor markets. Although there have been some (fairly desperate) attempts to find such a failure [such as Casey Mulligan’s theory, discussed in Chapter 3, that it was all caused by fear of Obama] none of them can explain a simultaneous slump in the US, Europe and the UK, countries with radically different labor market institutions.

In policy terms, the required response is reasonably clear. Instead of fiscal austerity, what is needed is a return to expansionary fiscal policy to promote economic growth. Only then can the vicious cycle of debt and deflation be broken.

Both for political and economic reasons, it is important to emphasise both sides of the Keynesian policy prescription: stimulatory budget deficits in recessions, matched by stabilising budget surpluses under normal, and especially boom, conditions.  This means that expansionary fiscal measures should be temporary, and accompanied by longer term policies to improve fiscal sustainability.

If the EU agreement signed in December 2011 were interpreted in the light of a sound Keynesian analysis, it would in fact be consistent with this approach. The agreement calls on EU governments to limit the ‘structural’ deficit to 0.5 per cent of GDP. The term ‘structural’ is not well-defined, but is generally taken to refer to the component of the budget that is determined by long-term revenue and expenditure policies rather than by short term macroeconomic fluctuations. If this interpretation is taken to allow for short run fiscal stimulus during recessions, then the structural budget should indeed be required to be in, or near balance.

An expansionary fiscal policy is essential to stimulate demand, but monetary policy must also be remodelled in the light of the crisis. The minimal requirement is a more expansionary policy in which a temporary increase in inflation would be accepted as part of the price of cleaning up the massive debts inherited from the crisis.

But  deepter changes are needed. The monetary policy regime of the past two decades, in which central banks were entirely independent of government, and the maintenance of low inflation was the sole (or, at least, pre-eminent) goal of monetary policy, has been a catastrophic failure. 

The failed system of inflation targeting should be replaced, in the first instance, by a target that takes explicit account of the need to maintain economic activity at a level consistent with full employment. The most popular candidate here is the proposal to target, instead, the level of nominal gross domestic product (GDP).

The idea would be to combine a target rate of inflation (say 2-3 per cent) with an estimate of the long-term rate of real economic growth required to maintain full employment (again 2-3 per cent is a plausible estimate). The aim would then be to keep the value of GDP, expressed in current dollars, on a growth path consistent with these targets (that is, at an average annual rate somewhere between 4 and 6 per cent).

 

This change would have several effects. First, it would restore the balance that used to prevail in monetary policy before the 1990s, when central banks were explicitly required to pursue full employment as well as price stability.  At a minimum, this would force central banks to admit that their current policies are failing, a key requirement for any progress.
Second, because the target would apply to the level of nominal GDP, its adoption would require central banks to catch up the ground lost over the last few years of depressed growth and generally low inflation. That would permit a temporary increase in inflation, which is necessary if growth is to be restarted against a crushing burden of debt.

Last but not least, a nominal GDP target would create room for fiscal policy as well as monetary policy. What is needed now is the abandonment of counterproductive austerity policies and their replacement with a combination of short-term fiscal stimulus and long-run measures aimed at a sustainable budget balance. 

The abandonment of inflation targeting would, of course, be an admission of failure. But central banks have failed, disastrously, and admitting this would be the first step towards a sustainable recovery. A system of nominal GDP targeting would maintain or enhance the transparency associated with a system based on stated targets, while restoring the balance missing from a monetary policy based solely on the goal of price stability.

An effective system of nominal GDP targeting central banks co-operate with pro-growth fiscal policy, instead of seeking to counteract it in the name of inflation targets. This in turn would entail a change in the nature of central bank independence. As in the Keynesian era, central banks would still be independent in the sense that they would not be subject to day-to-day political control of their policy decisions. That is, they would have the same kind of independence as other regulatory bodies put in place to manage aspects of economic policy where direct political control is unhelpful. On the other hand, they would no longer be empowered to act as if they were an economic Supreme Court, not merely independent of, but superior to, governments.

Alternative policy programs are all very well, but they are useless in the absence of a  political movement capable of resisting the push for austerity, and of demanding a progressive alternative. Until recently, there has been little sign of such a movement. But 2011 has been a year a political ferment throughout the world. The ‘Arab Spring’ arose in a very different context from that of the developed market economies, but the revolts were driven in large measure by the fact that people were no longer willing to accept a system where the benefits of economic progress were creamed off by a tiny elite, leaving the population as a whole to struggle.

The example of the Arab Spring has been inspirational. Resistance to austerity has emerged, first in Europe and then, more surprisingly, in the US, where the ‘Occupy Wall Street’ movement has upended many political preconceptions. 

So far, these movements have been notable more for their effects in raising consciousness than for concrete political achievements. But there are promising signs. In the US, the Obama Administration has finally been pushed into taking some positive steps, though it remains to be seen how much of this is mere electoral positioning.  Similarly, European social democrats, now in opposition in nearly all countries, are shifting away from their previously uncritical acceptance of market liberalism. The “European Growth and Jobs Pact” tabled by the Socialists and Democrats (the social-democratic grouping in the European Parliament) represents a step in the direction of resistance to austerity, though still a small one.

Meanwhile, even as the parties of the political right push ever harder for pro-rich austerity policies, their incoherence is becoming more evident.  Given the state of the US economy, and the failure of the Obama Administration to do much about it, the Republicans ought to be guaranteed of a sweeping victory in the 2012 elections. In reality, the process of nominating an alternative candidate has descended into farce, and the Congressional Republicans have plumbed unheard of depths of (un)popularity. In large measure, this reflects the total separation between ideology and reality now required of Republicans

Meanwhile, in Europe, the dominant rightwing power bloc, consisting of the conservative German and French governments, the European Central Bank and the European Commission, is trying ever more desperate expedients in its attempt to maintain the market liberal order. The imposition of “technocratic” governments in Greece (headed by a former member of the ECB Board) and Italy (headed by a former chairman of the European Commission) represents a substantial abridgement of democracy.  It is not clear how this will end, but very hard to see it ending well, at least in the absence of a radical change in policy.

The struggle against the politics of austerity will be a long one, and often dispiriting.  As the experience of the 1920s and 1930s showed, the forces pushing for austerity are powerful. Nonetheless, they were defeated in the end, by the New Deal in the US, the Attlee Labour government in the UK, and the success of social democratic movements and policies in Europe.

This time around, we are fighting the idea in a zombie form, already multiply discredited by experience.  Keynes’ critique of ‘Treasury view’ has been developed into a coherent alternative to classical economics. While far from being the last word, Keynesian economics has repeatedly demonstrated its capacity to explain a crisis that, according to the views of market liberals, should never have happened at all, and, if it did, should have been followed by a rapid recovery.

The revolts of the past year have shown how the power of ideas, when pushed forward by an active protest movement can be amplified by the power of modern communications technology. There is every reason to hope that the inevitable downfall of the zombie economics of austerity will come sooner rather than later.

{ 47 comments }

1

Tim Worstall 12.23.11 at 10:09 am

“Both for political and economic reasons, it is important to emphasise both sides of the Keynesian policy prescription: stimulatory budget deficits in recessions, matched by stabilising budget surpluses under normal, and especially boom, conditions. This means that expansionary fiscal measures should be temporary, and accompanied by longer term policies to improve fiscal sustainability.”

This runs smack into what we might call the “Polly Toynbee Problem”. Taken from the tone of her columns over the years.

As soon as a budget surplus is being run, or looks likely to be run, then every special interest group and their wishes comes out of the woodwork. But we’ve got the money now, we could solve this problem, or that one. The one I specifically remember from Polly is “ending child poverty”. Maybe a good thing to solve but the rhetoric of “Look, piles of money, spend it on what I think important” means that budget surpluses (at least, such equivalent to anything like the deficits we’re seeing now) are politically impossible.

In the UK the past few years and the next few look like increasing the national debt by some 40% of so of GDP (maybe 30%). Does anyone really think that budget surpluses of 5% or more of GDP for some years, or 2 or 3% for a decade or more can really be run?

And no, growing the economy so that debt falls as a percentage of GDP doesn’t cut it. JQ is specifically stating that budget surpluses have to be run to balance the cycle.

I’m deeply unconvinced.

“As the experience of the 1920s and 1930s showed, the forces pushing for austerity are powerful. Nonetheless, they were defeated in the end, by the New Deal in the US, the Attlee Labour government in the UK,”

Slightly odd there about Atlee. There have been only three episodes of actual budget surplus since WWII. First couple of years of Blair/Brown as they followed previous Tory budget numbers, Lawson for a couple of years and Atlee for a couple of years. (Err, OK Cripps (?) if we’re talking Chancellors).

Atlee may have been all sorts of wonderful things but an example of anti-austerity when he’s one of the very few examples of budget surplus we’ve got doesn’t sound quite right.

2

reason 12.23.11 at 10:18 am

Tim,
you well know Polly Toynbee is widely pilloried, also from the left, and has almost no influence. But the we want tax cuts now brigade – no they are a serious problem.

3

Martin Bento 12.23.11 at 10:29 am

The American experience, too, is only 6 years of surplus since WW2. Unless I misunderstood him, JQ’s actual position is that the national debt must be stable as a percentage of GDP over the business cycle (i.e., average over 1 cycle same as average over the next, but with countercyclical variation within the cycle), which implies usual deficits. If so, I’d wish he’d state that baldly instead of talking about balance over the business cycle, which is a different thing and creates a different impression. Which is it, John?

4

Guido Nius 12.23.11 at 11:04 am

The other question is whether the running of a deficit is always as good, regardless of the starting debt position being 50, 100, 150 or 200 per cent.

A real to-be-zombie (as opposed to these financial high-tech things) is the call for people to work more and work longer. Stress is a real issue in our society. Poverty is a real issue. Unbalanced access to decision making in favor of the rich is a real issue. Rich countries staring at their navels instead of helping poor countries is a real issue.

Macro-economic fiddling is a technical issue dividing technocrats into technocrats who are proud of being technocrat and technocrats calling other technocrats technocrats. The nice thing of theories based on cycles is that no amount of theorizing will do away with the thing going up and down.

5

philofra 12.23.11 at 1:27 pm

“……failure of expansionary austerity is already evident. Predictions that, once the state got out of the way, the private sector would come roaring back, have proved laughably false. After more than a year of austerity in the US and Europe, there is no sign of any recovery. Rather, the risk of another crash looms larger than ever.”

This remark indicates the great impatience and the need for instant gratification that exists out there. (Ironically instant gratification is partly and largely responsible for the financial mess economies have gotten into.) The economies of both the US and Europe have gotten themselves into such a hole – with overspending, overextending, too much capacity, and inflated expectations – that it’s going to take years to right things. What we are seeing with the ‘expansionary austerity’ is a start.

6

Walt 12.23.11 at 1:33 pm

philofra: So the solution to our problems is mass unemployment? How is that supposed to work? If your house burns down, the solution is that you should sit around until it magically fixes itself?

7

philofra 12.23.11 at 2:17 pm

@Walt

I didn’t say we shouldn’t try to improve and alleviate things. However, it is going to take time to clean up the mess the financial crisis created. There is no wand or magic bullet like many think exists.

The economies of the US and Europe are living a sort of zombie existence in that there is a deadness about them that will take time to expunge. It is unfortunate that so many have to suffer economically because the deeds of a few. Nevertheless, most were happy to go along for the ride without questioning it.

8

Tim Wilkinson 12.23.11 at 3:08 pm

Yeah, those pensioners, unskilled workers living hand to mouth, single parents etc. should have seen this coming and done something about it. They’ve got no-one to blame but themselves now that the only sensible course is to engage in a systematic vicious circle of dismantling the welfare state in response to the economy tanking.

9

Uncle Kvetch 12.23.11 at 3:34 pm

Yeah, those pensioners, unskilled workers living hand to mouth, single parents etc. should have seen this coming and done something about it.

Yes, we’re all banksters, when you really think about it. And at least the rich banksters can point to the fact of their having gotten rich, which shows that they must have been doing something right. The rest of us don’t even have that excuse.

We’re just deadness that needs to be expunged.

10

Tim Worstall 12.23.11 at 3:35 pm

“you well know Polly Toynbee is widely pilloried, also from the left, and has almost no influence.”

She’s an example of a polirtical pressure, that’s all.

Let me put it another way. We can all imagine various coutnries running a 10% og GDP deficit. We can just look out the window and see that happening.

Can anyone actually imagine a country running a 10% of GDP surplus in any one year?

Quite, the political pressures are asymmetric.

11

understudy 12.23.11 at 3:48 pm

And just to continue the line of thinking further … at least banks in the last cycle had to follow GAAP accounting standards, unlike government accounting. Pensions vested will be paid at companies like Bear and Lehman. Unlike the private sector, changes (increases) in government pensions and other future liabilities are not accounted for in deficit/surplus calculations. Should current Medicare commitments be viewed as a liability on the balance sheet (debt to GDP) and changes in these liabilities flow through the government income statement (deficit)?

Personally, austerity seems to have a better chance of working than any Western country of running a budget surplus, ever.

12

philofra 12.23.11 at 4:32 pm

“Yeah, those pensioners, unskilled workers living hand to mouth, single parents etc. should have seen this coming and done something about it. They’ve got no-one to blame but themselves now that the only sensible course is to engage in a systematic vicious circle of dismantling the welfare state in response to the economy tanking.”

Seriously, life isn’t fair. But I understand your position. It’s one of push-back. That’s all you can do. However, things aren’t is bad as they could be.

13

philofra 12.23.11 at 4:32 pm

“Yeah, those pensioners, unskilled workers living hand to mouth, single parents etc. should have seen this coming and done something about it. They’ve got no-one to blame but themselves now that the only sensible course is to engage in a systematic vicious circle of dismantling the welfare state in response to the economy tanking.”

Seriously, life isn’t fair. But I understand your position. It’s one of push-back. That’s all you can do. However, things aren’t is bad as they could be.

14

Watson Ladd 12.23.11 at 4:50 pm

NGDP targeting was proposed by the Economist. I’m having trouble as seeing that as pushback against the global capitalist class. It also isn’t clear that meeting an NGDP target will involve high inflation: that’s only the case if real output doesn’t improve fast enough, which would be a sign of policy failure.

15

Don Levit 12.23.11 at 5:20 pm

understudy wrote:
Unlike the private sector, changes in government pensions and other future liabilities are not accounted for in deficit and surplus calculations. Should current Medicare commitments be viewed as a liability on the balance sheet and changes in these liabilities flow through the government income statement?
Excellent points.
Actually, the only liabilities that Medicare and Social Security have, according to federal governmental accounting, is current year expenditures.
Anything beyond the current fiscal year is not a liability, for it can be changed (completely eliminated) by the Congress.

The FASAB is the accounting advisor for the federal government.
In a paper “Accounting for Social Insurance, Revised, ” published by the FASAB:
Page 85 “Social insurance is not an employee benefit. The accounting methods for employee retirement benefits reflect the fact that employees voluntarily exchange lower wages during their working years to receive certain future benefits. Such an exchange does not occur with social insurance benefits.”
Page 87 “A nonexchange transaction arises when one party receives value without directly giving or promising value in return. In regards to social insurance benefits the federal government gives value to beneficiaries WITHOUT RECEIVING VALUE IN RETURN. THE FACT THAT BENEFITS PAID ARE NOT BASED ON THE AMOUNT OF TAXES PAID CONFIRMS THE NONEXCHANGE NATURE OF SOCIAL INSURANCE.”
“Another important distinction between exchange and nonexchange transactions is the type of obligations that are recognized. The U.S. Supreme Court has affirmed the right of the Congress to modify future Federal Government benefits in any manner and at any time. The Government is not bound in its policy decisions by its previous actions; one Congress cannot bind a subsequent Congress.”
http://www.fasab.gov
Click on Exposure Drafts and Documents for Comment
Don Levit

16

Don Davis 12.23.11 at 5:25 pm

This is just a way of saying “It means exactly what we want it to mean!”. For instance, if DSGE macro is devoid of any implications why is it the only econometric model that can be used for research funded by the US Government?

argues that the whole edifice of NCE was intended and has become a giant rhetorical device that bends the minds of students so as to confine their activity to a predetermined set of areas and activities that preclude any effective attack, like that posed by Henry George, on their power and privilege.

(It is my first time posting here, so I hope my HTML fu works! :-) )

17

Don Davis 12.23.11 at 5:30 pm

“Stephen Williamson’s… claims that both the Efficient Markets Hypothesis and DSGE macro are devoid of any implications” is just a way of saying “It means exactly what we want it to mean!”. For instance, if DSGE macro is devoid of any implications why is it the only econometric model that can be used for research funded by the US Government?

Mason Gaffney argues that the whole edifice of NCE was intended and has become a giant rhetorical device that bends the minds of students so as to confine their activity to a predetermined set of areas and activities that preclude any effective attack, like that posed by Henry George, on their power and privilege.

18

beezer 12.23.11 at 5:50 pm

I agree basically with the piece. That said, I’m inclined to go along with Tom Keen’s observations regarding the importance of banking and credit expansion, or lack of same, in economies. His is a Keynes/Minsky type of viewpoint. Neo classic economics apparently gives short shrift to the role money and credit plays in economies, and that’s a problem Keen explains very well. He also makes some very strong arguments that economies, especially capitalist ones with fractional banking, are inherently unstable and a focus on equilibriums is therefore misleading at a minimum.

Nevertheless, from my perspective Keen’s arguments don’t contradict what you write here.

19

shah8 12.23.11 at 6:10 pm

A couple of points:

1) One of the issues that is driving this is that the elite class is unusually unified. Class war is prosecuted in part to maintain that unity.

2) The abandonment of employment targeting is fundamentally about maintaining neocolonialist economic frameworks. Basically Germany vis á vis Eastern and Southern Europe is the most concrete expression of this desire. If we didn’t abandon in preference to inflation targeting, the extra cash generated by the dual mandate would have gone to oil and other resource states to the point that might overturn the current elite’s sense of security. Other states, like Iraq, Iran, Turkey, Ghana, Nigeria, SA, various SAmerican states, would have industrialized at far more advantageous costs and climbed the value chain with the same effort that’s largely restricted to BRICs/SK/Sing/Taiwan. Energy resources would have been made precious, and strong penalties for waste (which is desirable by current batch of elites) would have altered and make complex social and economic planning. Geopolitics would also be more precarious.

20

Sev 12.23.11 at 6:24 pm

“a long slump like the one that has been going on since 2008 should not happen, except as a result of a failure in labor markets.”

Krugman has talked about nominal wage stickiness being one reason for this; you might want to briefly reference that. Presumably this reflects the extreme resistance the still employed majority feel to having their income ‘adjusted’ downward while their costs remain largely fixed. He also has discussed more recently the literally self-defeating result of austerity causing higher relative indebtedness, here citing IMF’s Blanchard to the same effect:
http://krugman.blogs.nytimes.com/2011/12/21/olivier-blanchard-isnt-very-serious/
I’d think you might want to expand on that a bit.

Tim #10 I think the point clearly is debt/gdp ratio; after all, both US and UK greatly improved on this during the post war era without, as you say, running a lot of surpluses.

21

Mark A. Sadowski 12.23.11 at 6:52 pm

“The failed system of inflation targeting should be replaced, in the first instance, by a target that takes explicit account of the need to maintain economic activity at a level consistent with full employment. The most popular candidate here is the proposal to target, instead, the level of nominal gross domestic product (GDP).”

I had no idea you favored NGDP targeting. I’m gratified to see yet another one of my favorite economists on board. Maybe there will be an Austerity Spring after all.

22

Barry 12.23.11 at 8:18 pm

Tim Worstall 12.23.11 at 3:35 pm

” Let me put it another way. We can all imagine various coutnries running a 10% og GDP deficit. We can just look out the window and see that happening.

Can anyone actually imagine a country running a 10% of GDP surplus in any one year?

Quite, the political pressures are asymmetric.”

This is irrelevant; growth in the Debt/GDP ratio is what’s important.

23

Tom 12.23.11 at 9:00 pm

“The monetary policy regime of the past two decades, in which central banks were entirely independent of government, and the maintenance of low inflation was the sole (or, at least, pre-eminent) goal of monetary policy, has been a catastrophic failure. “

I do not understand this. Greenspan lowered interest rates when the dot-com bubble burst and the goal was to stimulate the economy back. I have a hard time seeing the Fed as concerned only with low inflation. Actually, it seems pretty keynesian in practice to me.

p.s.: I found two typos: “classical economics (new old)” and “deepter”.

24

Tim Wilkinson 12.23.11 at 9:26 pm

Well Oman and Qatar are expected to do so this very year I believe. I suspect one will have to grant that they are indeed not true Scotsmen. But only if Tim Worstall argues it first, and admits to (gasp) loose talk.

25

P O'Neill 12.23.11 at 11:07 pm

Well Oman and Qatar are expected to do so this very year I believe

Counterpart to below-the-ground asset depletion, for one thing.

Ireland is an interesting case of a country that was running surpluses during the boom years and felt the need to come up with a wheeze to insulate the money from political pressures. The wheeze being to put the money (1% of GNP a year) in the National Pension Reserve Fund, the existence of which (1) postponed any debate about public sector pension reform and (2) meant that there was a nice 20 billion euro or so to dump into insolvent banks.

26

Zora 12.24.11 at 8:27 am

Jawbone recommended Koenraad Elst as an expert on Indian history. HA! Elst is a Flemish right-wing nationalist who has dabbled in contemporary Indian politics on behalf of the Hindutvadis — the right-wing Hindu fanatics. Like the ones who killed Gandhi, tore down the Babri Masjid, and massacred thousands of Muslims in Gujarat pogroms. Apologist for bigotry. Avoid.

27

Zora 12.24.11 at 8:29 am

Oops, I had several threads open at once and put this in the wrong comment box. Please DELETE. I will repost in the right thread.

28

Guido Nius 12.24.11 at 12:10 pm

“Meanwhile, in Europe, the dominant right wing power bloc, consisting of the conservative German and French governments, the European Central Bank and the European Commission, is trying ever more desperate expedients in its attempt to maintain the market liberal order.”

This is both wrong and misleading.

The central disagreement with the UK in December was on the unwillingness to make a compromise to protect the existing liberal order as established by the US & the UK in the last couple of decades (de-regulation of banking, speculation).

& whilst it’s true that France, Germany and the Commision/Parliament are right wing by European standards, they are not right wing tout court, at all. In Europe we do not discuss keeping tax hikes for the wealthy but have, de facto, converged on increasing taxes on wealth. For sure these are baby steps – but at least they are baby steps in the right direction.

I am not the only one in not seeing the fairness of inflation because it will hit those who work harder as those who rely on their wealth. Maybe it is technically a better solution (although I do not think so given the European issues are not short term in nature) but then call it as it is: a technocratic solution. Meanwhile, Murdoch can go on financing a couple of key politicians because the news temporarily was about how bad continental Europe was doing (we all know how much in love neo-liberals were with ‘Old Europe’). Also meanwhile, it seems that despite the continued attempts of the rating agencies to destroy Old Europe’s social model the crash stories are proving to be just that: stories.

29

Mr.Violet 12.24.11 at 12:42 pm

“If the EU agreement signed in December 2011 were interpreted in the light of a sound Keynesian analysis, it would in fact be consistent with this approach.”
The problem is that any EU agreement is not an economic agreement, is an agreement on a balance of powers between EU members, it takes a picture of the power status quo and tries to institutionalize it. So the economic language is left ambiguous enough so to mean everything and nothing, and what matters for the actual implementation of any policy is the balance of powers. This means that if a country is a strong one it will break the rule and nothing will happen, just the rule will be interpreted in a favorable way for that country. If a country is weak, the so called Troika will knock at its door.
This already happened with the “Stability and growth pact”.
This kind of power-might politics are called in European jargon intergovernmentalism which means that decisions are taken by the Council of the European Union or even outside of it in some kind of bilateral agreements between France and Germany (sometimes trilateral with UK, but recently, you know…) which are made not only before deciding, but sometimes even before discussing with other European Union members.
These dynamics in the EU are more similar to the dynamics of the UN than those of a Federal State.
Then there is the real federal stuff, in someway embodied by the European Parliament, but that for having an European Parliament directly elected and with an actual power has been a decade long endeavor against any kind of sabotage and it’s still far from been accomplished.

30

Guido Nius 12.24.11 at 12:54 pm

It is far from being accomplished which is why it would be good that the left would take the occasion of the next EP elections to run a truly European campaign. I think that is their plan but that could be wishful thinking.

Also, the difference with the new treaty to be made is that it actually targets limiting the intergovernmentalism in the EU in favor of the common institutions.

31

Tim Wilkinson 12.24.11 at 6:05 pm

Guido Nius @28 whilst it’s true that France, Germany and the Commision/Parliament are right wing by European standards, they are not right wing tout court, at all

EU itself is right wing though, inasmuch as it was and remains premised on the idea of creating a level playing field for market competition, so that IIUC various kinds of state intervention or participation in markets is ruled out. In effect the member states are playing themselves off against each other, dragging each other down – just as, globally, states tend to engage in a race to the bottom as they compete to be ‘business friendly’.

The extreme right – UKIP, Murdoch, half the conservative party – don’t like the EU in part because of melioristic measures that interfere with rampant short term profit-maximisation, like consumer and employee protection, the much derided ‘health and safety’, etc., but these things while not negligible are still essentially a matter of tinkering with a fundamentally and ineluctably neoliberal setup.

The central disagreement with the UK in December was on the unwillingness to make a compromise to protect the existing liberal order as established by the US & the UK in the last couple of decades (de-regulation of banking, speculation).

And this – which ought to be a rather unpopular position just at the moment – seems to have been quite effectively downplayed by Cameron and the Cons.

32

Tim Worstall 12.24.11 at 8:58 pm

“Tim #10 I think the point clearly is debt/gdp ratio; after all, both US and UK greatly improved on this during the post war era without, as you say, running a lot of surpluses.”

“This is irrelevant; growth in the Debt/GDP ratio is what’s important.”

I understand the point that both of you are making. It’s just that it’s not the point that JQ is making.

“Both for political and economic reasons, it is important to emphasise both sides of the Keynesian policy prescription: stimulatory budget deficits in recessions, matched by stabilising budget surpluses under normal, and especially boom, conditions. “

JQ is arguing, as he has done often, for hard Keynesianism. It isn’t just let the economy expand and make the debt less of a problem. It really is, run budget surpluses equal to (OK, even just near equal to) the deficits in the slumps so as to reduce in absolute, not just relative to GDP terms, the national debt.

And all I’m saying is that that policy is not politically possible.

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Guido Nius 12.24.11 at 9:39 pm

Tim, but the whole point of increasing convergence is to get away from the country to country fiscal competition. The EU is certainly too right wing for my taste but it is still one of the least right wing places on earth as UKIP rightly points out. Also, the project predates neoliberal fashion and as such can hardly be accused of having been put in place merely to defend that fashion. It is true that it swung with the rest of the world to the right. However, this was imho because there was not enough of it to put in enough of a defense against the unbalance of power towards fluid capital. Given a real chance what was not may well still be.

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Tim Wilkinson 12.24.11 at 9:53 pm

Arguing it’s not politically possible is not really a substantive argument – it’s just to say it will never catch on.

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Tim Wilkinson 12.24.11 at 10:18 pm

Guido, I’m just saying old-style left wing policies often seem to be ruled out because they are deemed to be uncompetitive. If that can change, great.

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Omega Centauri 12.25.11 at 2:37 am

The thing that worries me about Keynesianism (aside from the fact that the morality tale is a much easier intellectual and political sale), is the prospects of limits to growth pressures kicking in and decreasing the GDP trendlines, without the policymakers realizing, that the old trendlines are no longer acheivable, no matter the economics. We could apply deficit spending under the assumption that the crisis will be over before disastrous levels of debt are accumulated. Then what is to transpire, if we have to confront both severe debt, and Malthusian limits at the same time?

If we are really transitioning into Neo-Malthusian times, (as I believe), then we need a combination of austerity, and pump priming. The former; austerity needs to apply to the physical consumption of whatever commodities are becoming scarce, while the pump-priming needs to rapidly expand those parts of the economy which have a light resource footprint. Even better, a lot of pump priming can be investment into new technologies which conserve the critical resources. The need for this seems obvious. Yet, the strength of the political enemies seems almost insurmountable. And realization of the predicamate seems unlikley to be timely enough to avoid the trap.

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shah8 12.25.11 at 3:27 am

/me snorts…

Put your copy of Malthus down and step slowly away…

There is plenty of austerity needed. However, the destickified wages and benefits are about devolving power away from entrenched interest and to interests that can more profitably use it. In other words, nationalizing health care, for instance. Giving hiring power and authority to teachers rather than school boards (they vote on books, instead of a state board–they hire graders and other special needs professionals as needed, so forth and on) as another instance. Cracking down on crazy HR practices via more agressive regulatory enforcement on discrimination and other regulations that tends to need competent people in order for full compliance. Rationalize defense purchases and force the service branch to compete for the same pot of cash. Desubsidize suburbia through congestion taxation, mandatory services and taxes (water, fire service, roads/road lighting–all of it funded by proper taxes and none by ad hoc pay-for-services rendered shit). End sly resegregation policies such that all areas of a municipality/region/state get roughly the same quality of services and not one small area gets the bulk of benefit from the wider tax base.

So forth, so on…
We have the wage/price structure we do because of the cost structure of the services we need. That’s why expansionary austerity can never work. Our problems comes from extreme inefficiencies deriving from a broken down political system. Monti, for example, would solve more problems by arresting Burlesconi and his cronies, banning his party, and make a few tweaks to the payment structure of Italian politicians (10 year pay clawback policies should work, say…) than by forcing Italians to have their savings deflated through forcible creditification. Greece and Portugal especially, but Spain as well, suffer from post-Fascist deal complexes that needs to be unwound for long term resolving of economic pressures.

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Tim Wilkinson 12.25.11 at 3:23 pm

Since the potato famine has come up on another thread, I came across a summary which seems accurate enough (even though the source is I think said by some to be tainted – but I couldn’t easily find an alternative version anyway) and which provides another example of ‘free trade’-as-level-playing-field being used to preclude public works.

Russell and Trevelyan made a Public Works rule, which was later found as well in the Constitution of Jefferson Davis’s Confederacy:

“Any public works done shall not be of a nature to benefit any individuals in any greater degree than all of the rest of the community.”

To the despair of the better-off Irish farmers who were trying to save their countrymen, this rule eliminated all projects for drainage of bogs–the only way to rapidly increase food production–on the grounds that this would preferentially benefit those living nearest the bog being drained.

This was the common “free trade” argument against government infrastructure-building which was used against Abraham Lincoln’s Illinois networks at the same time.

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Robin 12.26.11 at 3:44 am

You advocate expansionary fiscal policy and nGDP targeting, great. Disappointingly you say nothing about the immediate financing of such a policy in the present day. Now that the costs of the failure of the few have been so effectively transferred to the many via governments I see very little room for fiscal manoeuvre.

Ultimately I’m left with unanswered questions about inflation and the confidence of ratings agencies (they matter, however contemptible that is).

40

Watson Ladd 12.26.11 at 3:47 am

Tim, how is bog draining public? The farmers who would own the land would get all the benefit, and would be more then able to pay to have it drained in the first place with functional capital markets. Also, food production did not need to be increased AFAIK: Ireland was a net exporter for much of the famine period, and the famine is often cited as due to a negative income shock more then absolute disappearance of food.

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Tim Wilkinson 12.26.11 at 3:41 pm

Though the relevant section was too long to quote in its entirety, anyone interested enough to comment might be expected to take the trouble to read it for themself.

I’d be interested to hear from any historians who consider the article inaccurate.

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Peter Whiteford 12.26.11 at 11:17 pm

Tom Worstall

Have a look at http://www.oecd.org/dataoecd/5/51/2483816.xls which gives figures for gross and net government financial liabilities from 1994 onwards.

In fact, many OECD countries ran surpluses after the mid 1990s until 2007, including consistently significant surpluses in Ireland, Belgium, Spain, Sweden, Denmark, Finland, the Netherlands, Australia and Canada. The UK and the USA also reduced gross and net financial liabilities – just by not very much. It is worth noting that the USA and the UK reduced liabilities a lot in the late 1990s, but started to increase them after 2001/2002.

So it seems to me that the policy is certainly politically possible. It is just that the UK and the USA reversed direction after 2001, although all the other Anglophone countries continued to run surpluses until they ran into the financial crisis.

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Peter Whiteford 12.26.11 at 11:18 pm

Sorry

That should of course be Tim.

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Alex 12.27.11 at 5:56 am

ISTM that given that we’re in the midst of the most dramatic austerity for many decades, a policy based on no evidence whatsoever, worrying about the political power of Polly Toynbee is a bit paranoid.

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Barry 12.27.11 at 3:06 pm

Watson Ladd 12.26.11 at 3:47 am

” Tim, how is bog draining public”
For obvious reasons.
“The farmers who would own the land would get all the benefit, “
Incorrect, for obvious reasons (they would get a lot).
“and would be more then able to pay to have it drained in the first place with functional capital markets. “
BWAHAAHAHAHAHAHA!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Ten lashes for use of efficient market hypotheses.

“Also, food production did not need to be increased AFAIK: Ireland was a net exporter for much of the famine period, and the famine is often cited as due to a negative income shock more then absolute disappearance of food.”

And producing more food would not have helped?

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hopkin 12.28.11 at 2:19 pm

re: surpluses
Sweden, Denmark, Finland, Netherlands. I think Norway should be in here too. Now what do these countries have in common? Well, they’re Polly Toynbee’s idea of paradise. So all this talk that you can’t have balanced budgets and generous welfare is not just wrong – the correlation is very strong, and it’s the other way.

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Peter Whiteford 12.28.11 at 9:17 pm

Norway certainly did run large surpluses, but for reasons it is difficult to duplicate in other European countries.

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