Blogging the Zombies: Austerity (revised)

by John Quiggin on November 20, 2011

Update Nov 20 I’ve revised this as a result of thinking about the comments, though I haven’t yet had time to take all the comments on board. The main change has been to focus specifically on the idea of “expansionary austerity”. As Keynes said in 1937, public sector austerity is desirable if the economy as a whole is booming. And, later in the chapter, I’ll talk about whether austerity is sometimes the least bad response to problems of foreign debt. The claim that is implicit in the current policies of the ECB, the UK Tories and the US Republicans is not merely that austerity is necessary as a response to debt but that it makes sense as a response to a deep recession. This idea is commonly described as “expansionary austerity” End Update note

I’m working on a paperback edition of Zombie Economics and adding a new chapter on austerity. Like last time, I plan to blog it in sections and take advantage of comments and criticisms from readers. I’m opening up with the intro, but plan to serve up something more substantive soon.

 

“The boom, not the slump, is the right time for austerity at the Treasury.” – Keynes 1937
Keynes, John Maynard. 1937/1983. Collected Writings of John Maynard Keynes, vol
21. London: Palgrave Macmillan

Most of the zombie ideas discussed in the first edition of this book flourished in the late 20th century, and were killed, at least as defensible theories, by the evidence of the Global Financial Crisis. By the time I began writing in 2009 it was evident that these ideas, so recently declared dead and buried by virtually all observers, were clawing their way back to a zombie life. I hoped that economists and policymakers would have the good sense to lay them to rest once and for all.

In reality, the opposite has happened. The zombie ideas I criticized continue to walk the earth and do immense damage. Worse still, the long-buried corpse of an idea discredited ever since the Great Depression have re-emerged. The zombie economics of ‘expansionary austerity’ now threatens to turn what is already the worst slump to afflict North American and Europe since 1945 into a new, and global, Great Depression.
The advocates of expansionary austerity make two claims. The first is that our current problems are the result of governments living beyond their means. The claim is absurd on the face of things – there is no plausible link between government budget deficits and the speculative bubble and bust that produced the Global Financial Crisis – but it resonates with deeply imbued beliefs about the virtues of thrift and the need for sacrifice as a response to adversity.

The second, even less plausible, claim is that the way to secure a sustainable economic recovery is for governments to spend less[1] thereby making room for the private sector. The painfully evident fact that there is already plenty of room for private expansion, in the form of unemployed workers and idle factories, is simply ignored.

As Keynes observed during the depths of the Great Depression, austerity (that is, tight control over public expenditure, and measures to put government budgets into balance or surplus) makes sense when the economy is booming, and there is excess demand for resources of all kinds. Surpluses built up in good times can be used to repay debt or create ‘fiscal space’ for an expansionary stimulus in response to an unexpected contraction. But the use of austerity measures at a time when the economy is already depressed will only make matters worse. The contractionary effects of austerity will reduce government revenues and undermine attempts to balance the budget.

Just as zombies are grim and distorted versions of their living selves, so the ideology of expansionary austerity is a grim and menacing version of the ideology of market liberalism. In the triumphalist 1990s, Thomas Friedman’s metaphor du jour was the ‘Golden Straitjacket’. The idea was that, while governments now had no choice but to adhere to the dictates of market liberalism, their citizens would be richly rewarded when they did so. Now the claim is that we need to suffer the pains of austerity, but that the eventual reward will be nothing better than to return the economy to the more-or-less normal functioning that has delivered little or nothing to most of the population over the decades of market liberalism.

This zombie idea is at least as powerful as any of those I attacked in the first edition of this boo. As I write this, it has already defeated any hopes for a rapid recovery from the long slump that has followed the Global Financial Crisis. It is on the verge of destroying the common European currency and, quite possibly, the European Union itself. In the United States, Republican demands for austerity have repeatedly brought the political system to the brink of collapse. The shutdown of the government, and even default on US public debt, have been averted only at the last possible moment, and may yet occur.

Nor is the rest of the world immune. Even countries that avoided the worst impacts of the Global Financial Crisis would find it difficult to navigate through a new crisis, with a likely further contraction in global trade and disruption of capital flows. Yet this seems to be the inevitable outcome of the policies being pursued in the US and, even more, in Europe. Expansionary austerity is the deadliest of zombie ideas.


[1] Some advocates of expansionary austerity also advocate higher taxation as a route to budget balance. More commonly, the “austerians” favor a shift in the tax burden, away from corporations and the wealthy, and on to workers, the middle class, and (via hihger sales taxes) the poor.

“The boom, not the slump, is the right time for austerity at the Treasury.” – Keynes 1937
Keynes, John Maynard. 1937/1983. Collected Writings of John Maynard Keynes, vol
21. London: Palgrave Macmillan
Most of the zombie ideas discussed in the first edition of this book flourished in the late 20th century, and were killed, at least as defensible theories, by the evidence of the Global Financial Crisis. By the time I began writing in 2009 it was evident that these ideas, so recently declared dead and buried by virtually all observers, were clawing their way back to a zombie life. I hoped that economists and policymakers would have the good sense to lay them to rest once and for all.
In reality, the opposite has happened. The zombie ideas I criticized continue to walk the earth and do immense damage. Worse still, the long-buried corpse of an idea discredited ever since the Great Depression have re-emerged. The zombie economics of ‘expansionary austerity’ now threatens to turn what is already the worst slump to afflict North American and Europe since 1945 into a new, and global, Great Depression.
The advocates of expansionary austerity make two claims. The first is that our current problems are the result of governments living beyond their means. The claim is absurd on the face of things – there is no plausible link between government budget deficits and the speculative bubble and bust that produced the Global Financial Crisis – but it resonates with deeply imbued beliefs about the virtues of thrift and the need for sacrifice as a response to adversity.
The second, even less plausible, claim is that the way to secure a sustainable economic recovery is for governments to spend less[1] thereby making room for the private sector. The painfully evident fact that there is already plenty of room for private expansion, in the form of unemployed workers and idle factories, is simply ignored.
Just as zombies are grim and distorted versions of their living selves, so the ideology of expansionary austerity is a grim and menacing version of the ideology of market liberalism. In the triumphalist 1990s, Thomas Friedman’s metaphor du jour was the ‘Golden Straitjacket’. The idea was that, while governments now had no choice but to adhere to the dictates of market liberalism, their citizens would be richly rewarded when they did so. Now the claim is that we need to suffer the pains of austerity, but that the reward will be nothing better than to return the economy to the more-or-less normal functioning that has delivered little or nothing to 80 per cent of the population over the last decade.
This zombie idea is at least as powerful as any of those I attacked in the first edition of this boo. As I write this, it has already defeated any hopes for a rapid recovery from the long slump that has followed the Global Financial Crisis. It is on the verge of destroying the common European currency and, quite possibly, the European Union itself. In the United States, Republican demands for austerity have repeatedly brought the political system to the brink of collapse. The shutdown of the government, and even default on US public debt, have been averted only at the last possible moment, and may yet occur.
Nor is the rest of the world immune. Even countries that avoided the worst impacts of the Global Financial Crisis would find it difficult to navigate through a new crisis, with a likely further contraction in global trade and disruption of capital flows. Yet this seems to be the inevitable outcome of the policies being pursued in the US and, even more, in Europe. Expansionary austerity is the deadliest of zombie ideas.


[1] Some advocates of expansionary austerity also advocate higher taxation as a route to budget balance. More commonly, the “austerians” favor a shift in the tax burden, away from corporations and the wealthy, and on to workers, the middle class, and (via hihger sales taxes) the poor.

{ 57 comments }

1

Hoover 11.20.11 at 12:32 am

I’m not sure the central claim is that “our current problems are the result of governments living beyond their means”.

Many people simply recognise that countries are over-indebted and that this situation is unsustainable. If policymakers decide that austerity is absurd enough to abandon, they’ll have to borrow more money.

That’s possible – the UK, for example is doing so. But borrowing more money may not be a viable solution for all countries if they get charged a lot for doing so. Portugal, for example. It seems to me that those countries have little choice but to be austere, if they want to be in the euro club.

I appreciate that your post is a polemic, but “austerity is the deadliest of zombie ideas” looks over the top. If we’re doing that sort of thing, how about looking at current ECB policy, which is actually physically killing people or at least lowering age of mortality.

2

derrida derider 11.20.11 at 1:25 am

I think even in the introduction you need to counter the “What about Greece?” austerians.

It is NOT that budget deficits cannot be too big in an open economy (sorry MMT people – I think your arguments only make sense in an autarky), nor is lying about them a smart thing to do. And once, whether through bad luck or bad management (both are always in plentiful supply), you find yourself in the situation where no-one will buy your paper then austerity is forced upon you, unless you can persuade some other government or a central bank to buy your paper for you. But the central point is that absent these hard circumstances austerity in a recession is dumb, dumb, dumb – and lots of governments are nowhere near being in these hard circumstances. And they can’t ALL be in those circumstances because savers have to buy someone’s paper; co-ordinated reflation works.

The fundamental point to make is that finance capitalism is the greatest mechanism ever devised for keeping humans healthy and happy, but it is an inherently unstable system that requires interventions, and periodic large scale ones, to keep it on track. For example, it’s the implicit assumption that a stable growth path exists somewhere, necessary to get a testable model, that is the fundamental zombie-creator in DSGE.

3

Shay Begorrah 11.20.11 at 2:50 am

I would have to disagree with #1 and #2 on the reanimation of austerity merely being part of a nuanced and realist response to new financial realities, in fact the idea that the European component of the global financial crisis is a result of poor national budgeting and insufficient fiscal discipline is still prevalent at the very top level of policy making circles.

From an editorial in the Financial Times by Wolfgang Schauble on September 5th 2011: Why austerity is only cure for the eurozone.

“Whatever role the markets may have played in catalysing the sovereign debt crisis in the eurozone, it is an undisputable fact that excessive state spending has led to unsustainable levels of debt and deficits that now threaten our economic welfare. “

This is the minister for finance of the world’s fifth largest economy and he has serious problems with cause and effect.

Schauble’s crazy as they come analysis of Europe’s involvement in the GFC was not popular at The Irish Economy blog.

4

Xerographica 11.20.11 at 2:51 am

No two government expenditures produce the exact same benefit to society. True or false? Eenie meenie minie moe? Magic 8 ball?

What is the value of consumers considering the opportunity costs of their spending decisions? What would the value be of taxpayers considering the opportunity costs of their tax allocation decisions?

What am I missing? Is there some model that I don’t know about? Some new powerful computer that can accurately gauge who the winners and losers should be?

Why wouldn’t it be a good idea to elect 535 personal shoppers to purchase Christmas gifts for everybody? Why wouldn’t it be a good idea for donors to PETA and donors to the NRA to pool their donations and elect representatives to divvy up the pool between the two organizations?

What special qualifications does parliament have at allocating taxes? Nearly 1000 years ago some Barons weren’t happy with how the king was spending their taxes. So what? They demonstrated that the king truly did not have “divine authority”? Thanks…but we’ve made a few advancements in economic theory since then. We now know how scarce resources are efficiently allocated.

The only zombies in the room are traditions that refuse to die. The best way to deal with zombies is to stick your head in the sand.

5

Sam C 11.20.11 at 3:03 am

derrida derider #2:

The fundamental point to make is that finance capitalism …

At the risk of showing that I don’t have an economist’s viewpoint, aren’t there two even more fundamental points: (1) it doesn’t matter how healthy your currency is if you don’t have a functioning economy (a point that the IMF management doesn’t understand but the people of Greece do), and (2) the inactive unemployed are a drain on the economy, better that they do something useful and contribute.

I’m not a fan of complete make-work schemes (I remember watching old ladies brush leaves into little piles on the sidewalks of Soviet Central Asia, heedless if they blew away) but better to have real public works generating assets, improving skill levels, and reducing misery and crime, than sentencing those who want to work to the misery of unemployment.

One could argue that the casino-style finance system generates wealth via make-work schemes because the finance markets create large numbers in bank accounts via their own private shenanigans on the gambling tables of the various exchanges (with little contact to the outside world) and then convert these imaginary numbers into real Ferraris, yachts, houses, private school fees, etc. They create imaginary wealth on paper, tell us it’s real, then persuade us to hand over real assets to them. A nice con trick.

6

Con George-Kotzabasis 11.20.11 at 3:25 am

Professor Quiggin
Are you proposing an unbalanced budget as a way out of zombie economics and long term prosperity? To live beyond one’s means is to live in FALSE prosperity that will not last long, as the present situation in Europe shows starkly. Moreover, a false prosperity encourages and incites a stampede of speculative bubbles that with algorithmic precision blow up in a bust. You are confusing austerity as a ‘drug’ and austerity as a ‘poison’. As a drug it cures your insanity to live beyond your means; as a poison it exacerbates the illness of recession by depriving you of the stimulants of a Central Bank that could weaken the virus of recession and cure it gradually, if one uses the funds wisely to reinvigorate the REAL economy and boost entrepreneurial creativity and innovation, as the leader of the Opposition in Greece, Antonis Samaras, last May, proposed in his Zappeio Address.

Hence, your “zombie” austerity turns into a boomerang and hits you with all the force of Newtonian gravity in your confused austerity.

7

Martin Bento 11.20.11 at 3:50 am

A key question here is to what extent is the austerity tomfoolery and what extent chicanery. Yglesias claims that even the creditors would net benefit from economic expansion, despite the fact that inflation redistributes wealth from creditors to debtors. I have my doubts and take the actual positions of the bankers, including central bankers, as evidence. Even the undead have self-interests.

8

Curmudgeon 11.20.11 at 3:53 am

Austerity keeps getting reanimated not because it makes economic sense but rather because it provides a powerful club for wealthy social Darwinists to dismantle government services that don’t benefit them directly.

Austerity isn’t an economic idea. It’s an economic veneer and justifying excuse for a sociopathic governing philosophy that sees no legitimate role for government other than as a tool to enrich the already wealthy.

9

PSC 11.20.11 at 4:21 am

Hi John,

First, I really enjoyed the first edition.

But if you’re working on a second edition, can I ask you to fix up a pet hate in the first? You confuse/switch too freely between the notion of “Efficient Markets”, as used in e.g. the Australian Wallis banking inquiry, and the “Efficient Markets Hypothesis” from Fama.

I think the chapter would be a lot stronger if:

* you started with a little survey of how the notion of “efficient markets” has been used to drive regulatory “reform” – Wallis is an excellent example of this, “Efficient Markets”, (capital E capital M) are invoked everywhere, but others include the accounting standards being full of mark-to-market language.

* then state that there’s a intellectual/theoretical framework that this sits in, part of which is some kind of pareto-optimality for “Efficient Markets”, and part of which is the EMH itself.

* then point out that it’s all well and good to have “efficient markets”, right up to the point that my pension is worth 75c/dollar and my government owns a few worthless banks because some country I’ve never heard of has defaulted.

Broadly you make all these points, but they’re obscured because (in my view) you’re a little fuzzy with the definitions. If you say “the amalgam of Efficient Market theories that was explicitly invoked to drive current bank regulation” – then we all know what you mean.

10

shah8 11.20.11 at 6:19 am

1) Austerity isn’t a “zombie idea”. It’s, as Curmudgeon sez, a propaganda meme used by creditors to denigrate necessary government functions and prioritized debt repayment. Actual austerity policies are almost *never* known as such. Military mobilization/demobilizations, currency pegging/depegging, decolonization, changes in how services are provided, artificial prices for food, gas, or checking account interest rates, reunification funding, deemphasising infrastructure plans (think Detente and Saturn V/Space Shuttle), see where I’m going? Open austerity policies always eventually fails (but not before the nimble gets theirs), in Chile, Menem Argentina, etc…The point isn’t even really anti-welfare state. It’s simple max debt collection mentality.

2) One does have to understand, that behind the curtain, this is about one thing…growth. It doesn’t really matter that Italy has a primary surplus, or that there is some easy growth/debt ratio that means Italy is solvent. Italy is not solvent in the near term because Italy isn’t capable of growing anymore. This is pretty important to understand because for all the screams about the ECB needing to monetize, it’s not really something that resolves the situation. For all that the UK and the US and others with their own central banks, we will eventually face debt revulsion and crisis as well. The crisis is ultimately about insufficient growth.

3) How does growth and debt interact? The central issue is the desire for positional rent from national banking monopolies (hence heavy resistance to concepts like the bancor). It works differently from US to France to Turkey to China, but societies in most if not all countries use proximity to hoards or monopoly printing presses as a tool to extract rent as well as undergird the financial services of the country. The ECB was constructed so as to aid national financial elites, as were the old ERM I and similar constructions. The problem is that national economies need the low interest rates that only a independent bank (not, say, the Japanese postal banking system) with an actual noneconomic mandate can pursue. The single mandate ECB is designed to allow needed fiscal function to be financed by private banks who do not necessarily participate in that national economy and perhaps not recycle any of that money back into that national economy, all the while, sucking up juicy zero-risk interest rates out of the national economy. Of course, zero risk is not zero risk and acting as a vampire squid does invite management questions so as to perpetuate the system…

4) I think there is a serious risk that events will outpace any place for “austerity” as an extra chapter. It’s just a propaganda meme taken out as a bugaboo for the natives in SAmerica or SEAsia. It’s not really meant to last in any real sense, and it only last for as long as countries are in trouble. As soon as the economic climate gets better, those IMF loans get paid off, quick. The sole purpose is to incubate a mindset that international creditors are the senior claimants in any haircut process. The European mess is simply too big and too critical and too long-term for “austerity” to be a serious lasting meme. Greece is not going to recover as quickly as South Korea or Indonesia. Nor is Eastern Europe. That means that the meme will be exposed pretty quickly for what it is and no actual anti-welfare state austerity for more debt system will be talked about or implemented when the paperback is out. I think what will eventually happen will be a set of controlled defaults at best, and places like Greece and Hungary/other EE countries will have their welfare state destroyed merely as a matter of lack of finances. Uncontrolled defaults…

Well, may God have mercy on all of our souls.

11

chris 11.20.11 at 6:28 am

Yglesias claims that even the creditors would net benefit from economic expansion, despite the fact that inflation redistributes wealth from creditors to debtors.

That would be the inflation that theoretically might occur *after* the labor market becomes tight, right? Creditors aren’t going to gain from having lots of their debtors declare bankruptcy because they are unemployed and their houses underwater. They need the debtors to be making money so they can be making payments. Inflation is small potatoes by comparison, if it happens at all.

I have my doubts and take the actual positions of the bankers, including central bankers, as evidence.

Clearly, we would all be fools to second-guess the infallible wisdom of the bankers.

12

Neville Morley 11.20.11 at 10:10 am

Perhaps this is specific to the UK, but I’d be interested to see some more discussion of the rhetoric used to justify austerity, above all the use of the misleading analogy with household finances – “The UK has maxed out on its credit card” line that our glorious leaders trot out on a regular basis. This is, I fear, an alarmingly powerful and persuasive image that makes anything even remotely Keynesian seem even more counter-intuitive than usual; it works to make austerity seem the only sensible course of action regardless of whether we blame the current situation on reckless banks or profligate states.

13

Tim Worstall 11.20.11 at 10:54 am

“This zombie idea is at least as powerful as any of those I attacked in the first edition of this boo. As I write this, it has already defeated any hopes for a rapid recovery from the long slump that has followed the Global Financial Crisis. It is on the verge of destroying the common European currency and, quite possibly, the European Union itself.”

We could equally argue that what’s about to destroy the euro and the EU is that the ECB doesn’t seem to be up to speed on Friedman and Schwartz.

But then Friedman is on JQ’s list of purveyors of zombie ideas, isn’t he?

14

Dirk 11.20.11 at 11:00 am

“The central claim of austerity is that our current problems are the result of governments living beyond their means. The claim is absurd on the face of things – there is no plausible link between government budget deficits and the speculative bubble and bust that produced the Global Financial Crisis – but it resonates with deeply imbued beliefs about the virtues of thrift and the need for sacrifice as a response to adversity.”

I think this is not how it is framed. We did the sub-prime, the Lehman, and now we do the sovereign debt crisis. The latest crisis is not supposed to explain the former two – these are now completely blanked out from public debate. The EU “reform” on rating agencies shows this clearly.

One thing that should be in the austerity chapter is Paul Krugman’s “confidence fairy”. Governments believe in moral imperatives instead of economics, and they act on these believes. It’s not that they are evil, it’s just that they don’t use science when making decisions. Instead, they listen to their guts. Debt was bad, so: reduce debt! Fallacy of composition? Never heard of that.

I’m looking forward to get more sneak previews.

15

bert 11.20.11 at 1:06 pm

A couple of comments have complained that austerity isn’t a zombie idea but rather a pretext used by malefactors of great wealth. But that’s the advantage of your zombie-hunting approach. You’re able to capture the way bad economic ideas are used to serve political ends.
Having said that, I think this might benefit from defining your zombie a bit more tightly. I don’t spend too much time figuring out [Tom] Friedman, but in your citation above I understand him to be talking about the policy environment required to attract and retain international capital, and to be making a general claim that the material benefits greatly outweigh the cost to economic sovereignty. I understand where you’re coming from, but that strikes me as a very broad definition of austerity. Can you even have austerity during a “triumphalist” period? The policy mix may be very similar, but as a governing programme does anyone run for office on austerity during a boom?

Perhaps if you narrow your fire onto a more specific target: the idea of ‘expansionary austerity’.
If you want to tie it in to the material from the hardback version, the similarities with the abuse of the Laffer curve offers a way to do that. A cuts programme promotes economic growth in the same way tax cuts promote revenue growth, by sprinkling fairydust on those at the top.

16

UnlearningEcon 11.20.11 at 2:20 pm

‘We could equally argue that what’s about to destroy the euro and the EU is that the ECB doesn’t seem to be up to speed on Friedman and Schwartz.

But then Friedman is on JQ’s list of purveyors of zombie ideas, isn’t he?’

I think it’s safe to say Friedman was wrong about the depression, as the money supply increased by 10% between 1929 and 1932.

17

Peter K. 11.20.11 at 4:59 pm

I had forgotten about Tom Friedman’s “golden straightjacket.” The problem with hot money and a current account deficit is that yes it can create a boom as it did in Spain and the European periphery but after the 2008 financial crisis, all the hot money flowed back out, severely worsening these countries’ budget outlooks as growth slowed and interest rates rose.

This sort of happened in the 1997 East Asian financial crisis. Hot money flowed out as countries devalued and had to submit to IMF structural adjustment programs. China learned the lesson well and built up its foreign reserves so it would never have to go to the IMF. This helped create the global savings glut and helped create the boom and bubbles pre-2007.

The IMF has changed it tune somewhat and had a study which demonstrated that “expansionary austerity” hasn’t worked.

18

Tim Worstall 11.20.11 at 5:55 pm

@16.

From DeLong today:

“Milton Friedman, 1998: the Bank of Japan should buy bonds for cash and keep doing so until the Japanese economy recovers:

Reviving Japan: The surest road to a healthy economic recovery is to increase the rate of monetary growth, to shift from tight money to easier money, to a rate of monetary growth closer to that which prevailed in the golden 1980s but without again overdoing it. That would make much-needed financial and economic reforms far easier to achieve…. The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.

There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately…”

Sure looks like what everyone is trying to get the ECB today.

19

StevenAttewell 11.20.11 at 6:15 pm

Regarding is austerity a zombie economics idea or a pretext – it’s both, it’s always been both. The economics side gives legitimacy to the pretext and provides rationalization for the top 19% below the top 1% to follow the leaders even when it leads to them taking in the neck. As Keynes put it:

“The completeness of the Ricardian victory is something of a curiosity and a mystery….That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

My own personal take is that I think what commends austerity not merely to the bankers, but also to the supposed technocrats, and the “high moderatist” journalists, and the upper-middle-class folks who follow there lead has more to do with a fear that the state actually has the capacity to fix this.

20

StevenAttewell 11.20.11 at 6:15 pm

* their lead, dang it.

21

bert 11.20.11 at 6:25 pm

Like you I come at this from a UK perspective, Tim. And in the current context austerity is fiscal policy. QE is uncontroversial by comparison, although that may be because it’s poorly understood. Not trying to shut you down, you understand. And not saying you don’t have a point. But if you want to debate [Milton] Friedman and the Bundesbank, and the grounds on which to disagree with either or neither or both, it might be better to pick another thread.

22

cian 11.20.11 at 6:46 pm

Sure looks like what everyone is trying to get the ECB today.

Um, no. They’re trying to get the ECB to backstop Italian and other bonds to prevent default.

23

cian 11.20.11 at 7:05 pm

I wonder if the part of the problem with austerity, as well as other ideas, is a confusion about money. A healthy economy is one in which people are making things, trading goods, investing, etc, etc. If nobody’s engaged in economic activity (such as Greece currently – kinda), then money is worthless. The ECB and Euro exlites seem fixated on money as a store of value, rather than something that facilitates economic activity.

Of course having money oneself is likely to cause one to have this bias.

24

Cranky Observer 11.20.11 at 7:20 pm

> Con George-Kotzabasis 11.20.11 at 3:25 am
> Professor Quiggin
> Are you proposing an unbalanced budget as a way out of zombie
> economics and long term prosperity? To live beyond one’s means is to
> live in FALSE prosperity that will not last long, as the present situation
> in Europe shows starkly. Moreover, a false prosperity encourages and
> incites a stampede of speculative bubbles that with algorithmic precision
> blow up in a bust. You are confusing austerity as a ‘drug’ and austerity
> as a ‘poison’. As a drug it cures your insanity to live beyond your means;

I’m sure your are familiar with Alan Greenspan’s January, 2001 testimony on the looming dangers caused by the third Federal budget surplus in a row and the necessity of taking action to ensure that the USG didn’t actually pay off its debt:

http://www.federalreserve.gov/boarddocs/testimony/2001/20010125/default.htm

Funny how that all worked out.

Cranky

25

Peter K. 11.20.11 at 10:29 pm

@21

“Like you I come at this from a UK perspective, Tim. And in the current context austerity is fiscal policy. QE is uncontroversial by comparison, although that may be because it’s poorly understood. ”

I believe monetary policy is relevant. Congressional Republican leaders in the U.S. sent an intimidating letter to Bernanke.

Krugman sums up the Krugman/Thoma/DeLong axis pretty well here:

“With the economy depressed and short-term interest rates up against the zero lower bound, government deficits would not crowd out private spending, but rather promote it. And when you’re in that situation, expanding the monetary base isn’t inflationary. On the contrary, the danger was deflation from excess capacity.”

The zombie ideas spring from the mistaken idea that we are not in a special situation. They argue that deficit spending will crowd out private spending. They argue that inflation is just around the corner.

26

StevenAttewell 11.20.11 at 10:39 pm

I would also argue that monetary policy is relevant, because the argument that Mario Draghi and his ilk are pushing is that one of the major downsides of QE and other forms of expansionary monetary policy is that this will let countries “off the hook” of austerity and deregulation. Moreover, I think they share a common fear of inflation over all other economic ills.

27

John Quiggin 11.20.11 at 11:01 pm

Don’t worry, the ECB is going to get a good hammering as the chapter progresses.

28

Anders 11.20.11 at 11:43 pm

@derrida derider

Just to pick you up on a (perhaps inadvertent) misrepresentation of MMT there (why is it that no one who dismisses MMT seems to have engaged with the actual purveyors of it?): you seem to imply that MMT states that “budget deficits cannot be too big in an open economy”.

In case this is what you are implying, can I point out that in fact, MMT maintains that in a monetarily sovereign economy (open or closed), (1) there is no level of budget deficit which is too big a priori, but (2) for any given private sector situation (in terms of willingness to run a surplus), there absolutely is in practice a level of budget deficit which would be too big – and would therefore be inflationary.

29

bert 11.21.11 at 12:20 am

I’m not saying monetary policy is irrelevant to the economy. I’m saying it’s only indirectly connected to the austerity zombie currently walking the earth.

I confess I didn’t follow the Republican antics on this too closely. Was this when Rick Perry threatened Bernanke with a lynching? I seem to remember the GOP claimed to be concerned about the exchange rate, and were outraged that someone would put manly virile strong dollars at risk.

The picture is perhaps clearer in the UK. Interest rates are rock bottom, inflation has been above target for over two years (for whatever reason), and more QE is apparently now being prepared. But alongside this comparatively relaxed monetary stance is a lot of rhetoric from the government about deficits and the need for fiscal retrenchment. Here’s David Cameron explaining last year how low interest rates, which are a gift the markets only give to the fiscally credible, are the key mechanism for turning cuts into growth.

Steven refers to the framing of the debate in the eurozone: “expansionary monetary policy … will let countries ‘off the hook’ of austerity and deregulation”. So, tight or loose, whatever relevance monetary policy has, it’s not the same thing as austerity.

30

shah8 11.21.11 at 4:12 am

You know something John Quiggen…

Isn’t “riskless” assets (created from regulatory arbitrage, and later benefiting from regulatory forbearance) the fundamental zombiefying force in the world today? Assets are privileged, like land in Japan, mortgage credit instruments on the homeowner and on the securities side in the US, and Euro sovereign debt where everyone pretends is back by the entire euro-union. Then banks leverage on these and other similar assets, like student loans, chasing out productive, but boring and tiring, financial work like assessing whether a client is worth loaning money to. Eventually, the financial industry has more claims than the economy can feasibly return profits to, because the profits were always artificial, same as any other price-fixing scheme. Then banks hold bad debts as zombies, while economies reflate from unacknowledged debt deflation.

I think that the belief that national finance should have regulatory rents unconstrained by economic realities and beyond the normal requirements of liquidity and its formation is the biggest, baddest zombie of them all, with quite the zombiefication bite!

31

Sebastian 11.21.11 at 5:09 am

Yikes I don’t often agree with shah8, but it seems like he is definitely on to something at 30.

32

bert 11.21.11 at 1:36 pm

Maybe I’m being too narrow.
If So-And-So Finance Minister announced an austerity monetary policy, I’d know it’d involve both deflation and immediate pain.
I’d also have a good idea what language the announcement was in.

But I’ll try and hold the line on another definition: zombie.
A zombie is an economic idea whose flaws are widely known, which is nonetheless put into service because it serves the interests of those who use it.
Shah8, I’m not clear what the zombie is in your post. At one stage it seems to be the debt itself.

33

Jasiek aka Jan 11.21.11 at 3:15 pm

Firstly, while I fully agree with both you and Keynes on countercyclical policy, it must be hard to develop a social consensus during a boom that this is a boom, and thus it must be politically difficult for the authority to implement austerity in a discretionary manner. During a boom, people tend to believe that the trend of either growth or employment has shifted upwards for ever. Hence, some automatic, built-in means of austerity must be necessary. I trust that a steeper schedule of progressive taxation, on the effective basis as a matter of course in consideration of deductions, perks etc., is a right tool in this regard. However, I doubt that raising corporate tax is a proper option for countercyclical policy in view of Keynes’ two-sector vision between corporates (or non-household entities as a whole) and households. Thus, the trunk of reform in our common view must be household income. It includes inheritance, because an inheritance is a transaction of assets that is income to the inherited households.

Secondly, if the authority has been debt-laden for the preceding period so heavily that the financial market has developed the consensus that any larger public debt is a sign of selling of the debt, how can the authority raise money to use for stimulus projects after the boom babble has popped? Thus, the question make the issue return to the first paragraph. That is, the then state of household income distribution.

Thirdly, I wonder how you think of the effect of (a change in) terms of trade. Quite strangely to me, people – whether in Australia, the United States, or Japan – seem to be expecting respectively that the Trans-Pacific Partnership (TPP) will expand their opportunities of business and employment by seemingly following Charles Davenant’s mercantilist free-trade as opposed to John Polexfen’s protectionism in a kind of simple dichotomy between these two rather radical views that overlook fixed factors of production that are different depending on economies. With reference to your Zombie Economics, you seem to be dealing with this issue only in the context of balance of trade (p. 49-50) in the context of efficient market hypothesis. As for “macroeconomic imbalances such as trade deficits” you writes, “The appropriate response is to intervene in financial markets to restrict the unsound lending practices that drive the growth of such imbalances.” There, you do not deal with other factors such as tariffs at all, and thus one may regard your point as presented within the framework of a customs union. If so, do you think of it to be really possible, with reference to the euro area, to intervene in financial markets, within a customs union that isn’t a fiscal union, to an extent sufficient to restrict the unsound lending practices even though the monetary authorities within a customs union like TPP cooperate to substitute a monetary union? Hence, I assume that your argument on international trade may require some extra insights in view of Keynes’ moderate argument in which he sympathises the idea of free trade in view of the merits from effective reallocation of rare resources and international division of labour but criticises the free-trade advocators’ logically precarious premise, which is obviously part of the efficient market hypothesis, that free trade will induce interest rates and investment levels to be automatically realigned in a sufficient manner (The General Theory of Employment, Interest and Money: Chapter 23).

With the above three points, I suspect that the Ricardian, American mainstream or Zombie economics was developed by some political needs, mainly in the United States, and not really by theoretical insights. In fact, every Zombie theory sounds based on what Keynes called a pseudo-mathematical method (The General Theory of Employment, Interest and Money: p. 275 and p. 297-298).

By the way, I am personally extremely interested in Poland’s economic policy. The English translation of Prime Minister Tusk’s policy speech of this week is presented on The Economist:

Reform in Poland, at last?
http://www.economist.com/blogs/easternapproaches/2011/11/tusks-speech

There the reporter and most commenters understand Tusk’s policy as austerity straightforward, but I doubt it. (The commenter Jasiek is me). The ruling party as a whole has been increasingly close to your view, especially since its core members broke off official relations with Leszek Balcerowicz.

34

Jeffrey Davis 11.21.11 at 3:25 pm

Any chance that the freshwater economists who support the Bush tax cuts (among other things) being given a hair shirt, shaved bald, and paraded around a city square? No? Well, then who cares about austerity analysis? Austerity isn’t an economic question — that’s been answered. It’s a political one: right wingers want to end the welfare state and bankrupting us is how they’ve decided to do it.

Cranky Observer @24 finds the historical document to show when insanity, politics, and corruption linked arms.

35

Critical 11.21.11 at 4:52 pm

To be fair to some of the republicans, the issue is there is no credibility that government spending will only be a crutch in a period of slack demand, rather than just a permanent addition to spending, and by extension debt/deficit, because there is no political consensus on raising taxes. I never heard a democrat in the later years of the Clinton administration saying cut spending, don’t need it now. It good times, more gov’t investing is critical, in bad times, the refrain remains the same, more gov’t spending is critical. Boy meet wolf.

36

cian 11.21.11 at 5:19 pm

To be fair to some of the republicans

I think at this point in time there is no reason to think that any of the Republicans expressing an opinion on this are anything other than opportunistic, or stupid. I see no point in taking any of their ideas seriously, or pretending that they’re making them seriously.

37

Steve LaBonne 11.21.11 at 5:25 pm

I never heard a democrat in the later years of the Clinton administration saying cut spending, don’t need it now.

Clinton left office with a budget surplus in place. I will let you do a little bit of historical research to find out what happened to it under Bush.

The right does NOT care about deficits, only about cutting taxes on rich people.

38

shah8 11.21.11 at 6:24 pm

*bert*, I don’t really have a clear idea of what I mean either, in my head…

It’s just that I see deals like what California made with BoA wrt distribution of state funds. When one examines that sort of thing, depositing into cards and not accounts, one sees a whole web of assumptions and principles. I think a bit of detail work by people who are better at it, on the deeper zombie concepts might well be worth it. Of course, this is a diversion from Quiggin’s actual thrust, in focusing on zombie ideas that are meant to openly influence the public. I still think this sort of thing is worth unraveling, though.

39

Barry 11.21.11 at 6:58 pm

Thanks, Steve.

40

bert 11.21.11 at 7:09 pm

Shah8,
I don’t know if you managed to catch “Inside Job”. It’s very much a zombie movie. The guy who comes out worst from it is Mishkin the crooked academic economist. There’s a great section at the beginning which shows on an individual level how regulatory capture happened in Iceland. If you haven’t seen it you might enjoy it (in a yelling-at-the-screen kind of way).

Critical,
I can understand why an American might not want to hear this from a European. It’s mainly a question of standing. But a bit of distance may allow you to tell wood and trees apart.
The Republican Party, and particularly the ‘conservative’ movement, is completely and utterly degenerate. Its support has devolved to two main groups: those motivated by short-term narrow self interest, and mouthbreathers.
David Frum shouldn’t get a free pass. His views on foreign policy in particular remain a mess. But his new piece in New York Magazine is an interesting read.

41

cian 11.21.11 at 7:20 pm

His views on foreign policy in particular remain a mess.

Yeah but that’s true of pretty much the entire US political class. David Frum is definitely one of the few non paleos who’s worth paying attention to at this point.

42

Sebastian 11.21.11 at 7:20 pm

I don’t see why you need to preface it with the Republican party at all. In the US, there is no credibility that government spending will only be a crutch in a period of slack demand, rather than just a permanent addition to spending, and by extension debt/deficit, because there is no political consensus on raising taxes enough to cover the spending.

That is a completely fair statement.

43

cian 11.21.11 at 7:52 pm

Well the democrats have been trying to raise taxes. And the Republicans have shown themselves more than happy to raise taxes on anyone who isn’t in the mythic 0.1%

44

bert 11.21.11 at 7:56 pm

“there is no political consensus”
Passive voice. No assignment of responsibility.
Evasive, I’d call that.

Krugman’s recently complained about a similar approach in press coverage of the supercommittee collapse.

45

James 11.21.11 at 9:09 pm

Steve LaBonne @37
Clinton left office with a budget surplus in place

Clinton left office with a budget surplus by 1) being President during the Internet Bubble, 2) spending Social Security taxes as part of the general tax revenue and 3) cutting welfare spending. I doubt you actually suggesting this as a plan to balance the US budget.

46

Steve LaBonne 11.21.11 at 9:31 pm

I’m not. That does not affect the fact that (un)Critical is full of it.

47

BillCinSD 11.22.11 at 12:21 am

James @ 45, Clinton era surpluses occurred in 1999 and 2000 without including Social Security Surpluses

48

Sebastian 11.22.11 at 1:34 am

Democrats are not trying to raise takes to the level required to balance the budget.

49

Steve LaBonne 11.22.11 at 1:43 am

Nor should they while we remain in an unemployment crisis. Nor are they the ones who have been working overtime for years to make responsible taxation levels politically poisonous.

In other news, Sebastian is not trying to be honest.

50

Sebastian 11.22.11 at 4:38 am

The weren’t talking about it in any of the 2000s either. I agree entirely that they shouldn’t try to balance the budget with taxes right this very second. But they won’t during the next expansion either.

In other news, Steve LaBonne relies on ad hominem.

51

Jasiek aka Jan 11.22.11 at 5:20 am

I find most of the commenters here to be talking of the political side of economic policies and not really the theoretical side of them that Professor Quiggin has been dealing with.

His viewpoint is how the political needs have produced theories and policies inappropriate for the dynamics of the real world even though they are not really wrong in view of logic, and I think we must first focus on the theoretical side of them, especially what premises observable in those zombie theories are unrealistic.

For example, some statistical methods can only be legitimate on the premise that the real world is in a state to which the quantity theory of money is applicable whereas, fundamentally, both the present Democrats and Republicans in the US stick to the quantity theory of money.

52

Steve LaBonne 11.22.11 at 1:23 pm

The weren’t talking about it in any of the 2000s either.

Clinton raised taxes against unanimous Republican opposition. The Republicans made sure Democrats paid the political price for acting responsibly. Then, in those 2000s, they blew a huge hole in the budget, when they regained power, by cutting taxes again (along with fighting “off-budget” wars.)

Sebastian is still not trying to be honest.

53

Tim Wilkinson 11.22.11 at 4:44 pm

1. It’s got posted twice again.

2. In the UK, I haven’t heard much of the specifically expansionary austerity claims – the rhetoric is:

* The last government was horrifically profligate and irresponsible and we now have a huge deficit.
* We have to get the deficit down as a matter of urgency, because otherwise it will bring down misery upon our children, and our childrens’ children, yea, even unto the tenth generation, and upon them shall it be visited an hundredfold, etc.
* This is because of interest payments (insert some suitably grim sounding figure here). Even though interest rates are low, and even though the debt which is indeed big is mostly due to bank bailouts – the first failure to recoup which has just occurred with the flogging off of part of Northern Rock.
* As a result we must have cuts (not tax rises or an end to bent deals with tax dodgers, etc). Oddly many of these cuts do not seem to be geared towards saving money any time soon, but rather attacking the welfare state.
* Also, if we do not carry out these austerity measures, the markets will demand higher gilt yields out of disapproval/fear of default.
* Slashing public spending during a serious recession is not a problem because private industry will take up the slack. This is the closest I’ve heard to a positive ‘expansionary austerity’ thesis – and even that is not put forward with much conviction. If it’s challenged, the response seems to be mostly just to revert to screaming about the deficit – and since the media seem to have swallowed the idea that the deficit is the biggest threat to humanity ever, this (i.e. implicitly accepting that austerity will wreck any prospect of recovery, but claiming that there is no alternative because the deficit is just such a danger) seems to go through OK. Obviously this involves ducking the central issue, that cet par, poor economic performance is going to hurt the treasury through lower taxes, higher benefits, etc.
* Hmm, slashing the deficit is proving harder than anyone anywhere could ever possibly have imagined, even though we’ve done everything right. Clearly we must continue on our current course (Cameron, today). And “We are recovering from a debt crisis, not a traditional recession”.

(BTW, today also saw looming the UK’s first (this time round) non-financial case of ‘too big to fail’. Thomas Cook, a giant travel agent, is in financial trouble and approaching the banks for an overdraft extension. Someone on BBC Radio 4 (probably Robert Peston, can’t remember) suggested the banks are likely to accede to the request on the grounds that the knock-on effects if TC went under would be appalling. (Who knows, maybe they will even suggest the government should chip in?). So much for lean free markets, and Darwinian selection at the level of the firm. Time to accept that oligopolies have more in common with monopoly than with perfectly competitive markets, and need to be thoroughly interfered with by governments?)

54

OCS 11.22.11 at 5:12 pm

The second, even less plausible, claim is that the way to secure a sustainable economic recovery is for governments to spend less[1] thereby making room for the private sector. The painfully evident fact that there is already plenty of room for private expansion, in the form of unemployed workers and idle factories, is simply ignored.

Just a minor point. I’ve always heard the “crowding out” idea as being about borrowing — the government borrows and spends so much that there’s no capital left for private sector expansion. I’m not saying it’s true, just that that’s the form I thought the argument usually took. If so, you might want to tweak that paragraph to address it.

55

gastro george 11.22.11 at 5:37 pm

@54 No, the theory (Ricardian Equivalence – Google is your friend) is not about crowding out, but the knowledge of future tax increases (or decreases) and their dependency on government expenditure. Pure tosh.

56

OCS 11.22.11 at 6:22 pm

@54 Actually, I’ve always considered Google more of an acquaintance. But I went ahead and used it, and the idea of crowding out I was vaguely remembering had to do with government borrowing reducing private sector investment by increasing interest rates. (I’m also aware of Ricardian Equivalence (not to be confused with Picardian Equivalence, which is the assertion that Jean-Luc Picard was as good as or better than James T. Kirk. But I digress)).

Anyway, I’m not trying to argue any of these ideas. But I figured I was probably John’s target reader (generally educated, interested in the big economic questions of the day, but with no very deep knowledge of economics). So when he said that idle factories and unemployed workers showed that the private sector had plenty of room to expand, he didn’t seem to be addressing what I thought he was trying to address, which was the crowding out argument, zombie though it might be.

But I may very well be misunderstanding. I often do. For what it’s worth.

57

Dipper 11.22.11 at 9:11 pm

“The claim that is implicit in the current policies of the ECB, the UK Tories and the US Republicans “

As a Brit, I’m all in favour of government using spending to reflate the economy and cause an increase in consumption and hence growth. Just not the UK government. It’s about time the Germans did their bit to rebalance the European economies by getting their wallets out.

The European issue is primarily a staring contest between governments to see who caves in first.

Comments on this entry are closed.