Both sides losing austerity fight

June 27, 2012

In one corner of the intellectual boxing ring is Stimulo. His fighting words: more economic stimulus. History and theory, he declaims, teach that governments should run much larger fiscal deficits in a downturn. In the other corner is the Cutback Kid, who delivers the opposite message: more austerity. He asserts that history and theory teach that governments should reduce their deficits. The two contestants for the Economic Policy Prize are in the midst of a long fight. Amazingly, they are both losing.

Stimulo has the open-hearted enthusiasm often associated with residents of the United States, for three decades known as the land of big fiscal deficits and small worries. His favourite example is the 1930s Great Depression, which only government spending could end. Now, almost four years after the collapse of Lehman Brothers, GDP growth remains slow and the unemployment rate high. The government deficit, he says, should be increased by as much as necessary to push the economy out of its current stagnation.

The Cutback Kid has a more restrained charm, the sort sometimes associated with suave European intellectuals. He praises the virtue of balanced government budgets: sound finances keep inflation far away, support the value of the currency and promote a strong economy by not stealing savings from the private sector, the source of durable growth. After four years of extraordinarily high government deficits, he says, it’s time to cut back.

There have been no knock-out blows. Neither stimulus nor austerity seems to work as predicted. The United States has tried stimulus and the UK austerity, but the results in both countries have been disappointing. The euro zone, which has tried less stimulus and more promises of austerity than either, has not done any better. Japan has been stimulating for years, without either recovery or inflationary disaster.

Here is a summary of the most recent round: Cutback Kid opens with a one-two punch – first Latvia, where punitive austerity is turning the suffering economy around, and then history, which shows that fiscal contractions often help restore economic growth, while large fiscal deficits usually have bad consequences. Stimulo is not deterred. He ducks Latvia – austerity isn’t really working there – and he punches back with examples of successful borrow-and-grow polices. Then he strikes hard with Greece, where austerity is crushing the economy.

And so it goes on. Stimulo responds to his failures with cries for more of the same, while Cutback Kid demands more policy finesse and more patience, because hard work cures slowly. As they argue, the economic news from almost every rich country does not get better. It’s hard to believe either side really has what it takes to win.

The boxing image fits the pugilistic tone of the stimulus-austerity argument. The protagonists often sound less like calm economists than politicians trying to “diss” their opponents. Indeed, the fervour reflects strongly held political views: the trust in governments and distrust of finance on one side and wariness of government and enthusiasm for fair markets on the other. However, the debate is emotional, not rational. The economic theory on both sides is flimsy and the historical evidence is ambiguous.

The intellectual obscurity is so great that even basic definitions are controversial. Does any fiscal deficit count as “stimulus”, or only increasing deficits? Or is stimulus limited to deficits that go beyond those created by the higher spending and lower revenue that inevitably arrive with an economic slowdown? Do virtuous intentions to reduce deficits count as “austerity”, or only actual reductions? Where does monetary stimulus – low policy interest rates, central bank purchases of debt and support for financial institutions – fit into the picture?

Despite the wild claims from the intellectual boxing ring, no one really knows how to restore financial order and economic health after a financial meltdown in countries which account for half of the world’s GDP. The best that can be said is that policymakers should restore confidence, strengthen institutions, avoid unnecessary financial pressure and reduce debts without destroying the financial infrastructure. The translation of those platitudes into policy is, to put it mildly, not obvious.

History’s lessons are hard to read, but there is one relevant – and frightening – precedent for the current problems: the discrediting of the orthodox 19th century model of laissez-faire capitalism and hard money. The failure started to become clear about a century ago; it then took 40 years – with depressions, great inflations and two world wars – to develop a more stable arrangement.

The post-war system evolved over the subsequent decades into one based on much debt, little regulation, free capital movements and narrowly focussed central banks. The Lesser Depression has discredited this model, and it will take time and imagination to find a replacement. The fight between Stimulo and the Cutback Kid is a pointless diversion from the task.


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Love the analogy. But who is the referee?

Posted by ofilha | Report as abusive

Not all countries are the same. A “country” is not the same as a species of tree, but is simply an amalgamation of Power that gives itself a “name”. A significant part of the history of the past 200 years of Western history has been about aligning “countries” with ethnic and racial groups, also referred to as “self-determination” and “nationalism”.

The USA is a Government, but no longer a “country” in the sense of being a nation. Nor does the Federal Government want it to be a “country” in the classical sense of the word. Instead it is a “country” only in the sense that we all share a single set of rulers, much as the old Austro-Hungarian Empire was. They tell us who we are and take what they please from us, enforcing their power with a de facto single Party State and history’s largest prison system. They tolerate nothing except official corruption and militarism.

This sort of system, which pretends to be about “The People” but is really about “The Powerful”, will have a future different from countries where ethnic groups and races have the power to rules themselves. This is largely what the Balkan Wars of the 1990’s were about. In the pursuit of economic and political Power, the American ruling class has destroyed the USA as a country and replaced it with a State modeled on a large American style “Corporation”.

Such a State is weak, as witnessed by Austria-Hungary, and lacks the social cohesion necessary for a “nation”. The problems here are far, far greater than mere economics and cannot be solved without some coming together of the Federal Government and the People. Such a reunion is very unlikely given a political system devoted to being one rather un-democratic thing while pretending to be a single nation which clearly no longer exists.

While this problem is likely to be solved through ever-increasing amounts of force coupled with decreasing amounts of freedom, it cannot be sustained under the high stress of the modern world where nation-States compete with amalgamated Empires with pretend “unity” which is really simply obedience to the State. The American system as it has evolved over the past 50 years cannot survive as it is. Continuing to “hire” employees by whim might work with a company but certainly does not work for a land.

In other words, I agree completely that the debate between stimulus and cutback is irrelevant to the problem. The Emperor has no clothes. Neither does the Empire. What is called for is aligning Governmental structure with the new social realities the Government has created. We need to figure out who and what we now are first.

Posted by usagadfly | Report as abusive

Stimulus may not have worked as it would during a regular recession of the 1970s or earlier, but we don’t live in those times.

I think the stimulative effects of recent gov’t action has been about as expected. It’s just not enough for a long-term solid recovery.

To get the economy back on a totally sound foundation we need more jobs & pay for ordinary people, sound mortgages, lower costs for higher education, health care and other things which have been rising too fast. We need a tax system which properly incentivizes investment in America rather than pushing wealth out of the country.

Education, R&D, jobs, higher pay and incentives to invest in America. These are things the Obama administration wants. Mitt Romney is only interested in lower taxes on the already-rich.

Posted by MarkHathaway | Report as abusive

The problem with the austerity debate is that the issue is defined too narrowly, with only two possible solutions.

The debate should be widened to include all possible ways to stimulate the economy.

One obvious strategy would be for the industrialized nations to allow access to their own markets only to countries who allow their currencies to float freely, and are not guilty of currency manipulation.

Obviously, China is growing at 8% annually because they artificially depress the value of the yuan (RMB). As a result, the USA has lost roughly 2.8 million jobs to China since 2000, according to one estimate.

Romney claims he would get tough on China. But can he be trusted? We need to ask him exactly how he would stop China’s currency manipulation. And how would he also persuade China to make North Korea stop their nuclear weapons program and close their brutal prison camps?

China has the power to change Korea, but they have never done so, because they take advantage of Korea’s evil ways to blackmail the world on trade issues.

America and Europe need leaders who have the competence and courage to go beyond the austerity versus stimulus debate. Ending currency manipulation by emerging nations such as China could significantly improve the industrialized economies, with or without austerity.

Reference: ton/2012/06/20/americas-long-slope-down

Posted by DifferentOne | Report as abusive

How to restore financial order? Easy, bring back consumer confidence.

Things like (decent payig) jobs, good educational oppurtunities for their children, low health care costs, thigns like this.

Your nonsense about austerity vs stimulus, and that ridiculous boxing analogy tells me you are Not Serious. Just scribbling.

Please pay attention to these words, Mr Hadas: “Education, R&D, jobs, higher pay and incentives to invest in America. These are things the Obama administration wants. Mitt Romney is only interested in lower taxes on the already-rich.” Thank you to Mr MarkHath.

Posted by krimsonpage | Report as abusive

Boxing analogy is stupid. Stimulus will never work when the government has been stimulating the economy every year; that is why every year the federal government runs deficits.

Austerity may work, but the government would have to pay attention to the details. Cutting spending by a certain percent across the board is stupid. There are times when micro-management is necessary, this is one of them.

For those ideological fools; u-bam-a has never had a good idea, he is for socialism and especially for himself.

Being full of hate for Republicans or any other group is both evil and foolish.

The facts no one wants to read.

Posted by ALLSOLUTIONS | Report as abusive

To make a black or white argument, or “choice” in a world economy constantly in flux from multiple and unpredictable forces is beyond silly. You might as well try to make the blacksmith choose between the hammer and the anvil. Stimulus and austerity are each tools appropriate to resolve certain problems.

It isn’t a simpleton’s “one size fits all” scenario and never will be. Let’s take one atypical part of the world economy, America, for example. The government of these United States is functionally comprised of three privileged “professional” classes.

There is the judicial, which over the last hundred years has rendered itself functionally unaccountable to anyone anywhere, is a rogue “loose cannon” no longer owing service or respect to “we, the people”. There are the politicians, more and more of which are in or from the legal profession, who look to their own interests and influence before those whom they purportedly represent. There are the agencies of countless unionized bureaucrats no one can eliminate who judge their own success by the size of their budget and number of taxpayer-paid placeholders.

Let us ignore the partisan polymics and simply agree that “our” government today has expanded so far beyond providing specific and purposely limited “needs” of “we, the people” that no one today is able with any certainty at all to list what once all understood to be the purpose of federal authority. Without any limit to purpose, is it any wonder that there is no limit to associated costs?

There is but one way forward, and that if for there to be national debate as to what kind of country America is to be; no more and no less. If there is to emerge a common goal, there must somehow emerge a “national majority consensus” as to precisely what, in the 21st Century, are the “needs” of American citizen/taxpayers. Does it take an accountant or a rocket scientist to understand that available and sustainable revenue is an absolute limit to where a “need” becomes a “want”?

We, the people, must DEMAND, as a first step, that Congress QUIT increasing America’s debt limit. That’s NOT “austerity”. That’s called “living within our means” (actually, well above it).

How about “meeting in the middle” by increasing revenue? NO! Tax revenue is the crack cocaine of every bureaucrat and politician. This would be like trying to put out a fire with gasoline!

When these people have show taxpayers they can PROPERLY prioritize and efficiently allocate existing tax revenue, THEN we can have that conversation. Until then, government will continue to be a black hole that NO amount of money can EVER fill.

Does anyone seriously doubt what I say here?

Posted by OneOfTheSheep | Report as abusive

“Latvia, where punitive austerity is turning the suffering economy around”. This is a silly statement which few in Latvia believe. Unemployment in Latvia has dropped mainly because Latvians are moving to any country in Europe which will let them in.

Posted by MPLSLW | Report as abusive

On politicians: no one can possibly believe they do not behave, and thing, in a theatrical rather than a perceptive manner. They do as they are told. To that extent, they most certainly debate as if they live in a black and white world. In other words, it has become black and white because the hands on the levers of power think that way, or pretend to.

It is an error to think you understand politicians or the wealthy people who have purchased their souls. Do not expect reason to lead you to some sort of “ought to” conclusion. They are humans, and deliciously selfish ones at that. Sadly they play with us as if we were flies, while claiming to have “our” interests at heart.

Most certainly, the politicians, including the ones who hold lifetime sinecure Lordships that we call “judges”, must be brought to heel, and their powers limited. One effective method seems to be voter initiatives that legally override the politicians. Certainly there must be other effective solutions.

But we also have to define precisely who “we” are and to what extent, if any, we want to continue to share a Government with the other people who now live here today. A significant part of the problem is that we must redraw lines about exactly who we are, voluntarily and not at gunpoint. That means defining who does, and does not, get a say about “our” laws and “our” national priorities. Americans need a new crack at self-determination.

Posted by usagadfly | Report as abusive

Any government can only operate successfully if it has the support of the people. At this point so much of the world wealth has moved to so few, most nations must comply with the banking systems wishes, rather than what’s good for the people. Hence they lose public support. The USA dumps billions into the military, and what good is a huge military without a war to fight? The only solution I can see is, everything in moderation.

Posted by boon2247 | Report as abusive

(quote) “post-war system evolved over the subsequent decades into one based on much debt, little regulation, free capital movements and narrowly focussed central banks. The Lesser Depression has discredited this model… ”

interesting denouement – looking forward to part two

Posted by scythe | Report as abusive

Neither is the “total” solution. Certaily not stimulus; as once it starts, you go back into recesssion when you shut it down. Also, it doesn’t create lasting private sector jobs. What’s needed is honest, competent politicians and government workers being made more accountable and paid far less than they presently are. No subsidies for politically connected friends, no subsidies for companies, no tax loopholes. Fair and equitable taxation. Encouraging all citizens to depend on self-reliance and hard work. Government owes its citizens a playing field that offers you opportunity to suceed, not handouts. Everyone likes a free lunch. Government attempts to please everyone will result in a continuation of the demise of the economy.

Posted by Handbook | Report as abusive

There are obviously structural problems at work. Free trade does not work for high wage areas and has not in the past. The educational system is not world class any more. We pay more for health care than nations who get more. Not the lest we vote into office ideologs that smile nice but do not take a critical look at problems.

Building a road may put some people to work for a short time. But problem is factories shut down and moved. After a wile we will not the skills or will operate in those business any more.

Stimulus to work now must be directed to fixing particular economic problems. Like aid to business for expanding high wage exports. Notice expanding and high wage. Or free tuition for studding for degrees in short supply of inexperienced graduates (experienced skilled workers are always in short supply if business do not hire the inexperienced). We just increased the supply of paying patients without doing the same for doctors, nurses and hospitals in the short run.

Posted by SamuelReich | Report as abusive

This is an excellent piece of analysis, putting into simple terms a very complex situation.
If both Stimulo and the Cutback Kid are not going to make much difference, I know which I would prefer, namely the one that doesn’t leave a massive debt to be repaid.
Doing the tough things usually works in the long run. The Roman Empire was rescued from disaster by Diocletian’s economic reforms, even though they were unpopular. Similarly Germany and the northern Europeans have done the hard yards to make their economies more efficient. Australia did the same thing twenty-five years ago under Hawke/Keating, and then by Howard; we need to look at this again. The Rudd/Gillard give-away mentality is the wrong approach, but at least Australian has some money in the bank (thanks Howard/Costello!).
Easy wages policies and government deficits to fill in the hole they make will not save anyone in the long term.
If anyone has money left in the kitbag they can use it to similute the economy. But if there is no money put aside, give up hope of being rescued by Simulo; in this case it is time for the Cutback Kid.

Posted by GrahamDLovell | Report as abusive

It is not Cutback Kid vs Stimulo it is Cutback Kid vs Normalcy and Stimulo vs Normalcy in separate fights over a long period of time. Unfortunately Normalcy is not a fighter that wavers or tires so the strategies Cutback Kid and Stimulo use to fight this opponent are very important.

A depression is a relative thing. It is caused by over-extended economics. Consumers borrowed beyond their means and then governments, etc.

Use the boxer analogy. Say our boxer trains for a ten round fight, his body is conditioned to last the ten rounds. But say in the second round he becomes aggressive and punches at a rate above the normal rate he trained for. He has a boost of adrenaline (debt driven spending) and punches away feeling great at the time, but the round ends and our opponent Normalcy is still there.
Our boxer tires. In boxing we do not call the third round a depression, but in economics they do. The level of activity in the second round was not sustainable and it is silly for anyone in the corner to expect it is.

What to do in the fourth round?

The Stimulo corner (think US) says you punched great in that second round you need to keep doing it, but Stimulo’s body says no. His corner sneaks in some drugs to give him an artificial boost which works. He wins the fourth round, but Normalcy is not defeated. By the fifth round Stimulo is in much more serious trouble tired from the exertion, more drugs? There is a serious risk of a knock out of Stimulo.

The Cutback Kid’s corner (think Latvia) is health conscious they know they are in for a long fight. They caution their fighter to move and adjust, but not engage until his arms have recovered. The fourth round is difficult it is a draw or a loss, but by the fifth round the fighter is back into the fray as he should be.

A “pre-bust normal” is not a normal level of economic activity, it is an over inflated level of economic activity. For people to try to maintain or regain that same level of abnormal economic activity is not sustainable. One can try and at best stimulate oneself at an unsustainable plateau while waiting for normalcy to catch up (think Japan and the lost decades). Once you are in an overextended position there is only one way out, get back to normal and normal is a level somewhere below you.

But this is not an argument against government spending, government is part of that fighters body as well playing an important part in social and defense programs that capitalistic economics cannot handle. A fighter without strong government (think anarchy) and private sector (think communism) is unbalanced and loses regardless.

Posted by WorldWize | Report as abusive

When Reagan and Greenspan stole the Social Security Trust Funds in the 80s and then gave the money to their wealthy friends, that began the demise of the middle class. But if you were one of the wealthy, it began an unprecedented shift of wealth from the workers to the manipulators; a period of wealthy welfare lasting to this day.

Reagan cut taxes for the rich from 70% to 28% and increased taxes on middle class, as he raised taxes 7 of 8 years hitting hardest the lower & middle class. He also tripled National Debt – his tax cuts for the wealthy left budget holes increasing then national debt from $900 Billion to $2.8 Trillion.
With all that money going to the top tiers, it was easy to want more. One had to look no further than overseas to see the profit potential of cheap labor, no taxes and no regulation. Along with that extra money came the bonus of weakening the American labor force and demoting unions until they became relatively ineffective. Reagan fired 11,345 union workers for striking and his war on unions continues to this day.

Unions were very strong when the middle class was strong in the 50s. One wage earner supported the family back then, and supported it well.
Now it takes three or four in the family working multiple low paying jobs to make ends meet with a very reduced standard of living, while all the money of the fifties have gone to the top – Wall Street and large corporations.

As workers’ wages decline, their Social Security and Medicare contributions and benefits decline as well. This means that down the road, most workers will be broke. This is the Republican dream – the end of social safety nets and the end of high wages and benefits so that 2 or 3% of the population can control 95% of the wealth.

All of these lowered wages and benefits in America for poor and middle class Americans further line the pockets of corporations whose profits increase hourly.

Long before Reagan ran for President, he railed against any kind of government backed health care. Again, in the pockets of the AMA and the insurance companies, he knew that affordable health care would help nobody but the consumer, and Ronnie was all about the wealthy (key in “Reagan, Operation Coffee Cup” – an example of the Republicans original underhanded tactics that are still used today).

When Reagan and Greenspan looted the Social Security Fund, they also used the money to pay back all the rich military industrial complex donors who helped Reagan get elected, especially the ones from California.

The military then became a part of the budget that was never questioned, with a war here or a war there promoted by Republicans in order to keep the military indispensable in the eyes of Americans. Regardless that the cost of both the active military and retired military with free health care and 20 year retirements that in real money costs us 65% of our budget, Americans are sold on their “troops.” .

Reagan and Greenspan knew what they were doing. As the budget became strained with more and more money going to the rich and to the military, social programs were cut. In other words, government, a long time protector of the working people which in the past shielded them from abusive tactics by corporations, was weakening. Their undying goal was to get rid of Medicare and Social Security completely, which is still the Republican goal.

This became the drum beat of Republicans – get rid of big government. In other words, get rid of the people’s voices. And it worked. The theory of trickledown economics or supply side economics even fooled the democrats for a while as regulations were relaxed and the money flowed like a torrent to the top. But it was a house of cards built on credit and Wall Street gambling.

Forcing the poor and middle class in America to fall behind was not enough to satisfy the insatiable appetite for wealth, so ways were thought up to make money even off of the workers’ decreased wages, and whose lifestyles were falling behind and whose incomes were becoming more and more detached from the upper class.

So, easy credit and high interest rates were made available by the bankers which gave the poor and middle classes a false sense of hope and security by artificially propping up their standard of living. Also, this ‘enjoy now and pay later’ scheme meant that the poor and middle class not only were making less and less in wages, now a large percentage of those wages were going to the banks in the form of interest payments, sometimes as high as 30% on credit cards.

And now, the coup d’état against the middle class: As the middle class took on thirty year mortgages (where all of the interest is conveniently paid up front first before principle), bankers wanted more money than that. What better way than to bundle mortgages and sell them? That’s a quick turn over and a quick buck. And what the heck, if it all backfires, the government would be forced to back up the bankers, not the public, because the banks could fail and bring down the entire financial house of cards.

Plus, the banks now get many of the houses back through foreclosure. It’s a beautiful world for the wealthy.

So the middle class, not only losing any increase in wages and benefits for thirty years, lost up to 40% of their net worth that was invested in their homes, more if they were foreclosed.

This is the way it is going and not much can stop it. Middle class Americans are not organized so will sit back in their recliners not saying a word and watch their standard of living slowly erode. They believe the Republican lies – that it is all the greedy and lazy workers fault and unions killed America.

So, what will the result be?

For middle class Americans, it means no health care, which means that saving for retirement, college expenses, or owning a home is history merely because the out of pocket expenses for the first serious illness that comes along wipes out everything. Just the cost of drugs alone will break anyone, which can easily run into the hundreds of thousands of dollars PER ILLNESS because of pharmaceutical’s influence in congress.

So where is the incentive for young people to work hard and get ahead? There will be none. Then, what will workers do? Will they sit around and bemoan their plight and blame it on themselves? Probably.

I hope so, because the alternative would be more than just a class warfare of words.

Posted by urownexperience | Report as abusive

What we need is less government (this doesn’t mean no regulation, incidentally). Less government means less debt, less debt means less tax, and less tax sets the real economy free. Austerity is a (negatively) loaded word that shouldn’t be used in this sort of debate.

By the way, do the people who write comments longer than the original article actually believe that anyone reads them? Some of us do still have jobs.

Posted by CO2-Exhaler | Report as abusive