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A short history of austerity: it almost never works
Where's austerity? Governments love spending in good times and bad, and talk about living within their means on one hand and spending/making new promises on the other. We will kick the can and dodge the bill and spend some more, despite all the times various people in various countries in the last few years have talked about "getting fiscal houses in order." (Typing "Geithner fiscal house in order" to google gets 542,000 results and it feels like he said someone had to get their/we were going to get our fiscal house in order about that many times.) It's all BS.
No one (media and those who advertise on it, government, people, etc) wants austerity or to even live within their means, but then after years of a country living beyond their means, funny that no one wants to face the bill - but they do want to be bailed out of their bad decisions. Recessions are no fun either, lets not have those and if we can print and print, we don't have to go through that anymore. It's the mythical free lunch everyone thought didn't exist. It's very popular and politicians get elected, and when the bill comes due they hope it's someone else's problem.
Why even have the amount of government we have when no one is making actual decisions aside from telling Bernanke to get to work printing money. Seriously? No one wants to decide on anything, and it's a lot easier to throw money at problems. Why have a budget or even go through the motions of discussing having one when spending and taking away any sort of cap/checks and balances is a lot more popular and fun?
Some people think government spends money efficiently (or as if governments doing the spending are actually acting for the collective good, which is hysterical and goes against all manner of evidence to the contrary in the last decade or two, including all manner of cronies and Bush's "Haves and Have Mores" speech - Bush was just kidding, he was really interested in the needs of the whole country) and governments will lessen spending when appropriate, as if politicians can control themselves when they think the printing press can solve their problems and allow them to make all manner of popular/re-electable promises instead of them having to actually make, you know, difficult decisions. "Let me issue and control a nation's money and I care not who writes the laws." -Rothschild, 1790. Or, today, the people who write the laws find it's easier to just issue money and make noise to generate the appearance of doing something rather than making productive decisions.
I'm curious if some would be so pro-spending and willing to agree with whatever the current administration wanted if it wasn't the political party they favor currently in office. We're never going to have any progress in this country because debate in this country has devolved to the degree that no one can have a disagreement on any aspect of current policy without being accused of being political. No one can actually disagree with what's currently being done, they're just saying that because they don't like what's currently being done - right.
As for citizens, I'll say this: don't confuse love of nation with love of government.
Governments - especially one that can't agree on a thing - spending money willy-nilly by itself isn't going to create a sustainable recovery, either (when it starts to wear off, it was of course because it was "not enough" - on that path, it very well may never be "enough" - what is "enough", really? There is no quantitative definition because no one wants there to be any limit); it requires much more difficult decisions and actually facing core problems. We've had the easiest monetary policy in history, spent trillions and, for a number of major issues, the country is still at square one. We have ZIRP and QE, and I've asked what if a recession (not outside the realm of reality/possibility - not tomorrow, but we are likely closer to that point in the cycle) happens - no one seems to have an answer. NIRP instead of ZIRP?
Mervyn King said it well: "“Monetary policy works, at least in part, by providing incentives to households and businesses to bring forward spending from the future to the present. But that reduces spending plans tomorrow. And when tomorrow arrives, an even larger stimulus is required to bring forward yet more spending from the future. As time passes, larger and larger doses of stimulus are required. A long period of exceptionally low interest rates may also encourage excessive risk-taking, leading to vulnerabilities in important financial institutions."
Even better from King: “..the challenge we face is not the inadequacy of the framework, but the fact that there is no easy route to recovery after a major banking crisis. Recovery is inevitably slow and protracted. The healing process will take time, and patience is not a quality associated with our political debate."
I'm not saying that "austerity works!" as much as I continue to disagree that the solution for countries facing some difficult times is to throw money at problems and hope they go away (popular, but not sustainable - it's kicking the can with the hope that it becomes someone else's problem when it continues to become clear that short-term solutions aren't creating a sustainable long-term path) It's all short-term thinking and politicians caring about their current popularity and not having to face reality rather than the long-term needs of the country.
Lastly, as for austerity, you're also going to have continued beggar-thy-neighbor policies/currency wars as countries try to cheapen their currency to gain a short-term export advantage.
Over a year ago, but still pertinent today. Especially concerning leadeship or the lack there of. Speeches by Richard W. Fisher Austin, Texas | December 16, 2011
Where Have We Been and Where Are We Going? (With Reference to Wodehouse's Lead Pipe, Saint Willibrord's Shuffle, Munch's Scream and Sarah Bloom Raskin's Sink) Remarks before the Austin Chamber of Commerce
Exerpts: The great comedic writer P.G. Wodehouse pretty much summed it up when he wrote that “just when a (fellow) is feeling particularly braced with things in general ... Fate sneaks up behind him with a bit of lead piping.”[2] My colleague Sarah Bloom Raskin—one of the newest Fed governors, and a woman possessed with a disarming ability to speak in non-quadratic-equation English—recently used the example of the common kitchen sink to illustrate a point. I am going to purloin her metaphor for my description of our present predicament. You give a dinner party. The guests leave and you are washing the dishes. When you are done, you notice the remnants of the party are clogging the sink: bits of food, coffee grinds, a hair or two and the like. You have two choices. You can reach down and scoop up the gunk, a distinctly unpleasant task. Or you can turn the water on full blast, washing the gunk down the drain, providing immediate relief from both the eyesore and the distasteful job of handling the mess. You look over your shoulder to make sure your kids aren’t looking, and, voilà, you turn the faucet on full blast, washing your immediate troubles away. From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow. It may provide immediate relief but risks destroying the plumbing of the entire house. It is a pyrrhic solution that ultimately comes at a devastating cost. Better that the Congress and the president—the makers of fiscal policy and regulation—roll up their sleeves and get on with the yucky task of cleaning out the clogged drain. The former prime minister of New Zealand, Mike Moore, has written a book titled Saving Globalization: Why Globalization and Democracy Offer the Best Hope for Progress, Peace and Development. He dedicates it “to honorable public servants, elected or otherwise” and adds a quote from Martin Luther King Jr. To remind them of their ultimate duty as leaders of democratic societies, King said: “Cowardice asks the question—is it safe? Expediency asks the question—is it politic? Vanity asks the question—is it popular? But conscience asks the question—is it right? … There comes a time when one must take a position that is neither safe, nor politic, nor popular, but one must take it because it is right.”[7] That time is now. Our nation’s economy is at risk. The Federal Reserve has done everything it can to reduce unemployment without forsaking our sacred commitment to maintaining price stability, or crossing over the monetary river Styx into full-blown debt monetization. I personally don’t care which party is in the White House or controls Congress. All I know is that the “honorable” members of Congress and presidents past, Republicans and Democrats alike, have conspired over time, however unwittingly, to drive fiscal policy into the ditch. They purchased their elections and reelections with popular programs so poorly funded that they now threaten the economic well-being of our children and our children’s children. Instead of passing the torch on to the successor generation of Americans, they have simply passed them the bill. This is the opposite of honorable. Like all of you here, I am sickened by our politicians’ tendency to kick the can down the road, even when it is starkly clear that doing so jeopardizes America’s well-being. Small wonder that some recent polls show only 9 percent of the American people view Congress favorably. (One senator posited that the 9 percent consisted of blood relatives and congressional staff!) But this is the holiday season, and especially now, I am given to viewing the world through optimistic eyes. The Christmas spirit may be overwhelming my judgment, but I believe that the American people—from the mainstream to the Tea Party to the unemployed and disaffected who have taken to the streets—are in the process of forcing politicians to get their act together. There is a loud, distinct, clarion call for leadership—for the people we entrust to right the rules that determine our economic future, cast away cowardice, expediency and vanity, and get on with leading us out of our fiscal wilderness. At this time of year, I always count my many blessings. My brother, Mike, is here today; he has finally seen the light and has moved to Texas after a long and successful career in institutional asset management in New York and California. I admire him for more than his professional accomplishments. We experienced some rough times when we were kids, and he always stepped into the breach, forgoing the pleasures of his teenage years by working tough jobs so he could pay the rent and put food on our family table when things were not going well for our father. Thanks to Mike, we survived those difficult times and went on to live the American dream. My brother and I know how blessed we are that our parents chose to immigrate to this great country. They came here because there was no limit to upward mobility; they came to the United States because it was the land of milk and honey; because they knew that here, their children would live better lives than they lived; that there was no limit to what anybody with determination and the lucky break of being an American could accomplish. Mike and I have lived out our parents’ dream. There is no reason why any American child today should not have that same opportunity. If the American dream is to survive, we will need to re-create a fiscal and regulatory environment that—in conjunction with the Fed conducting prudent monetary policy—will liberate the forces of entrepreneurial risk taking that have always been America’s hallmark, and that allowed successor generations to live far better lives than their parents ever thought possible. Only then will we get back to generating the jobs and the prosperity for all of our people, not just for financial sharpies. Only then will we restore faith in the prospect of upward mobility for all, not just the few. And only then, with the nation’s economy firmly back on a trajectory of promise and prosperity, will we feel “braced” with confidence that no force can dislodge by sneaking up behind us with a proverbial lead pipe. FULL SPEECH TEXT HERE;http://www.dallasfed.org/news/speeches/fisher/2011/fs111216.cfm
European countries tried that in response to recent financial crisis instead of trying to stimulate growth an they clearly failed. There is the experience of 1930s. When money supply could not be increased it caused a depression and failed banks in 1000s and economy shrunk until it hit rock bottom. A generation has gone and lessons learned in 1930s is apparently forgotten.
The evidence speaks for itself. There is not significant success story for sovereign level austerity on a large scale. Only small countries have succeeded on a moderate basis when all other countries around them do not also need to go austere so they can use exports to counter the austerity.
It is prudent for a family cut since they are not the monopoly supplier of money. If everyone cuts than it becomes a problem.
Consider the GDP equation:
GDP = C + I + G + (X - M)
C consumption I investments G government X Exports M Imports
If C is declining sharply, some other factors in that equation has to go up. Typically in a recession I drops. X-M has been negative for US. So, the administration proposed infrastructure investment (trying to influence I and G) and declining currency (trying to influence X-M) are choices. G is the one that administration can control. If you also cut G when C is declining, you will make more harm. That is what the austerity does.
We only did fiscal stimulus in 2009 and some early in 2010. Every since 2010 election government spending has been on decline. This is actually slowing US recovery. The employment figure is gradually improving and again government has been shedding employees in the last 3 years at all local, state and federal levels. When employment growth is slow, C is not growing as fast as well.
The calls to have drastic cuts in government is delusional....
Austerity.... Ends Badly Deficit Spending/Currency Devaluation.... Ends Badly Raising Taxes.... Ends Badly (as the consumers have no more income to spare) Any Combination of the Above..... Ends Badly
Everyone wants a plan that will solve our problems. I don't see one that magically solves our problems.
Eventually the piper will be paid, it's just a matter of when and by whom.
Growth is the only way out... With growth you can divert a portion of growth to paying back debt.
Without some growth the ability pay back those debts diminish more. As economy slows down due to austerity, more companies lay of more people and thus you need second round of austerity. This is exactly what is happening in Europe. It becomes a vicious cycle. The human cost meanwhile is very very high. You destroy the economy significantly until it hits a bottom and depending on the crisis that bottom could be very deep (like a fire is allowed to burn it down to ashes and run out of fuel).
The debt takes care of itself in a growing economy. The growing economy results in growing revenue for the government to pay back the debt. While GDP increases in a growing economy, debt decreases and debt to GDP ratio returns to more normal levels.
When GDP is shrinking if you do not stimulate the economy decisively the damage will be done and you will have a much bigger hold to dig out. You will need bigger stimulus or you will have to wait until the forest is burned down completely if you decide that there is no point anymore to fight it.
Europe is paying for lack of decisiveness in that when the main issue was slowing growth/lack of growth the ECB made a mistake and worried on inflation and kept the interest rates high. They did not adopt stimulative monetary and fiscal policies. Policy mistake.
Now, this latest crisis has shown how Eurozone countries created a gold standard like situation by giving up their own currency sovereignty. In the gold standard times, the crisis response only came from austerity as it was the only thing you could do. You had to let it burn until nothing is left and build again from that low. Gold based currencies could not easily increase the money supply and provide liquidity and credit when credit was shrinking fast. Banks failed, companies failed, cascade effect. Now in those crisis times some countries temporarily floated or devalued their currency to ease the problem.
Today's similarity is that while Germany the big fat lady on the table does not need more stimulation, the other do need. Yet, they did give away their monetary policy decisions and Germany is driving that according to its own needs and they only thing that is left for countries in trouble is fiscal austerity and they do not even have devaluation option like in gold standard times. Their system is severely broken.
We are lucky we have an independent Fed and honestly the people at Fed (and much criticized Bernanke, who has studied great depression) is much much better than politicians and has been fighting the good fight despite congressional obstructionism.
The only way out is to grow the economy and there is no swift action to solve problems in a short time without creating bigger problems. We did not get into this situation in one day. A lot of our long running problems need to be solved over long time planning again. Yet, we are a nation of no patience... If things are not back where it was 6 months ago when the crisis has started we are quick to judge that actions has not worked (when it clearly did and maybe was not enough size or simply need more time)
Amen. Those who specialize in creating "labels" for people seem to believe that if they label you a "liberal" (or much worse) that then infers that you are automatically "against growth". Ridiculous. If they could only forget their stupid labels for a while maybe we could get something going in the growth department. As for Mr. Bernanke, as far as I am concerned he is about as close to a financial hero as we can find these days, and I'm very glad he paid serious attention when studying the great depression.
If we hadn't squandered serious money on two stupid wars (the first of which was put on the ol' credit card by the very same folks who are now loudly crying about the deficit) we'd have a bit of room for spending to stimulate the economy. Thanks, non-liberals.
I agree with Investor. Growth is the engine out of our economic problems.
Heaven knows we have decaying intrastructure that needs repair or replacement. It is in time like these, when investors are paying us to take thier money (with government bonds yielding around 2%) that these repairs may be financed with a lower payback than is possible in better times.
No doubt renewed stuff on the ground will enhance our climb to better times and yield dividends far into the future. We need to sieze the day and eschew austerity !
Reply to @Jarrett: Agree with this. Not an economist, but I think the best time to get debt is when you are getting money at very low interest rate. We just want to make sure that this money is used to improve infrastructure, education, healthcare which add value to the country and useful to everyone, rather than pure wasteful expenditures (dare I say some of the wars?). For businesses, I am in favor of linking any tax deductions only to the immediate measured impact on job creation (How many jobs/added compensation to your labor force in US last year at your company?).
Agree that encouraging growth is the clear way to go. However, there are some folk who believe that higher taxes should be a large part of the package. And there are others who believe higher taxes kill growth, since most jobs are created in small businesses, and higher taxes always hit small business owners. Some believe if we keep adding more and more federal government jobs, that will take care of unemployment. Clearly there is no easy way out of the mess the administration and congress (current and past) have created. Some believe we will inflate our way out of the worst of our financial mess. That seems to be the easiest, but not the sanest, option. As one poster said, if the government is going to spend, it should be on real jobs (not more government jobs) and lasting results in terms of how it is spent (not on large bank and corporate bailouts/buyouts). After spending all that we did, it is almost impossible to identify where it all went. That is perhaps why many people are wary about spending even more. Then there is all the foreign aid that seems to disappear once it leaves our shores. This is such a hot subject to a lot of folks. For sure, there are no easy answers, but surely some kind of compromise would be a start. We have already raised taxes, now how about some real efforts to cleanup social security (pretty easy solutions, really), medicare, and medicaid? Maybe we have to limit politicians to just one term so that they don't have to worry about re-election. Maybe then they will do the right thing? Wishful thinking?
Reply to @BobC: Surely everyone like to get more efficiency out of big social programs such as social security, medicare and medicaid. But how to do it without being label socialist is questionable? Many already despise social medicine being practiced in Europe and Canada, even though their model may not work perfectly across the board. The final form of Obamcare has changed/compromised so much in the past four years,I wonder if it actually will save medicare and medicaid in the long run. As long there are insurance companies act as the middlemen in the healthcare system, profit will always be first before patient care.
Comments
No one (media and those who advertise on it, government, people, etc) wants austerity or to even live within their means, but then after years of a country living beyond their means, funny that no one wants to face the bill - but they do want to be bailed out of their bad decisions. Recessions are no fun either, lets not have those and if we can print and print, we don't have to go through that anymore. It's the mythical free lunch everyone thought didn't exist. It's very popular and politicians get elected, and when the bill comes due they hope it's someone else's problem.
Why even have the amount of government we have when no one is making actual decisions aside from telling Bernanke to get to work printing money. Seriously? No one wants to decide on anything, and it's a lot easier to throw money at problems. Why have a budget or even go through the motions of discussing having one when spending and taking away any sort of cap/checks and balances is a lot more popular and fun?
Some people think government spends money efficiently (or as if governments doing the spending are actually acting for the collective good, which is hysterical and goes against all manner of evidence to the contrary in the last decade or two, including all manner of cronies and Bush's "Haves and Have Mores" speech - Bush was just kidding, he was really interested in the needs of the whole country) and governments will lessen spending when appropriate, as if politicians can control themselves when they think the printing press can solve their problems and allow them to make all manner of popular/re-electable promises instead of them having to actually make, you know, difficult decisions. "Let me issue and control a nation's money and I care not who writes the laws." -Rothschild, 1790. Or, today, the people who write the laws find it's easier to just issue money and make noise to generate the appearance of doing something rather than making productive decisions.
I'm curious if some would be so pro-spending and willing to agree with whatever the current administration wanted if it wasn't the political party they favor currently in office. We're never going to have any progress in this country because debate in this country has devolved to the degree that no one can have a disagreement on any aspect of current policy without being accused of being political. No one can actually disagree with what's currently being done, they're just saying that because they don't like what's currently being done - right.
As for citizens, I'll say this: don't confuse love of nation with love of government.
Governments - especially one that can't agree on a thing - spending money willy-nilly by itself isn't going to create a sustainable recovery, either (when it starts to wear off, it was of course because it was "not enough" - on that path, it very well may never be "enough" - what is "enough", really? There is no quantitative definition because no one wants there to be any limit); it requires much more difficult decisions and actually facing core problems. We've had the easiest monetary policy in history, spent trillions and, for a number of major issues, the country is still at square one. We have ZIRP and QE, and I've asked what if a recession (not outside the realm of reality/possibility - not tomorrow, but we are likely closer to that point in the cycle) happens - no one seems to have an answer. NIRP instead of ZIRP?
Mervyn King said it well: "“Monetary policy works, at least in part, by providing incentives to households and businesses to bring forward spending from the future to the present. But that reduces spending plans tomorrow. And when tomorrow arrives, an even larger stimulus is required to bring forward yet more spending from the future. As time passes, larger and larger doses of stimulus are required. A long period of exceptionally low interest rates may also encourage excessive risk-taking, leading to vulnerabilities in important financial institutions."
Even better from King: “..the challenge we face is not the inadequacy of the framework, but the fact that there is no easy route to recovery after a major banking crisis. Recovery is inevitably slow and protracted. The healing process will take time, and patience is not a quality associated with our political debate."
I'm not saying that "austerity works!" as much as I continue to disagree that the solution for countries facing some difficult times is to throw money at problems and hope they go away (popular, but not sustainable - it's kicking the can with the hope that it becomes someone else's problem when it continues to become clear that short-term solutions aren't creating a sustainable long-term path) It's all short-term thinking and politicians caring about their current popularity and not having to face reality rather than the long-term needs of the country.
Lastly, as for austerity, you're also going to have continued beggar-thy-neighbor policies/currency wars as countries try to cheapen their currency to gain a short-term export advantage.
______
http://www.zerohedge.com/news/2013-03-10/what-austerity
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/03/Debt Issuance US YTD_1.jpg
Fiscal austerity in Europe doesn't mean large spending cuts:
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/05/20120509_austerity1.png
Over a year ago, but still pertinent today. Especially concerning leadeship or the lack there of.
Speeches by Richard W. Fisher
Austin, Texas | December 16, 2011
Where Have We Been and Where Are We Going? (With Reference to Wodehouse's Lead Pipe, Saint Willibrord's Shuffle, Munch's Scream and Sarah Bloom Raskin's Sink)
Remarks before the Austin Chamber of Commerce
Exerpts: The great comedic writer P.G. Wodehouse pretty much summed it up when he wrote that “just when a (fellow) is feeling particularly braced with things in general ... Fate sneaks up behind him with a bit of lead piping.”[2]
My colleague Sarah Bloom Raskin—one of the newest Fed governors, and a woman possessed with a disarming ability to speak in non-quadratic-equation English—recently used the example of the common kitchen sink to illustrate a point. I am going to purloin her metaphor for my description of our present predicament. You give a dinner party. The guests leave and you are washing the dishes. When you are done, you notice the remnants of the party are clogging the sink: bits of food, coffee grinds, a hair or two and the like. You have two choices. You can reach down and scoop up the gunk, a distinctly unpleasant task. Or you can turn the water on full blast, washing the gunk down the drain, providing immediate relief from both the eyesore and the distasteful job of handling the mess. You look over your shoulder to make sure your kids aren’t looking, and, voilà, you turn the faucet on full blast, washing your immediate troubles away.
From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow. It may provide immediate relief but risks destroying the plumbing of the entire house. It is a pyrrhic solution that ultimately comes at a devastating cost. Better that the Congress and the president—the makers of fiscal policy and regulation—roll up their sleeves and get on with the yucky task of cleaning out the clogged drain.
The former prime minister of New Zealand, Mike Moore, has written a book titled Saving Globalization: Why Globalization and Democracy Offer the Best Hope for Progress, Peace and Development. He dedicates it “to honorable public servants, elected or otherwise” and adds a quote from Martin Luther King Jr. To remind them of their ultimate duty as leaders of democratic societies, King said:
“Cowardice asks the question—is it safe? Expediency asks the question—is it politic? Vanity asks the question—is it popular? But conscience asks the question—is it right? … There comes a time when one must take a position that is neither safe, nor politic, nor popular, but one must take it because it is right.”[7]
That time is now. Our nation’s economy is at risk. The Federal Reserve has done everything it can to reduce unemployment without forsaking our sacred commitment to maintaining price stability, or crossing over the monetary river Styx into full-blown debt monetization. I personally don’t care which party is in the White House or controls Congress. All I know is that the “honorable” members of Congress and presidents past, Republicans and Democrats alike, have conspired over time, however unwittingly, to drive fiscal policy into the ditch. They purchased their elections and reelections with popular programs so poorly funded that they now threaten the economic well-being of our children and our children’s children. Instead of passing the torch on to the successor generation of Americans, they have simply passed them the bill. This is the opposite of honorable.
Like all of you here, I am sickened by our politicians’ tendency to kick the can down the road, even when it is starkly clear that doing so jeopardizes America’s well-being. Small wonder that some recent polls show only 9 percent of the American people view Congress favorably. (One senator posited that the 9 percent consisted of blood relatives and congressional staff!)
But this is the holiday season, and especially now, I am given to viewing the world through optimistic eyes. The Christmas spirit may be overwhelming my judgment, but I believe that the American people—from the mainstream to the Tea Party to the unemployed and disaffected who have taken to the streets—are in the process of forcing politicians to get their act together. There is a loud, distinct, clarion call for leadership—for the people we entrust to right the rules that determine our economic future, cast away cowardice, expediency and vanity, and get on with leading us out of our fiscal wilderness.
At this time of year, I always count my many blessings. My brother, Mike, is here today; he has finally seen the light and has moved to Texas after a long and successful career in institutional asset management in New York and California. I admire him for more than his professional accomplishments. We experienced some rough times when we were kids, and he always stepped into the breach, forgoing the pleasures of his teenage years by working tough jobs so he could pay the rent and put food on our family table when things were not going well for our father. Thanks to Mike, we survived those difficult times and went on to live the American dream.
My brother and I know how blessed we are that our parents chose to immigrate to this great country. They came here because there was no limit to upward mobility; they came to the United States because it was the land of milk and honey; because they knew that here, their children would live better lives than they lived; that there was no limit to what anybody with determination and the lucky break of being an American could accomplish. Mike and I have lived out our parents’ dream. There is no reason why any American child today should not have that same opportunity.
If the American dream is to survive, we will need to re-create a fiscal and regulatory environment that—in conjunction with the Fed conducting prudent monetary policy—will liberate the forces of entrepreneurial risk taking that have always been America’s hallmark, and that allowed successor generations to live far better lives than their parents ever thought possible. Only then will we get back to generating the jobs and the prosperity for all of our people, not just for financial sharpies. Only then will we restore faith in the prospect of upward mobility for all, not just the few. And only then, with the nation’s economy firmly back on a trajectory of promise and prosperity, will we feel “braced” with confidence that no force can dislodge by sneaking up behind us with a proverbial lead pipe.
FULL SPEECH TEXT HERE;http://www.dallasfed.org/news/speeches/fisher/2011/fs111216.cfm
The evidence speaks for itself. There is not significant success story for sovereign level austerity on a large scale. Only small countries have succeeded on a moderate basis when all other countries around them do not also need to go austere so they can use exports to counter the austerity.
It is prudent for a family cut since they are not the monopoly supplier of money. If everyone cuts than it becomes a problem.
Consider the GDP equation:
GDP = C + I + G + (X - M)
C consumption
I investments
G government
X Exports
M Imports
If C is declining sharply, some other factors in that equation has to go up. Typically in a recession I drops. X-M has been negative for US. So, the administration proposed infrastructure investment (trying to influence I and G) and declining currency (trying to influence X-M) are choices. G is the one that administration can control. If you also cut G when C is declining, you will make more harm. That is what the austerity does.
We only did fiscal stimulus in 2009 and some early in 2010. Every since 2010 election government spending has been on decline. This is actually slowing US recovery. The employment figure is gradually improving and again government has been shedding employees in the last 3 years at all local, state and federal levels. When employment growth is slow, C is not growing as fast as well.
The calls to have drastic cuts in government is delusional....
Deficit Spending/Currency Devaluation.... Ends Badly
Raising Taxes.... Ends Badly (as the consumers have no more income to spare)
Any Combination of the Above..... Ends Badly
Everyone wants a plan that will solve our problems. I don't see one that magically solves our problems.
Eventually the piper will be paid, it's just a matter of when and by whom.
Growth is the only way out... With growth you can divert a portion of growth to paying back debt.
Without some growth the ability pay back those debts diminish more. As economy slows down due to austerity, more companies lay of more people and thus you need second round of austerity. This is exactly what is happening in Europe. It becomes a vicious cycle. The human cost meanwhile is very very high. You destroy the economy significantly until it hits a bottom and depending on the crisis that bottom could be very deep (like a fire is allowed to burn it down to ashes and run out of fuel).
The debt takes care of itself in a growing economy. The growing economy results in growing revenue for the government to pay back the debt. While GDP increases in a growing economy, debt decreases and debt to GDP ratio returns to more normal levels.
When GDP is shrinking if you do not stimulate the economy decisively the damage will be done and you will have a much bigger hold to dig out. You will need bigger stimulus or you will have to wait until the forest is burned down completely if you decide that there is no point anymore to fight it.
Europe is paying for lack of decisiveness in that when the main issue was slowing growth/lack of growth the ECB made a mistake and worried on inflation and kept the interest rates high. They did not adopt stimulative monetary and fiscal policies. Policy mistake.
Now, this latest crisis has shown how Eurozone countries created a gold standard like situation by giving up their own currency sovereignty. In the gold standard times, the crisis response only came from austerity as it was the only thing you could do. You had to let it burn until nothing is left and build again from that low. Gold based currencies could not easily increase the money supply and provide liquidity and credit when credit was shrinking fast. Banks failed, companies failed, cascade effect. Now in those crisis times some countries temporarily floated or devalued their currency to ease the problem.
Today's similarity is that while Germany the big fat lady on the table does not need more stimulation, the other do need. Yet, they did give away their monetary policy decisions and Germany is driving that according to its own needs and they only thing that is left for countries in trouble is fiscal austerity and they do not even have devaluation option like in gold standard times. Their system is severely broken.
We are lucky we have an independent Fed and honestly the people at Fed (and much criticized Bernanke, who has studied great depression) is much much better than politicians and has been fighting the good fight despite congressional obstructionism.
The only way out is to grow the economy and there is no swift action to solve problems in a short time without creating bigger problems. We did not get into this situation in one day. A lot of our long running problems need to be solved over long time planning again. Yet, we are a nation of no patience... If things are not back where it was 6 months ago when the crisis has started we are quick to judge that actions has not worked (when it clearly did and maybe was not enough size or simply need more time)
If we hadn't squandered serious money on two stupid wars (the first of which was put on the ol' credit card by the very same folks who are now loudly crying about the deficit) we'd have a bit of room for spending to stimulate the economy. Thanks, non-liberals.
Heaven knows we have decaying intrastructure that needs repair or replacement. It is in time like these, when investors are paying us to take thier money (with government bonds yielding around 2%) that these repairs may be financed with a lower payback than is possible in better times.
No doubt renewed stuff on the ground will enhance our climb to better times and yield dividends far into the future. We need to sieze the day and eschew austerity !
If you want the proofs, look abroad.
Agree with this. Not an economist, but I think the best time to get debt is when you are getting money at very low interest rate. We just want to make sure that this money is used to improve infrastructure, education, healthcare which add value to the country and useful to everyone, rather than pure wasteful expenditures (dare I say some of the wars?). For businesses, I am in favor of linking any tax deductions only to the immediate measured impact on job creation (How many jobs/added compensation to your labor force in US last year at your company?).
http://www.huffingtonpost.com/robert-reich/the-contest-over-the-real_b_2875076.html