Sunday, 7 June 2015
Hot air on austerity from Amartya Sen.
Harvard economist Amartya Sen recently published this article entitled “The economic consequences of austerity” in which he criticizes austerity. And there’s been much excitement on the Twittersphere about the article.
Any article which is critical of austerity is bound to get the approval of brainless lefties. Whether the article actually analyses the austerity problem correctly is irrelevant for 95% of the population, brainless lefties in particular. The important thing for the 95% is the emotional thrill that comes from reading about the evils of austerity.
So if you’re a member of the 95% I recommend Sen’s 4,000 words of hot air, flowery language and waffle. 95% of the population will always prefer listening to a well-known personality talking garbage than some unheard of individual revealing the secrets of the Universe.
In contrast, if you’re a member of the 5% who actually thinks about what the problem is, and what the best solutions might be, read on. (There’s only about 400 words to read in contrast to Sen’s 4,000).
Austerity in Europe.
Sen’s first mistake is that he attributes austerity in Europe to a failure to implement Keynsian stimulus during the recent recession. In fact the vast bulk of the most serious austerity in Europe (i.e. in periphery countries) is attributable to the inherent problems of a common currency: that’s the fact that uncompetitive countries cannot devalue, thus they have to go for INTERNAL DEVALUATION. That is they have to undergo years of deficient demand and excess unemployment so as to get their costs down. Greece is obviously the most serious case there.
However, that’s not to say that the Eurozone couldn’t have done with A BIT MORE Keynsian stimulus over the last five years or so. Given the very low inflation rates in core countries, clearly SOME additional stimulus would have been in order, and is still needed at the time of writing. At least that’s true if the inflation target is the standard 2%.
But to repeat, lack of Keynsian stimulus is not the basic cause of the worst instances of austerity in Europe (i.e. Greece).
Cutting the debt.
Sen’s second mistake is where he says “There is, in fact, plenty of evidence in the history of the world that indicates that the most effective way of cutting deficits is to resist recession and to combine deficit reduction with rapid economic growth.”
Well the big problem there (or should I say “apparent problem” which economics professors like Sen can’t solve) is that to get economic growth one has to run a bigger deficit, which in turn (allegedly) increases the debt.
Well the solution to that problem (as MMTers have been pointing out for years) is thus.
There’s a phenomenally easy way of cutting the debt which requires no growth at all (though clearly if some growth appears from nowhere, that’s nice). Indeed this amazing method of cutting the debt is known to half the population and has recently been put into effect BIG TIME. But Harvard economics professors like Sen don’t seem to be aware of it. It’s called . . . . wait for it. . . . I put it in red just for extra emphasis:
You may have heard of it.
It consists of simply printing money and buying back the debt. And if that money printing exercise is too inflationary, no problem: just raise taxes. If taxes are raised by the right amount, that will cut demand and inflation by the right amount.
Incidentally Harvard is a hot bed of pro-austerity incompetents: e.g. Kenneth Rogoff and Carmen Reinhart. And then there’s the famous advocate of so called “expansionary fiscal austerity”: Alberto Allesina. Plus there’s the Harvard historian who thinks he knows something about economics and advocates austerity: Niall Ferguson.
And finally, there is one problem with the above advocated QE solution: people just don’t believe that solutions to economic problems can be that simple. Well sometimes they aren’t: that’s true. On the other hand, the “emperor with no clothes” phenomenon is a VERY REAL and common one. That is, THERE ARE grotesque incompetents in high places in this world.