Pro austerity article by Ruchir Sharma in the Financial Times.

The article is entitled “Dear Joe Biden, deficits still matter”, and it’s a nice example of the fact that very often no knowledge of economics is needed to demolish articles by pseudo sophisticates in broadsheet newspapers – so called “professional economists” in particular. All you need is grasp of logic and some common sense.

Sharma’s first mistake is to argue (4th para) that because stimulatory measures in recent years have increased inequality, therefor increased inequality is necessarily a feature of stimulus. False logic: clearly QE (given that it poured money into the pockets of those holding government debt, i.e. the rich) increases inequality. But stimulus could equally well be implemented by boosting social security payments and thus benefitting the LESS WELL OFF.

Put another way, there is, fantastic as this it seem, a well known alternative to featherbedding Wall Street. It’s an alternative which every bricklayer, plumber and street sweeper is well aware of, though whether the pseudo sophisticates who write of the Financial Times are aware of it is more doubtful: it’s to help Main Street!  Doh!

Sharma’s next illogical claim is that “Average voters are justifiably befuddled by the claim that governments can borrow without limit or any consequences.” So because the “average voter” (who hasn’t got past Chapter one of an introductory economics text book) thinks something ergo some weight should be given to the average voter’s views?  Perhaps Sharma also thinks we should consult the “average voter” on which Covid vaccine is best.

Of course there is an apparent clash between my above claim that common sense is sometimes all you need to demolish arguments by “professional economists” and the latter claim that specialist knowledge is sometimes needed. Well the answer to that apparent clash lies with the word “sometimes”: that is, sometimes common sense alone will do, and sometimes it won’t.

 

Productivity.

Next, Sharma claims (para starting “The incoming administration….”) that rising government debt “drags productivity lower”. Really? Where’s the evidence? Sharma doesn’t provide any!  

Next, he claims that an OECD study shows that a significant proportion of stimulus money has supported zombie firms and that that has held back economic growth (para starting “But recent studies…..”). Unfortunately that OECD study says nothing in its abstract, nor in the introduction in the main text, nor in the conclusion about the latter "stimulus supports zombies" point. .

But on the subject of zombie firms it’s pretty stark staring obvious that any form of demand, whether government / central bank implemented stimulus or plain simple household spending will support a number of zombie and non-zombie firms. The crucial question is whether stimulus spending has a bigger “zombie supporting” effect than more normal forms of demand like household spending. Well given that a significant proportion of stimulus is designed to boost household spending, it’s not immediately obvious why there should be any difference there!

Of course there are SPECIFIC TYPES of stimulus spending that CAN have a “pro zombie” bias. One example is the furlough schemes several countries have implemented in reaction to Covid. The latter schemes will tend to preserve EXISTING types of employment rather than encourage the new forms of employment which are likely to arise post Covid: e.g. more working from home and more online shopping. But that does not mean that stimulus spending is INHERENTLY pro zombie.


Conclusion.

Given that the Financial Times did a big “mea culpa” about a week before Sharma’s article admitting that the “limit the deficit and debt” policy it had pushed since the 2007/8 bank crisis was wrong, you’d think the FT would take a bit more care to avoid publishing articles by “limit the deficit and debt” enthusiasts who obviously haven’t a clue.