Monday, December 03, 2012

No, austerity really doesn't work well in producing a recovery in a depression, in Europe or anywhere else

Philip Arestis and Malcolm Sawyer write about how Austerity is not working in Europe Triple Crisis 11/29/2012, including for countries not part of the debt-troubled "periphery" of the eurozone but also others who are practicing austerity economics during this depression:

The GDP figures published in the Eurostat press release on the 15th of November 2012 for the Economic and Monetary Union (euro area) marked the confirmation of a double-dipped recession (with negative growth in quarters 2 and 3 of 2012). Gross domestic product was 0.6 per cent lower in the third quarter of 2012 compared with 12 months earlier. Germany and France have so far managed to escape the double dip for the present, but most other countries, including the more hawkish on fiscal austerity (such as Netherlands, Finland) recorded lower output in 2012 Q3 compared with 2011 Q3. For other European Union (EU) countries, the UK had emerged from its double-dip recession with Olympic boosted growth in Q3 after three quarters of negative growth, leaving 2012Q3 GDP at same level as 12 months earlier. Output remains below its 2007 level in the EU and in the European Monetary Union (EMU) — indicating, in effect, at least a lost half-decade.

The return of recession is symbolic of the failure of the austerity programmes, which have been striking down economic activity throughout the EU and EMU {eurozone} [my emphasis]
Austerity economics turns out to be very costly.

They make a good point about the Clinton surpluses:

In the USA in the second half of the 1990s, the budget deficit programme of Clinton occurred alongside an IT-stimulated investment boom (and the bubble) and the budget moved into surplus and unemployment fell.

But it was not the efforts at fiscal consolidation which brought down the deficit but the investment boom, and when the investment faltered the budget position turned from surplus into deficit. The lessons from austerity and fiscal consolidation programmes should be clear – when through luck or good judgement a programme of fiscal consolidation goes alongside an investment or export boom then it can reduce deficit and sustain economic activity. But when (as in present circumstance) investment is sluggish and prospects for exports are generally poor, then fiscal consolidation has little impact on reducing the budget deficit and comes at the expense of a revival of economic activity. [my emphasis]
The US is a special case in that the dollar is presently the only world reserve currency, which means that other countries will hold a substantial amount of them. Which, in turn, means that the US will run a chronic trade deficit, particularly in combination with other policy choices that encourage more imports and exports.

Here a basic accounting identity kicks in, which is that the trade surplus/deficit of any country will equal its public and private internal surplus/deficits. Since the US runs chronic trade deficits and will for the foreseeable future, either the public or private sector, or both together, will have to be in deficit. In the case of an investment boom like the one during the late Clinton years, the net annual private deficits were large enough compared to the trade deficit to push public accounts into net surplus.

There are specific mechanisms by which this happens, such as investment producing more jobs and thereby lowering government transfer payments and increasing tax revenues. But the accounting identity holds. This is what leads Jamie Galbraith to say that in a real sense, the federal government can't by its own actions determine whether it will be in surplus or deficit.

The EU countries operating under German Chancellor Angela Merkel's fiscal suicide pact have committed themselves to a further austerity-inducing mechanism that is essentially pro-cyclical, i.e., it will makes recessions and depressions worse:

It must also be noted that member countries with a public debt in excess of 60 per cent are required to run a budget surplus designed to reduce its debt level by one twentieth of the difference between their debt ratio to GDP and 60 per cent. The central focus of the fiscal compact is on the achievement of a so-called structural balanced budget – that is, a budget which would be in balance when the economy is operating at “potential output.” In ‘The Fiscal Compact is Unachievable”, (Social Europe Journal) we have argued that a government budget in balance and actual output equal to potential output (or full employment), are in general incompatible. The historic experience of most industrialised economies throughout the post-war period is that budget deficits are required to sustain the level of demand. The common pursuit by EMU countries of the unachievable balanced budget will bring further austerity.
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