Austerity will worsen the crisis, because it is built on a lie.

[one...two...tree 2,762]

William Mitchell, The Nation

When President Obama announced in December 2009 that "We don't have enough public dollars to fill the hole of private dollars that was created as a consequence of the crisis," the leader of the largest economy in the world told us that, despite having caused the worst economic crisis in eighty years, neoliberalism was still firmly in charge. The global economic crisis might suggest that the neoliberal promise—that markets can self-regulate and deliver sustained prosperity for all—was a lie. But that doesn't seem to have registered with governments, which have, without exception, built their responses to the crisis on a series of myths—the same myths that caused the crisis. Despite millions remaining jobless and poverty rates rising, governments have claimed that there is no alternative but to impose austerity by cutting budget deficits. In the United States and among most parties in Europe—whether in government or opposition—the unquestioned dominance of neoliberal ideology has reduced economic debate to questions of nuance. So conservatives eschew tax increases and want larger spending cuts, whereas progressives favor a combination of spending cuts and tax increases. This homogenization of the political debate has not only stifled progressive voices; it is also obscuring the only credible route to recovery.

What began as a problem of unsustainable private debt growth, driven by an out-of-control financial sector aided and abetted by government deregulation, has mysteriously morphed into an alleged sovereign debt crisis. As private spending collapsed in 2007–08, budget deficits (public spending minus taxes) rose to bridge the gap. Now conservatives, some of whom were direct beneficiaries of bailout packages in the early days of the crisis, tell us that our governments are bankrupt, that our grandchildren are being enslaved by rising public debt burdens and that hyperinflation is imminent. Governments are being pressured to cut deficits despite strong evidence that public stimulus has been the major source of economic growth during the crisis and that private spending remains subdued.

Austerity will worsen the crisis, because it is built on a lie. Public deficits do not cause inflation, nor do they impose crippling debt burdens on our children and grandchildren. Deficits do not cause interest rates to rise, choking private spending. Governments cannot run out of money. The greatest lie—endlessly repeated by neoliberal economists and uncritically echoed by the mainstream media—is the claim that if governments cut their spending, the private sector will "crowd in" to fill the gap. British Prime Minister David Cameron's austerity campaign and President Obama's foreshadowed budget cuts are built around these lies.

The neoliberal narrative has run into some inconvenient facts. Interest rates remain low, and governments—even those of deeply troubled Greece and Ireland—have not defaulted on their debts. In most of the developed world inflation is falling, and where it is rising, it is due to rising energy and food costs rather than excessive deficits. Further, despite what they might say in public and what they demand of governments, bankers' private actions show they know better—why else would long-term bond yields remain at historic lows? Yet the public conversation is mired in misinformation, paralyzing policy-makers, while the public interest is being sacrificed and a lost generation of unemployed is emerging.

But isn't there a sovereign debt crisis in Europe? True, the nations that signed up for the euro did surrender their individual economic sovereignty—they use a currency they do not issue and thus have to borrow to cover deficits, which makes them dependent on bond markets and thus really does put them at risk of insolvency. Events in Greece and Ireland are testimony to that fact. But that problem lies in the flawed design of the euro monetary system, which was a neoliberal ploy to limit the capacity of these governments to borrow and spend. The euro nations are an exception to the rule that modern governments—like the United States and Britain—cannot run out of money and will never default on their public debt.

How Did We Get Here?

The Great Depression taught us that without government intervention, capitalism is inherently unstable and prone to delivering lengthy periods of unemployment. The Hooverian orthodoxy of balanced budgets, tried during the 1930s, failed. Full employment came only with the onset of World War II, as governments used deficit spending to prosecute the war effort. The challenge was how to maintain this full employment during peacetime.

Western governments realized that with deficit spending supplementing private demand, they could ensure that all workers who wanted to work could find jobs. All political persuasions accepted this commitment to full employment as the collective responsibility of society. As a result, very low levels of unemployment in most Western nations persisted until the mid-1970s. While private employment growth was relatively strong during this period, governments maintained a buffer of jobs for the least-skilled workers. These jobs were found in the major utilities, the railways, local public services and major infrastructure functions of government. By absorbing workers who lost jobs when private investment declined, governments acted as an economic safety valve. In addition, welfare systems provided income support and other public services (such as health and education) to citizens in need. While there were significant differences across nations in the scope of these systems, they all shared the view that the state had a role to play in providing economic security to citizens.

However, conservative resistance to the use of budget deficits grew in the late '60s, particularly in the United States, as inflationary pressures mounted because of spending associated with the Vietnam War. And conservatives believed that trade unions had become too powerful. But the full-employment consensus didn't collapse until the escalating inflation that followed the OPEC oil-price hikes of the '70s. This marked the beginning of the neoliberal era, which has dominated the political debate ever since.

Rather than a failure of the system to create enough jobs, an idea that underpinned the New Deal consensus, mass unemployment was now depicted as an individual problem—poor work attitudes leading to a lack of job-seeking—exacerbated by excessively generous welfare payments. Policy-makers also adopted the neoliberal theory of unemployment, which claimed that Keynesian-style spending could no longer deliver lower unemployment without causing inflation. The only way the government could reduce this "naturally occurring rate of unemployment" was to further free up the labor market. So if governments were unhappy about the level of unemployment, their only alternative was to make it harder for workers to get income support payments and to eliminate other "barriers" to hiring and firing (for example, unfair dismissal regulations). Attacks on trade unions and statutory protections for workers began in earnest.

These same ideas had driven the failed policies that led to the Great Depression. But history is easily forgotten, and with support from business and a co-opted media, a paradigm shift in the academy permeated policy circles. As the neoliberal train gathered pace, the debate became focused on so-called "microeconomic reforms": cutting expenditures on public sector employment and social programs and dismantling what were claimed to be supply impediments (such as labor regulations, minimum wages, Social Security payments and the like). Privatization and outsourcing accompanied these policy shifts.

Fiscal policy (spending tax revenues to achieve social aims) was actively used during the full-employment era, with monetary policy (the government's power to set interest rates) being considered less effective. The neoliberal assault on the use of fiscal policy began in the '70s, with the rise of monetarism. Politicians seized on the ideas of Milton Friedman to claim that their sole objective should be to control the money supply in order to manage inflation. Although various experiments at controlling the money supply failed dismally in the '80s (remember Reaganomics?), the dominance of monetary policy in mainstream economics was complete. Fiscal policy was demonized as being inflationary and its use eschewed, depriving liberally inclined governments of the tools to advance a more progressive agenda.

The public justifications were all about creating more jobs and reducing poverty, but the reality was different. Since 1975 most nations have failed to create enough jobs to match their willing labor supply.

The assault on regulation and the attack on workers' rights brought about a growing gap between labor productivity and real wage growth. The result has been a dramatic redistribution of national income toward capital in most countries. For example, in the G7 countries between 1982 and 2005 there was a¨6 percent drop in the share of national income paid as wages (as opposed to interest or dividends). This was a global trend.

In the past, real wages grew in line with productivity, ensuring that firms could realize their expected profits via sales. With real wages lagging well behind productivity growth, a new way had to be found to keep workers consuming. The trick was found in the rise of "financial engineering," which pushed ever increasing debt onto the household sector. Capitalists found that they could sustain sales and receive an additional bonus in the form of interest payments—while also suppressing real wage growth. Households, enticed by lower interest rates and the relentless marketing strategies of the financial sector, embarked on a credit binge.

The increasing share of real output (income) pocketed by capital became the gambling chips for a rapidly expanding and deregulated financial sector. Governments claimed this would create wealth for all. And for a while, nominal wealth did grow—though its distribution did not become fairer. However, greed got the better of the bankers, as they pushed increasingly riskier debt onto people who were clearly susceptible to default. This was the origin of the subprime housing crisis of 2007–08.

more...

http://www.thenation...terity?page=0,1

[JohnSmith2007 353]

What complete drivel!! Nations cannot run out of money? This sounds like the nonsense that Krugman was pushing. We will soon be spending a majority of our tax revinue on debt servicing and it isn't a problem? How can you even think about posting this lunacy?

[mawilson 2,133]

What complete drivel!! Nations cannot run out of money? This sounds like the nonsense that Krugman was pushing. We will soon be spending a majority of our tax revinue on debt servicing and it isn't a problem? How can you even think about posting this lunacy?

It's mind boggling.

[JohnSmith2007 353]

It's mind boggling.

And they give Nobel prizes to idiots that put this ####### out. No wonder our economy is going down the drain.

[I AM NOT THAT GUY 5,715]

And they give Nobel prizes to idiots that put this ####### out. No wonder our economy is going down the drain.

I blame selfish old hippies.

[Obama 2012 1,714]

The US cannot run of out money..... right now (that can change very quickly if IMF gets their way).

The consequences of their actions can be seen on a daily basis though. The author is ignorant in blaming rising energy costs on inflation. He is very much incorrect. You have to ask yourself why energy costs are rising? They are rising because OF INFLATION. Inflation is the devaluation of currency, in which the US has been doing for the past century. The US Dollar today is worthless. It's #######. You might as well wipe your butt with it after a messy #######.

I hate articles like this that address a proper part of the problem ( the deregulation of the financial sector ) yet make the article irrelevant when they start babbling about ####### they don't understand.

[Usui Takumi 1,562]

The US cannot run of out money..... right now (that can change very quickly if IMF gets their way).

The consequences of their actions can be seen on a daily basis though. The author is ignorant in blaming rising energy costs on inflation. He is very much incorrect. You have to ask yourself why energy costs are rising? They are rising because OF INFLATION. Inflation is the devaluation of currency, in which the US has been doing for the past century. The US Dollar today is worthless. It's #######. You might as well wipe your butt with it after a messy #######.

I hate articles like this that address a proper part of the problem ( the deregulation of the financial sector ) yet make the article irrelevant when they start babbling about ####### they don't understand.

Interestingly most nations at this time are more worried about their currency being too strong - such as the Yen, Euro, and the Renminbi.

[Nina~ 431]

The US cannot run of out money..... right now (that can change very quickly if IMF gets their way).

The consequences of their actions can be seen on a daily basis though. The author is ignorant in blaming rising energy costs on inflation. He is very much incorrect. You have to ask yourself why energy costs are rising? They are rising because OF INFLATION. Inflation is the devaluation of currency, in which the US has been doing for the past century. The US Dollar today is worthless. It's #######. You might as well wipe your butt with it after a messy #######.

I hate articles like this that address a proper part of the problem ( the deregulation of the financial sector ) yet make the article irrelevant when they start babbling about ####### they don't understand.

The value of US dollar is a double edged sword. Having a weaker dollar lessens its buying power hence increasing the price of imports, which helps lowering trade deficit. So a strong dollar is not necessarily better than a weak dollar. Morover, inflation is also not that bad.. It is only uncontrolled inflation that is bad. Having a nominal inflation is sign of a strong economy and it is way way way better than deflation. Read up on Deflationary Spiral if you are interested.

[I AM NOT THAT GUY 5,715]

If you are a debtor, you like inflation. If, on the other hand, you are an investor, you don't.

[Obama 2012 1,714]

The value of US dollar is a double edged sword. Having a weaker dollar lessens its buying power hence increasing the price of imports, which helps lowering trade deficit. So a strong dollar is not necessarily better than a weak dollar. Morover, inflation is also not that bad.. It is only uncontrolled inflation that is bad. Having a nominal inflation is sign of a strong economy and it is way way way better than deflation. Read up on Deflationary Spiral if you are interested.

Inflation is a good thing? Are you out of your mind.

It's not a sign of a strong economy, it's a sign of an in trouble economy. One that is not stable and one that can in no way maintain itself. We've had long-term inflation for the past century. You cannot seriouly imply that it's a good thing.

A $0.05 1908 loaf of bread would cost you $20 today. That tells you how much the dollar is worthless.

The problem with inflation is that it gets people used to the idea that they require more wages/cash flow to maintain themselves and when the currency regains strength, they are not willing to give back those wages/cash flow.

Deflation (i/e stronger currency) is what you ultimately hope for. You end up with a better quality of living, cheaper goods, the ability to buy cheap materials, cheaper labor (theorhetically), and a more affordable situation for those who don't have much money.

Part of our problem is the association of deflation and lower wages as I mentioned. NO one likes to talk about that or the reality that is necessary because of it. People fail to realize that as cost of living goes down, then wages need to go down with them. This is the double-edged sword of minimum wage. Sure it gives a fair/livable wage to your area, but the odds of politicians doing the right thing to bring it down to where it would need to be is minimal...

We keep running away from our problems by printing more money all the time. We add those extra zeros in hopes of bailing this out, bailing that out, when really what we should be doing is getting a grip of the financial industry again and letting 'too big to fail' companies fail. We are ENCOURAGING bad behavior by bailing companies out, by bailing out people who screw up their financials, etc. Paying for someone's debt does nothing to solve the overall problem. The idea that congress spends what it does without consequence is so dangerous to the wellfare of our nation. We may not see those consequences now because we can print dollars at all and they will be used, but what happens when that ability goes away?

[Zero Sum 305]

I think there is a difference between nominal inflation and out of control inflation, as Nina states it.

[Nina~ 431]

Inflation is a good thing? Are you out of your mind.

It's not a sign of a strong economy, it's a sign of an in trouble economy. One that is not stable and one that can in no way maintain itself. We've had long-term inflation for the past century. You cannot seriouly imply that it's a good thing.

A $0.05 1908 loaf of bread would cost you $20 today. That tells you how much the dollar is worthless.

The problem with inflation is that it gets people used to the idea that they require more wages/cash flow to maintain themselves and when the currency regains strength, they are not willing to give back those wages/cash flow.

Deflation (i/e stronger currency) is what you ultimately hope for. You end up with a better quality of living, cheaper goods, the ability to buy cheap materials, cheaper labor (theorhetically), and a more affordable situation for those who don't have much money.

Part of our problem is the association of deflation and lower wages as I mentioned. NO one likes to talk about that or the reality that is necessary because of it. People fail to realize that as cost of living goes down, then wages need to go down with them. This is the double-edged sword of minimum wage. Sure it gives a fair/livable wage to your area, but the odds of politicians doing the right thing to bring it down to where it would need to be is minimal...

We keep running away from our problems by printing more money all the time. We add those extra zeros in hopes of bailing this out, bailing that out, when really what we should be doing is getting a grip of the financial industry again and letting 'too big to fail' companies fail. We are ENCOURAGING bad behavior by bailing companies out, by bailing out people who screw up their financials, etc. Paying for someone's debt does nothing to solve the overall problem. The idea that congress spends what it does without consequence is so dangerous to the wellfare of our nation. We may not see those consequences now because we can print dollars at all and they will be used, but what happens when that ability goes away?

Deflation is not the same as stronger currency. You are getting confused between deflation and devaluation. They are completely different things. Devaluation (weaker currency) is what happens when the value of the dollar drops with respect to other foreign currencies. Deflation on the other hand is when prices fall, and it is generally seen as more harmful than inflation because it is harder to correct and stabilize the economy. As Zero Sum pointed out, there is a huge difference between nominal inflation and out of control inflation.. Paying $20 for a loaf of bread is not a bad thing when your wages have kept up with the inflation.

[mawilson 2,133]

A $0.05 1908 loaf of bread would cost you $20 today. That tells you how much the dollar is worthless.

Seriously? A loaf of bread costs $20?

I don't eat a lot of bread, but I still think it costs less than $20.

[Obama 2012 1,714]

Deflation is not the same as stronger currency. You are getting confused between deflation and devaluation. They are completely different things. Devaluation (weaker currency) is what happens when the value of the dollar drops with respect to other foreign currencies. Deflation on the other hand is when prices fall, and it is generally seen as more harmful than inflation because it is harder to correct and stabilize the economy. As Zero Sum pointed out, there is a huge difference between nominal inflation and out of control inflation.. Paying $20 for a loaf of bread is not a bad thing when your wages have kept up with the inflation.

Inflation = Devaluing of the currency.

Deflation = Strengthening of currency.

Inflation/Deflation have nothing to do with actual prices. Prices really are irrelevant and are a consequence of the items listed above.

You claim that $20 for a loaf of bread isn't a big deal when wages keep up, however you're creating a false/temporary stability by keeping wages up and creating an even bigger problem (as i already stated) when a currency strengthens and the prices adjust with them.

The chart is highly flawed in thinking that constant government intervention in sitautions like that is good. Sure, you'll notice a temporary reprieve, but you don't solve the overall problem at all. In fact all you do is stop an economic bubble from bursting right then and you re-inflate it eventually to a point when it does burst it will be 10x worse than when it almost did the first time.

Economies have to adjust. You HAVE TO let banks and companies fail. You have to deal with the consequences of mismanagement. We have become such an entitlement society, we forget the basics of what it takes to keep a steady flow of growth over time. We want everyting fixed right here and right now, which while it seems like a nice idea, it isn't the right way to go about things.

Do you honestly think our economic situation is better today than it was 3-4 years ago now? You've got blinders on in the world around you if you really think so. Sure, wall street is happy, but main street is far from it. Wall street is easy to make happy though because of the environment they've been given. They can do whatever they want without consequence, because they understand that Joe Tax Payer will bail them out. We'll just print them more money to play with, let them spend it, watch THEM increase our prices because eventhough we gave them money, they understand that the money we had to print for them is now worth less than the money they had before. They therefore go ahead and put more money into things like oil, corn, cotton, etc.... causing prices in those industries to go up, which causes consumer prices go up as well.

When you stop and understand what happens and the way our economy really works, there is no way in hell anyone could be happy with continued inflation.

Deflation is not the monster here. It is the smartest thing we could do to our currency right now. ESPECiALLY with the threat of losing it as the world's reserve. Because if we lose that status, then people will be begging and pleading for deflation or a whole new currency entirely. The US Dollar will be so worthless, that no one will want to touch it. Hell, there are plenty today who don't want to even now and that's why the IMF wants to drop the dollar.

Seriously? A loaf of bread costs $20?

I don't eat a lot of bread, but I still think it costs less than $20.

we're talking the currency value in 1908. A loaf of bread in 1908 that cost you a nickel, would be $20 if you used today's currency back then.

[mawilson 2,133]

we're talking the currency value in 1908. A loaf of bread in 1908 that cost you a nickel, would be $20 if you used today's currency back then.

Ah - understood.

What was the average wage back then (in today's dollars)? Just curious.