Why Austerity won't work.

CrystalLettuce

http://www.davidmcwilliams.ie/2011/09/19/it%E2%80%99s-pointless-to-be-an-eu-poster-boy?utm_source=WebsiteSubscribers&utm_campaign=886850d481-Weekly_Roundup_10_August_2011&utm_medium=email

The problem with austerity is that it has never worked anywhere in the world without either being preceded, or followed, by a massive devaluation or massive credit injection. Our ‘successful’ period of austerity from 1987 to 1990 was preceded by a devaluation in 1987 and followed by another one in 1992, and all the while interest rates fell dramatically.

Likewise, Reagan and Thatcher’s massive fiscal contractions of the early 1980swere accompanied by the most rapid injection of credit either economy had seen since the 1920s, leading to a bubble and two housing busts in the late 1980s.

Would the TINA crowd please provide examples of successful austerity that didn't fall under this pretext?

Austerity destroys growth so without some measure to counter harsh cutbacks, or any notable reduction in government spending, how are you ever going to recover? Where are the jobs going to come from if we just balance the books? Nobody is giving any answers.

Don't know if I agree with the rest of the article though.

OMD

CrystalLettuce wrote: »

http://www.davidmcwilliams.ie/2011/09/19/it%E2%80%99s-pointless-to-be-an-eu-poster-boy?utm_source=WebsiteSubscribers&utm_campaign=886850d481-Weekly_Roundup_10_August_2011&utm_medium=email



Would the TINA crowd please provide examples of successful austerity that didn't fall under this pretext?

Austerity destroys growth so without some measure to counter harsh cutbacks, or any notable reduction in government spending, how are you ever going to recover? Where are the jobs going to come from if we just balance the books? Nobody is giving any answers.

Don't know if I agree with the rest of the article though.

You need to define what austerity working means. I would take it as being better than no austerity

Bullseye1

Is this austerity or a necessary correction of public spending? We are spending more than we make. We need a reduction in day to day spending such as social welfare and wages. But I would have preferred to see us continue invest in infrastructural projects with the reduction in private sector wages in construction projects can be completed for alot less money. Unfortunately that is not going to happen.

Permabear

This post has been deleted.

Debtocracy

Permabear wrote: »

This post had been deleted.

The path backward is not the same as the path forward. If we were to go back to 2003 levels of spending, the standard of living would be far worse than 2003. Why? Because of debt. Debt keeps growing even when the money supply has severly contracted.

To put it simply, austerity will not work because a contracted economy will not be able to meet its growing debt obligations. Almost every economy in the world is obsessed with economic growth, not because of a drive to become more prosperous, but to simply service the expanding debt. Austerity in combination with default on the other hand makes more sense. The Western economy is currently sick with debt and needs to vomit through default. Alternatively a new monetary system would provide a less destructive solution but what are the chances of that happening when nobody recognises the problem with the current system.

Head The Wall

Hate to state the obvious here but you reckon there should be no Austerity and instead we should keep spending money we don't have.

And stop spouting about how people will keep lending to us regardless of consequences, there isn't a never ending money supply, what it is you propose we do instead and back it upi with some credible info.

uncle_sam_ie

It work out fine for the Germans back in the 1930's.

sharper

CrystalLettuce wrote: »

Where are the jobs going to come from if we just balance the books? Nobody is giving any answers.

Since the bubble burst in 2007 and the hole in our finances became obvious to even the most wilfully obtuse I've been asking where the money is supposed to come from if we don't cut back. All I've gotten so far is vague notions we can just increase taxes to cover the deficit.

How about you? Any ideas?

Dannyboy83

We need a reduction in current expenditure.
(Ideally some should also be redirected to capital expenditure, but a reduction in spending seems unachievable enough atm)


The Left purposely confuse the argument around austerity.

Government reducing spending of borrowed money = good
Government reducing spending of earned money = not so good (during a recession)

thebman

Head The Wall wrote: »

Hate to state the obvious here but you reckon there should be no Austerity and instead we should keep spending money we don't have.

And stop spouting about how people will keep lending to us regardless of consequences, there isn't a never ending money supply, what it is you propose we do instead and back it upi with some credible info.

Yes that is basically what the OP believed on the last thread I had this discussion with them on.

Either that or we should go bankrupt and default according to the OP as austerity is impossible for an economy to grow when engaging in austerity (despite the fact that we are now posting growth figures even if they are being hampered by austerity, we are posting low growth figures so there is evidence so far that we can engage in austerity and grow the economy).

In fact, this topic is on the VB show now

CrystalLettuce

Permabear wrote: »

This post had been deleted.

I'm not just talking about the cuts we've had thus far but the cuts that those in the IMF etc. are encouraging.

You also need some kind of stimulus in the economy if you want recovery, and high welfare helps that. Unfortunately our cost of living is still very high so it's hard for that to take effect.

CrystalLettuce

Dannyboy83 wrote: »

We need a reduction in current expenditure.
(Ideally some should also be redirected to capital expenditure, but a reduction in spending seems unachievable enough atm)


The Left purposely confuse the argument around austerity.

Government reducing spending of borrowed money = good
Government reducing spending of earned money = not so good (during a recession)

Why?

CrystalLettuce

sharper wrote: »

Since the bubble burst in 2007 and the hole in our finances became obvious to even the most wilfully obtuse I've been asking where the money is supposed to come from if we don't cut back. All I've gotten so far is vague notions we can just increase taxes to cover the deficit.

How about you? Any ideas?

Where are the jobs going to come from? This might hold the key.

Also I'm curious as to why most people seem to be ignored the article I posted in favour of talking about "The left". It's also worrying how right wing biased this forum is. Why is there almost no representation of the other side of the spectrum?

This isn't the first time it's happened. With regards alternatives to Austerity, I posted something on that too, but again, it got ignored. I hate having to tread back through my own posts or bookmarks for this every time I'm asked for something to back up what I'm saying by someone who was posting in a thread where I already did so.

CrystalLettuce

Head The Wall wrote: »

Hate to state the obvious here but you reckon there should be no Austerity and instead we should keep spending money we don't have.

And stop spouting about how people will keep lending to us regardless of consequences, there isn't a never ending money supply, what it is you propose we do instead and back it upi with some credible info.

But we're being lent money regardless. That money is there, to be lent to us. The difference is, that there are restraints attached to it that may end up being harsher in the long run than what is anywhere near optimal for growth, which is the key to getting out of the recession.

It's not a case of getting money out of nowhere(Money doesn't exist in the first place, so technically you can keep spending money, though this is part of the issue), that money is already there. The conditions on the loan do not generate the money, if anything it's the opposite. I do not know why the right insist on this intellectual dishonesty.

Godge

CrystalLettuce wrote: »

You also need some kind of stimulus in the economy if you want recovery, and high welfare helps that. Unfortunately our cost of living is still very high so it's hard for that to take effect.

The bit in bold is completely wrong. High welfare does not act as a stimulus to the economy. Imagine if you tripled current social welfare rates. Lots of people would stop working and go on the dole so economic activity would go down.

McWilliams as always only gets it half right at best - remember he was the man who dreamed up the bank bailout for Lenihan, a great track record.

How about this? Cut social welfare in half and at the same time abolish the universal social charge. What happens? Well suddenly there is a huge incentive to people on social welfare to get a job at any price, while for employers wages can be lower because take-home pay is up. While such an approach is politically and socially unacceptable in Ireland, it would stimulate the economy much better than maintaining or increasing social welfare rates. Bottom line is, if you want to stimulate economic activity you make it more attractive to work than be on the dole. One of the clear ways of doing that is cutting social welfare.

Godge

CrystalLettuce wrote: »

But we're being lent money regardless. That money is there, to be lent to us. The difference is, that there are restraints attached to it that may end up being harsher in the long run than what is anywhere near optimal for growth, which is the key to getting out of the recession.

It's not a case of getting money out of nowhere(Money doesn't exist in the first place, so technically you can keep spending money, though this is part of the issue), that money is already there. The conditions on the loan do not generate the money, if anything it's the opposite. I do not know why the right insist on this intellectual dishonesty.

We are being lent money thanks to the kindness of our friends in the EU and the international community through the IMF. If they didn't lend us the money, nobody would. As a result, you wouldn't get your social welfare payment, the ATMs would stop working, public servants wouldn't get paid, shops wouldn't get stock, etc etc.

This idea that the money is there regardless is some sort of Walter Mitty type dreamland, you might as well live in Oz.

murphaph

CrystalLettuce wrote: »

Where are the jobs going to come from?

The only place a sustainable economy will ever come from: an export led recovery.

We should take the focus off the domestic economy and get the focus back on our exports. It's forgetting outside world and focusing on internal matters that le us to the dire situation we're now in.

I see you don't really believe money exists etc. so I think I understand now where a lot of your posts are coming from.

Money may not exist but the concept of exchanging labour for something to eat certainly does and money just makes it easier to do this. If you can think of a better system that allows me to work in exchange for a wide variety of things I want/need, I'm all ears!

dynamick

Irish government spending is to stay level at approx 70bn for the next 4 years.

The economy is being let down gently with the cushion of below cost loans to fund the state and our banks and NAMA. Cheap funding is a form of stimulus to the economy.

There is no alternative to correcting our overspending. Once you spend more than you have, then you have to borrow the difference and once nobody will lend to you anymore then you have to stop spending.

This doesn't apply to countries that print their own currencies.

What is the exit strategy?

Cut deficit
Shrink banks
Live off cheap euro money until the state is considered safe by the markets
Country returns to growth due to low business costs, high supply of labour.

So are these things happening? Banks are less than half the size they were. Deficit is falling: primary surplus by 2013/2014. 67bn line of cheap credit for bank and state funding. NAMA funded @1.7%. GNP & GDP are both higher in Q2 than a year earlier. 10 yr bond yields down to 7.9% this morning.

So, yeah, I'd say that's working.

thebman

dynamick wrote: »

This doesn't apply to countries that print their own currencies.

It sort of does though, Britain is doing austerity and it has its own currencies but has to cut to live within its means because too much quantitative easing would lead to a risk of hyperinflation I imagine.

As always though, there is no such thing as a free lunch, everything has its consequences including a debt binge. Public expenditure expanded on the back of an unsustainable property bubble fueled by cheap credit, the credit is gone, the bubble is gone and so expenditure must return to pre-bubble levels in order to remain sustainable.

Unless we can magically get our economy back to property bubble, cheap credit levels fast and I don't see anyway that is possible.

Godge

thebman wrote: »

As always though, there is no such thing as a free lunch, everything has its consequences including a debt binge. Public expenditure expanded on the back of an unsustainable property bubble fueled by cheap credit, the credit is gone, the bubble is gone and so expenditure must return to pre-bubble levels in order to remain sustainable.

.

But that is only part of the story. Hundreds of thousands were taken out of the income tax net, capital gains taxes and capital acquisitions taxes were reduced, the taxes from property were based on transactions rather than on existing bricks, mortar and land. So taxation was lower than it would otherwise have been and therefore has a role to play in taking up the slack.

Medu

In a way what he is saying is that we need MORE austerity! In his view austerity won't work unless we either leave the euro and devalue OR we reduce wages and prices in the economy. He believes the former is the easier option and that we should go down that route.

cyberhog

Well IBEC were on RTE news earlier warning that excessive austerity is NOT needed.

IBEC Chief Economist Fergal O'Brien said: "The renewed rush to austerity across Europe is not a reason for Ireland to accelerate its plans to close the budget deficit. This approach would stunt growth prospects and it is unproven what, if any, benefit we would garner from the markets. We have a credible plan to correct the public finances. We need to stick to it."

http://www.ibec.ie/IBEC/Press/PressPublicationsdoclib3.nsf/vPages/Newsroom~additional-austerity-not-needed-at-this-time-18-08-2011?OpenDocument

Icepick

What people call austerity is mostly just return to sanity and a balanced budget.

andrew

CrystalLettuce wrote: »

http://www.davidmcwilliams.ie/2011/09/19/it%E2%80%99s-pointless-to-be-an-eu-poster-boy?utm_source=WebsiteSubscribers&utm_campaign=886850d481-Weekly_Roundup_10_August_2011&utm_medium=email



Would the TINA crowd please provide examples of successful austerity that didn't fall under this pretext?

Austerity destroys growth so without some measure to counter harsh cutbacks, or any notable reduction in government spending, how are you ever going to recover? Where are the jobs going to come from if we just balance the books? Nobody is giving any answers.

Don't know if I agree with the rest of the article though.

I'm not sure if any such examples exist, but that's because I don't think any other country has had to implement austerity measures while at the same time having no control over monetary policy. So what he's saying isn't that austerity can't work without devaluation, just that in the past it hasn't worked without devaluation, because devaluation is easier than forcing price and wage adjustments.

The reality is that there's no theoretical reason as to why austerity requires devaluation to work. Reducing costs works in the same way as devaluation, by boosting exports. This is what has happened in Ireland, with exports contributing heavily to the recent return to growth (or at least, the recent slowdown of the recession).