Austerity policies based on flawed research?

spank_inferno

20Cent wrote: »

Barroso admits austerity is not working
http://www.independent.ie/business/irish/barroso-admits-austerity-is-not-working-29214126.html

What he said:

"While I think this policy (austerity) is fundamentally right, I think it has reached its limits."


We'll never know of course, Ireland is still running a 12 billion annual deficit.
So we have yet to try our hand at austerity.

SupaNova2

20Cent wrote: »

Barroso admits austerity is not working
http://www.independent.ie/business/irish/barroso-admits-austerity-is-not-working-29214126.html

It'd be nice if you actually read the article and what he actually said.

20Cent

SupaNova2 wrote: »

It'd be nice if you actually read the article and what he actually said.

Why are you saying that?

Scofflaw

20Cent wrote: »

Why are you saying that?

Because of what Barroso actually says:

In a speech in Brussels, Jose Manuel Barroso said the EU should place a greater emphasis on policies that stimulate growth and less on so-called austerity measures, such as cutting government spending.

"While I think this policy (austerity) is fundamentally right, I think it has reached its limits," the commission president said.

"A policy to be successful not only has to be properly designed, it has to have a minimum of political and social support."

But austerity is working in Ireland, he said, adding: "It is a painful programme, but it is working."

I appreciate that the Indo titled it as per your post, but their title is complete nonsense given what he actually said. "Barroso admits austerity is working in Ireland" would be more accurate.

cordially,
Scofflaw

20Cent

Scofflaw wrote: »

Because your summary "Barroso admits austerity isn't working" is a very large misrepresentation of what he says, while the presentation of that misrepresentation immediately following the line about R&R making the front page implies that Barroso has been forced into the "admission" he hasn't made by the flaws in R&R.

This is open and shut factual misrepresentation, not a matter of opinion, and very close to warranting an infraction or ban.

moderately,
Scofflaw

Not a summary its the headline of the article.
Almost all other newspapers are reporting it as similar. These are journalists used to interpreting what he says this is a close to an admission as there will be. The R&R story was also reported on the front page story, its one significant part in the backlash against the austerity measures which have been shown to be counter productive.

The IMF have said it, the ECB have implied it, even the bondholders are saying it now.

Bill Gross, the manager of the world’s largest bond fund Pimco.
"The U.K. and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not,” Gross said. “You’ve got to spend money.”

Scofflaw

20Cent wrote: »

Not a summary its the headline of the article.
Almost all other newspapers are reporting it as similar. These are journalists used to interpreting what he says this is a close to an admission as there will be. The R&R story was also reported on the front page story, its one significant part in the backlash against the austerity measures which have been shown to be counter productive.

The IMF have said it, the ECB have implied it, even the bondholders are saying it now.

Bill Gross, the manager of the world’s largest bond fund Pimco.
"The U.K. and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not,” Gross said. “You’ve got to spend money.”

I had in fact already amended my post to reflect the fact that it was their title rather than yours - but that doesn't make the title any less a complete contradiction of what he actually says.

They say "Barroso admits austerity isn't working" - Barroso actually says "austerity is working in Ireland". You cannot derive the former from the latter.

The press do not have superhuman powers of discrimination, that make their pronouncements authoritative even where they contradict the facts. On the contrary, they simply tend to write to their own agendas, and the facts are secondary. In this case they have provided a headline which visibly contradicts the facts as quoted in the article, and the headline is therefore of no value.

cordially,
Scofflaw

20Cent

Scofflaw wrote: »

I had in fact already amended my post to reflect the fact that it was their title rather than yours - but that doesn't make the title any less a complete contradiction of what he actually says.

They say "Barroso admits austerity isn't working" - Barroso actually says "austerity is working in Ireland". You cannot derive the former from the latter.

The press do not have superhuman powers of discrimination, that make their pronouncements authoritative even where they contradict the facts. On the contrary, they simply tend to write to their own agendas, and the facts are secondary. In this case they have provided a headline which visibly contradicts the facts as quoted in the article, and the headline is therefore of no value.

cordially,
Scofflaw

The facts are that the arguments for austerity have taken a body blow this week. R&R is just a part of it, a graduate student tore it apart.

Pretty much all the stakeholders are saying this now. Barroso is subtle and hardly going to admit his policy for the last few years is wrong. The journalists have to interpret what he is saying. All the indications are that a new approach is required involving quantile easing and a stimulus. This is what the G20 are discussing, the IMF, the US treasury etc are saying.

The fact is that austerity is not working in the worst hit countries Ireland, Greece, Italy, Portugal and Spain.
http://www.rte.ie/news/2013/0214/367699-austerity-study-impact/

The push for more austerity is ideologically driven rather than a rational one based on facts. Seems like a shift in policy is on the horizon but its a pity it took so long to come about.

Geuze

If by austerity you mean "reducing the fiscal deficit to a sustainable amount" - then it is working, and we have to continue with it until the fiscal deficit falls to reasonable levels.

I don't think that statement can be disputed. No matter what ideology you follow, it is not possible for the Irl Govt to continue to borrow 10bn approx per annum indefinitely.

To stop doing this means "the Govt will continue to borrow approx 10bn per annum and continue to accumulate larger and larger public debt, which is storing up problems for the future".

Geuze

However, what may be possible is the following:

Continue to reduce the fiscal deficit with a mix of tax increases and spending cuts which are growth-friendly, or at least less harmful to economic growth, and which may contain some fiscal stimulus, e.g. some sort of capital expenditure boost


For example: more tax increases aimed at pensioners, less aimed at families, so that consumer spending takes less of a hit

Scofflaw

20Cent wrote: »

The facts are that the arguments for austerity have taken a body blow this week. R&R is just a part of it, a graduate student tore it apart.

Pretty much all the stakeholders are saying this now. Barroso is subtle and hardly going to admit his policy for the last few years is wrong. The journalists have to interpret what he is saying. All the indications are that a new approach is required involving quantile easing and a stimulus. This is what the G20 are discussing, the IMF, the US treasury etc are saying.

The fact is that austerity is not working in the worst hit countries Ireland, Greece, Italy, Portugal and Spain.
http://www.rte.ie/news/2013/0214/367699-austerity-study-impact/

The push for more austerity is ideologically driven rather than a rational one based on facts. Seems like a shift in policy is on the horizon but its a pity it took so long to come about.

"Barroso is subtle"? This is just special pleading to get around the problem that he's not saying what's claimed for him.

We might be seeing a shift in policy, but it's not coming about because the opposition to it are presenting better facts - they too are ideologically driven, and present things like the outcome of the collapse of the construction sector as if they were the effects of the resulting policies of austerity, primarily in defence of a variety of inflated entitlements.

regards,
Scofflaw

hatrickpatrick

Let's suppose for a second that we devalued the Euro in a major way.
Who would benefit versus who would lose? Just curious. From where I'm standing, a plummeting euro equals increased exports from struggling nations, equals good news for EVERYONE. Why in God's name has this not happened yet? Who's holding it back?

SupaNova2

hatrickpatrick wrote: »

From where I'm standing, a plummeting euro equals increased exports from struggling nations, equals good news for EVERYONE. Why in God's name has this not happened yet? Who's holding it back?

If it was as simple as devalue = everyone wins I'm sure it would happen.

Scofflaw

hatrickpatrick wrote: »

Let's suppose for a second that we devalued the Euro in a major way.
Who would benefit versus who would lose? Just curious. From where I'm standing, a plummeting euro equals increased exports from struggling nations, equals good news for EVERYONE. Why in God's name has this not happened yet? Who's holding it back?

Variously, a plummeting euro doesn't change much either for eurozone-internal trade or for countries whose primary problem is not an export slump (and I can't think of many countries where that's a major contributing factor in their crisis), while impacting standards of living in respect of non-eurozone imports. Like inflation, it's a stealth way of cutting wages and profits, but it's completely untargeted. It also gives yet another reason for non-eurozone money to flee the eurozone, and not just the banks.

As per the Economist:

THE opening paragraph of Bloomberg's news story on Venezuela's currency move is a classic example of what devaluation actually means.

"Venezuelans lined up to purchase airline tickets and TVs this weekend in a bid to protect themselves from price increases after ailing President Hugo Chavez devalued the bolivar for a fifth time in nine years."

The official rate is falling from 4.3 to the dollar to 6.3; a 32% devaluation. Foreign goods will cost more. In other words, a devaluation is a decline in the country's standard of living. Traditionally, it is a tool used by a desperate government with a poor economic policy. Venezuela, despite its oil wealth, has a 22% inflation rate, even before the latest move. Sometimes countries get trapped in a dismal cycle in which high inflation causes the country's exports to be uncompetitive, prompting a devaluation that only leads to more inflation and so on.

Competitiveness is usually only restored by a decline in real wages. This can be achieved by having nominal wages fall while the exchange rate is unchanged (call it plan A), or by having wages fail to adjust to the inflationary effects of a devaluation (plan . Either way, we come back to a standard of living decline.

Devaluation is a very blunt instrument, rife with unintended consequences, which is why it's not really been used since the ability to do it was removed from the politicians by the creation of independent central banks. Politicians do prefer it, because it achieves a wage cut across the economy without all the difficult negotiations the government is currently undergoing - central banks prefer the difficult negotiations and targeted wage cuts, because they're more precise and have fewer unintended consequences, and they don't have to do the negotiating or pay the cost in lost votes.

Essentially, devaluation is the current policy, but done "internally" by the difficult process of negotiated wage cuts and adaptive price falls in the private sector as opposed to "externally" by an exchange rate change. In both cases sectoral interests and oligopolies will resist wage cuts - in internal devaluation, they do so explicitly by opposing wage cuts, in external devaluations they do so by seeking wage rises. So if we were doing an external devaluation, we'd currently have the public sector seeking - and threatening action over - 'cost of living increases'. In both cases they're seeking to maintain the same standard of living.

cordially,
Scofflaw

SupaNova2

That's a good summary, add that devaluation can help anyone with debt at the expense of those that have savings. From the ECB themselves:

Price stability prevents the arbitrary distribution of wealth and income associated, for instance, with the erosion of the real value of nominal claims (savings in the form of bank deposits, government bonds, nominal wages) resulting from inflation. Large erosions of real wealth and income due to high inflation can be a source of social unrest and political instability. To sum up, by maintaining price stability, central banks help broader economic goals to be achieved, thus contributing to general political stability.

As money maintains its value over time, it can be held for longer periods. This is particularly useful because it allows the act of sale to be separated from the act of purchase. In this case, money fulfils the important function of a store of value.

Uncertainty about the rate of inflation may also lead firms to make wrong employment decisions. To illustrate this, let us suppose that in an environment of high inflation, a firm misinterprets the increase in the market price of its goods by, say, 5 %, as a relative price decrease as it is not aware that the inflation rate has recently fallen from, say, 6 % to 4 %. The firm might then decide to invest less and lay off workers in order to reduce its production capacities, as it would otherwise expect to make a loss given the perceived decrease in the relative price of its goods. However, this decision would ultimately turn out to be wrong, as the nominal wages of employees due to lower inflation may increase by less than that assumed by the firm. Economists would describe this as a “misallocation” of resources. In essence, it implies that resources (capital, labour, etc.) have been wasted, as some employees would have been made redundant because of instabilities in price developments.

… reduce distortionary effects of tax systems and social security systems …Fourth, tax and welfare systems can create incentives which distort economic behaviour. In many cases, these distortions are exacerbated by inflation or deflation, as fiscal systems do not normally allow for the indexation of tax rates and social security contributions to the inflation rate. For instance, salary increases that are meant to compensate workers for inflationary developments could result in employees being subject to a higher tax rate, a phenomenon that is known as “cold progression”. Price stability reduces these distortionary effects associated with the impact of inflationary or deflationary developments on taxation and social systems.

… increase the benefits of holding cash … Fifth, inflation can be interpreted as a hidden tax on holding cash. In other words, people who hold cash (or deposits which are not remunerated at market rates) experience a decline in their real money balances and thus in their real financial wealth when the price level rises, just as if part of their money had been taxed away. So, the higher the expected rate of inflation (and therefore the higher nominal interest rates – see Box 3.2), the lower the demand by households for cash holdings (Box 3.4 shows why higher nominal interest rates imply a reduction in the demand for (non-remunerated) money). This happens even if inflation is not uncertain, i.e. if it is fully expected. Consequently, if people hold a lower amount of cash, they must make more frequent visits to the bank to withdraw money. These inconveniences and costs caused by reduced cash holdings are often metaphorically described as the “shoe-leather costs” of inflation, because walking to the bank causes one’s shoes to wear out more quickly. More generally, reduced cash holdings can be said to generate higher transaction costs.

… prevent the arbitrary distribution of wealth and income … Sixth, maintaining price stability prevents the considerable economic, social and political problems related to the arbitrary redistribution of wealth and income witnessed during times of inflation and deflation. This holds true in particular if changes in the price level are difficult to anticipate, and for groups in society who have problems protecting their nominal claims against inflation. For instance, if there is an unexpected increase in inflation, everyone with nominal claims, for example in the form of longer-term wage contracts, bank deposits or government bonds, experiences losses in the real value of these claims. Wealth is then transferred in an arbitrary manner from lenders (or savers) to borrowers because the money in which a loan is ultimately repaid buys fewer goods than was expected when the loan was made. Should there be unexpected deflation, people who hold nominal claims may stand to gain as the real value of their claims (e. g. wages, deposits) increases. However, in times of deflation, borrowers or debtors are often unable to pay back their debt and may even go bankrupt. This could damage society as a whole, and in particular those people who hold claims on, and those who work for, firms that have gone bankrupt.

… contribute to financial stability Seventh, sudden revaluations of assets due to unexpected changes in inflation can undermine the soundness of a bank’s balance sheet. For instance, let us assume that a bank provides long-term fixed interest loans which are financed by short-term time deposits. If there is an unexpected shift to high inflation, this will imply a fall in the real value of assets. Following this, the bank may face solvency problems that could cause adverse “chain effects”. If monetary policy maintains price stability, inflationary or deflationary shocks to the real value of nominal assets are avoided and financial stability is therefore also enhanced.

Scofflaw

SupaNova2 wrote: »

That's a good summary, add that devaluation can help anyone with debt at the expense of those that have savings.

And that's probably the major reason why it's currently a popular idea.

cordially,
Scofflaw

hatrickpatrick

Given that those struggling with debt seem to vastly outnumber those with massive savings, would it not be fairer to pursue policies which favour the former?

And also Scofflaw the big issue in terms of why I argue moremformdrect devaluation than indirect grouch taxes etc is that te former isn't as obvious a way of reducing people's wealth and therefore won't impact on confidence as much as direct austerity does.

Since economics is an exercise in mass psychology is the approach which does less harm to consumer confidence not logically almost always the better option?

SupaNova2

The ECB states some solid reasons for not having varying rates of inflation. Having a consistent rate at least gives economic actors better ability to plan, for the ECB to turn around and make a sharp devaluation as opposed to constant inflation targeting, makes for more random distribution of wealth, rewarding those who took on too much debt to invest in over-ambitious business plans or a MacMansion as opposed to those who took more sound economic decisions.

SupaNova2

hatrickpatrick wrote: »

Given that those struggling with debt seem to vastly outnumber those with massive savings,would it not be fairer to pursue policies which favour the former?

Jimmy took out a huge mortgage to buy a second home in Leitrim during the bubble, Timmy took out a loan and invested in a software company producing games for mobile phones. Jimmy is struggling with debt, Timmy has seen great growth. Devaluation takes the real value of Timmy's nominal claims to ease the burden of Jimmy's debt. Even if there are more Jimmy's than Timmy's, devaluation takes purchasing power away from those that are better at allocating scarce resources.

hatrickpatrick

^ If the economy is comprised of far more Jimmys than Timmys, the economy as a whole benefits from easing their troubles a bit. Timmys will suffer as well if the entire economy tanks due to generally battered confidence, so surely it's a question of which is the lesser of two evils?

EDIT: Just to give this a personal touch, I'm definitely more of a Timmy myself and I have a lot of savings, certainly a lot more than most college-age people I know do. I'm very careful with my money and have been since I was a kid, in fact I still have most of my old birthday money and so on.

While devaluation would hurt me a little, in the bigger picture I'm hurt far more if the economy is still in the toilet when I finish college and find there are no jobs. In the same way I'm hurt by a generally bad economy if it means my college fees go up, taxes go up etc.

So it genuinely is a question of the lesser of two evils, and right now it seems to me that growth should be the absolute top priority. If my savings will take a hit in the short term in order to achieve that, well so be it.

Tim Robbins

20Cent wrote: »

Time to end the charade, these austerity polices are making things worse rather than improving the economies of the countries involved.

Austerity is not meant to generate growth it is meant to cut deficit.

And what's your solution? Devalue - can't. Print more money - ask the Germans. Debt forgiveness - how can you do that when you have the highly paid public sector and generous welfare state.

Austerity does work. Deficit is going down.

KyussBishop

hatrickpatrick wrote: »

Let's suppose for a second that we devalued the Euro in a major way.
Who would benefit versus who would lose? Just curious. From where I'm standing, a plummeting euro equals increased exports from struggling nations, equals good news for EVERYONE. Why in God's name has this not happened yet? Who's holding it back?

It means an increased cost of imports including oil, thus knock-on inflation through that (which may be offset however, by the change in trade balance).

Closing the output gap (i.e. solving unemployment) is the more important goal, and that can be done with a job guarantee until the private sector is ready to soak up the workers.

If this is funded through money creation, and the exchange rate is let float, it may result in some temporary incidental devaluation, which would inherently be factored in to limited spending based on inflation targets, and which is corrected as GDP increases and as other countries catch up with the EU's increased economic activity.


It's important to note that devaluation is not inflation, and vice versa (even if one may lead to the other, it is not 1:1, it depend on imports); devaluation is all about international trade, and the percentage devaluation does not inherently change the currencies buying power by the same amount.

Internal devaluation (different to above) also makes debts harder to pay off, by killing peoples income and making debt grow as a proportion of income.

SupaNova2

hatrickpatrick wrote: »

^ If the economy is comprised of far more Jimmys than Timmys, the economy as a whole benefits from easing their troubles a bit. Timmys will suffer as well if the entire economy tanks due to generally battered confidence, so surely it's a question of which is the lesser of two evils?

There are many more complexities. When the euro is a widely held reserve in part because the ECB has chosen to strictly limit its depreciation, deciding to sharply devalue would reduce demand to hold euros as a reserve. There is a relatively quiet game of currency wars in the background that is continuously being played. The unfair strength of the dollar due to its privilege as reserve has allowed the US to export more than it imports for decades. The ROW doesn't want to support such a system indefinitely.

Larbre34

A very good piece

http://www.irishtimes.com/news/world/europe/letter-from-europe-austerity-is-fast-becoming-a-dirty-word-1.1371799

Cody Pomeray

spank_inferno wrote: »

So we have yet to try our hand at austerity.

Most people intend "auterity" to mean a process of fiscal tightening, as opposed to imediately cutting the entire debt of a country overnight. Which I'm sure some fringe elements with a fleeting interest in economics will always continue to promote. Thankfully without success.

Ireland has tried austerity, by most people's definition. Ireland's improving reputation and attractiveness as a place to do business can probably be attributed in large part to such austerity. In that sense, Ireland is an exception.

Interesting interview with Christine Lagarde on Hard Talk this morning. Should be on youtube soon if anyone missed it; some very interesting fodder for thought on those who still promote austerity as a remedy for the Eurozone.

spank_inferno

Larbre34 wrote: »

A very good piece

http://www.irishtimes.com/news/world/europe/letter-from-europe-austerity-is-fast-becoming-a-dirty-word-1.1371799

What is the alternative?

Borrow?
Is that not what got Europe into its current mess?

If "Austerity" is now a dirty word in europe, that is probably more to do with those with their nose in the trough having a little less to go around.

spank_inferno

Cody Pomeray wrote: »

Most people intend "auterity" to mean a process of fiscal tightening, as opposed to imediately cutting the entire debt of a country overnight. Which I'm sure some fringe elements with a fleeting interest in economics will always continue to promote. Thankfully without success.

Ireland has tried austerity, by most people's definition. Ireland's improving reputation and attractiveness as a place to do business can probably be attributed in large part to such austerity. In that sense, Ireland is an exception.

Interesting interview with Christine Lagarde on Hard Talk this morning. Should be on youtube soon if anyone missed it; some very interesting fodder for thought on those who still promote austerity as a remedy for the Eurozone.

Again, what is the alternative?

Governments have to, at some point get their spending under control.

Cody Pomeray

spank_inferno wrote: »

Again, what is the alternative?

Governments have to, at some point get their spending under control.

It is acknowledged that public debt ratios are too high. I doubt there is a single literate person in human civilization who denies this.

I'm not suggesting that there is no need for fiscal austerity in the Eurozone. What I said is two-fold.

(1) That Ireland has been embarking on a path of fiscal austerity, which is working for Ireland because it enjoys a price competitive economy. Therefore, under most people's understanding of the term "austerity", i.e. fiscal tightening, what you are saying - about Ireland yet having to try austerity - is grossly incorrect.


(2) That austerity alone is not working for the Eurozone, which has a less competitive economy, with high fiscal multipliers, not least in the periphery. Austerity is not a dirty word, but its pace can be slowed and its effectiveness and palatability can be improved by twinning it with a pan European stimulus package - The Hollandaise.

Larbre34

spank_inferno wrote: »

Again, what is the alternative?

Governments have to, at some point get their spending under control.

Not by ending borrowing they don't.

Governments borrow, have always borrowed, always will borrow. Its how that money is invested to invigorate activity and get a return thats the issue. If you dial it down too much you kill potential in an economy for a decade.

Certainly Ireland has a structural deficit, but if you strip out the forced borrowing to prop up failed private institutions, the state itself is in a sustainable position.

Inflating away debt will always be how exchequers grow. In the western hemisphere the crunch on credit in this case came about because of a reckless pyramid of private lending and a lax supervision of diligence and capital requirements.

Its not Governments spending as such that needs controlling, its the policy of throwing exchequer lifebelts to failed private enterprise that should end.

K-9

Larbre34 wrote: »

Not by ending borrowing they don't.

Governments borrow, have always borrowed, always will borrow. Its how that money is invested to invigorate activity and get a return thats the issue. If you dial it down too much you kill potential in an economy for a decade.

Certainly Ireland has a structural deficit, but if you strip out the forced borrowing to prop up failed private institutions, the state itself is in a sustainable position.

Inflating away debt will always be how exchequers grow. In the western hemisphere the crunch on credit in this case came about because of a reckless pyramid of private lending and a lax supervision of diligence and capital requirements.

Its not Governments spending as such that needs controlling, its the policy of throwing exchequer lifebelts to failed private enterprise that should end.

Most of our borrowing is made up of debt to finance structural deficits and refinance old debt that we had for years, I don't think any of the Troika money has gone towards banks for example.

I also think people think no austerity would mean no more cuts to Social Welfare, Public Sector pay and services. Tax revenues barely cover welfare and pay, never mind running services like hospitals, schools and Garda stations, and that's before mentioning interest on the debt. The economy hasn't been sustainable at all with or without mind bank costs.

KyussBishop

Catching up on some RSS links from the last week; here is a great article from David Graeber on this (which I regret only seeing now):
http://www.guardian.co.uk/commentisfree/2013/apr/21/no-need-for-economic-sadomasochism

Also proposes an interesting additional policy for tackling the crisis in Europe, which was specifically proposed in Ireland, though was rejected offhand by Noonan.