Austerity policies based on flawed research?

View wrote: »

It may be politically powerful - that doesn't mean it's economically powerful.

If a company has X amount of shares in issuance, each share is worth 1/Xth of the net wealth of the company. If it increases the number of shares it has in issuance, it doesn't mean the net wealth of the company increases, rather it merely dilutes the value of each share in existence (each share is now worth a decreased 1/(X+Y)th of the company).

The economy and money isn't analogous to a company with shares; that is a deep misunderstanding of fiat money.

In an economy with idle labour (unemployment) and idle industry/resources, using created money to put the two together, increases GDP and increases the 'economic pie' overall.

View wrote: »

Likewise, each unit of money in existence is ultimately worth a fraction of the net wealth of the area that uses it. Issuing more money doesn't increase that net wealth (immediately, altough it may help long term) rather it devalues the value of each unit of money in circulation.

If you claim a reduction in the spending power of money, you have to describe that in terms of inflation (including of specific goods), and inflation is mostly about supply bottlenecks (i.e. a shortage of a good, making its price increase), which makes economics mostly about resource management.

If you've got the resources at hand (with labour being the most important of them), and you put created money to use with that, then you increase economic activity.

View wrote: »

Dozens of countries around the world have gone down the road of churning our more more in order to create "wealth". It doesn't work because on anything other than a short term basis because the value of the currency drops and the prices of imports from other currency areas increase.

You say it works on a short-term basis here, I agree; that is all it is needed for, to get back to full employment (one of the most important resource bottlenecks in the economy, where if you spend past the point of full employment you do get ever increasing inflation).

View wrote: »

Perhaps more fundamentally though as governments spends their money largely on non-profit activities, they essentially engage in economic value destruction (albeit socially useful activities) on a continual basis (e.g. That local hospital is a drain on the public purse even if highly desirable). That reduces the net wealth of a government and its people. Unless that is counter-balanced by economic value creation - an area governments are notoriously bad at - the result of what you are suggesting is not "sustainable government spending" but unsustainable spending and - ultimately - the hard reality of bail-outs and increasing poverty.

Terms like 'economic value destruction/creation' are deliberately vague terms, used by Austrians to muddy debate, and as a jumping-off point to condescend to people when called out on it; you wont find a succinct definition of terms like that in any of the standard reputable places online (wikis or non-Austrian economic sites), because of that.

You even describe government spending being 'a drain on the public purse', as if we have not been talking about public use of money creation all along (where there is no 'public purse'; expenditure is restrained by inflation targets), and you think government in such a situation should run a profit (i.e. take more money out of the economy than they put in), when they have no need to due to money creation; that's a whole lot of vague nonsense, fast making it seem like you don't have intent for honest discussion.



Again, a really simple way to explain and understand this (and I'd like you to address this, because arguments against have tried a total 'Austrian' reframing of the discussion thus far, instead of addressing things as presented), is just comparing it to private banking and private use of money creation; copying from my previous post:
Private banks create money all the time (a view shared by many, including a leading editor of the Financial Times, plus the Bank of England, and many central banks around the world), yet somehow it is unthinkable that it may be possible for government to as well.

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Where, using money creation, private banks add money to the economy through loans, government can add money using public spending (limited by inflation targets, thus debunking the lazy hyperinflation nonsense); where private banks take money out of the economy through debt repayments + interest, government can take money out through taxes (but without the inherent unsustainability of banks debt-based money).

It's simple enough (when the right narrative for explaining it is found), and the analogies between how public/private money creation work are pretty clear, yet despite the mechanics of it being so analogous, public money creation is somehow supposed to magically lead to hyperinflation (with the mechanism of that being totally unexplained by anyone making the claim, and despite repeatedly stating public spending would be limited by inflation targets; requiring the most dishonest obtuseness to ignore).


So again, private banks put money into the economy with loans, take it out with debt repayments and interest; that's perfectly good and fine for you.
Government would put money into the economy through public spending, take it out with taxes; suddenly this is bad, and is magically supposed to lead to hyperinflation.

What I think motivates the Austrian reaction to this, is not any interest in the economic reality of it, but just a knee-jerk anti-government reaction, where they will oppose anything which takes such rent-seeking abilities away from private banks, and gives it to government for social purposes instead; the speed with which such followers jump to disingenuous argument on the topic, always leaves me with the feeling they are fully conscious of it.

20Cent wrote: »

450 papers citing the paper that used wrong figures still significant.

That's my problem with it.

Journal editors and others in positions of responsibility seem to have forgotten or overlooked one of the basic instructions passed on to any undergraduate in any scientific or quantitative trial or research:

One piece of research is not enough. Findings must be replicable.

We obviously can't condemn a paper that has cited R&R or Alesina in laying out the land or in passing.

What we can condemn are those who made excessive use of one paper, knowing its findings had not been replicated elsewhere, either to construct "hard facts" or upon which to construct consequential findings, which must now be re-examined.

Based on 20cent's quote, Olli Rehn appears to be an example of the former.

Scofflaw wrote: »

Both of you are ignoring the fact that a five year old policy cannot possibly be based on a three year old paper.

Woah there horse, who said it was the basis for austerity?

Nobody as far as I can see.

I think it's reasonable to suppose Rehn referred to it in his defence of austerity.

It would be idiotic to say this paper invented the principle of fiscal austerity. Some credit please.

20 cent wrote the thread title,

clearly should have said "defence of austerity politics partially based on flawed research terms and conditions apply"

maybe he meant the bailouts specifically.

either way leave me out of that thanks!

Scofflaw wrote: »

It's not accurate, though, to say that people aren't claiming that this undermines the whole austerity policy framework, because people certainly are doing so, and that's what makes this into a story.

It can undermine "the austerity framework" depending on what you mean by the austerity framework.

If we are taking Rehn's comments, for example, on the "widely acknowledged, based on serious research" interplay between GDP growth and >90% public debt/ GDP, then yes, that is undermined.

Dob74 wrote: »

Unemployment in the US 7.7% UK 7.8%.
Looks like the stimulus worked to me.

The Piigs need to play hard ball. Lying down and expecting creditor country policy doesn't work.
Kicking the can down the street wont get us out of the depression we are in.

Playing hardball?
This is laughable really.
In Irelands case it would read like.
You give us billions so that we can keep paying our welfare receivers and public servants much more than you pay yours. But its not working. We need more. Give us more or else. Or else what?

Dob74 wrote: »

The 60 Billion handed over to the banks to save German and French banks.
We could just scrap by with the defiecit the way it is but the banks sunk us.
Austerity is causing deflation and we are in a debt spiral. We will not be able to climb out of the neo-liberal free market debt the Ahern governments created.
Time to face the fact that we are bankrupt. Thanks to our banks.

Of course it is way easier to believe what you want to believe, but a lot of what you say has been proven wrong over and over again.

For example the German and French banks thing.
I'm not saying German or French or any other foreign banks are blameless but for starters banks aren't really German or French or anything these days. The world of finance is a global network of corporates who all own a bit of each other fluctuating all the time.
When things go downhill a game of musical chairs starts and Ireland came out without a chair and for the most part that problem was of their own making.

There is no Austerity. As someone else pointed out the bailout that bridges the deficit is in fact the stimulus everybody is crying out for. If you don't believe just picture what the country would look like without that money.

People are saying the EU, Germany, whatever imposes austerity. They are not, in fact they keep Ireland afloat and all they get in return is being vilified.

I wonder what the people's opinion would be like if the roles were reversed. I'd bet my arse it would be cries for 'let the feckers sink'.