- Paul Krugman: The Austerity Agenda
- Links for 2012-06-01
- Fed Watch: Push Comes to Shove
- Fed Watch: Cash Exiting China
- DeLong: The Economic Costs of Fear
- Government Spending: "Sometimes Things Are Not What We Think They Are"
Posted: 01 Jun 2012 12:24 AM PDT
What do austerity advocates really want?:
The Austerity Agenda, Paul Krugman, Commentary, NY Times: "The boom, not the slump, is the right time for austerity." So declared John Maynard Keynes 75 years ago, and he was right... — slashing spending while the economy is deeply depressed is a self-defeating strategy,... it just deepens the depression.
So why is Britain doing exactly what it shouldn't? ... Over the past few days, I've posed that question to a number of supporters of the government of Prime Minister David Cameron... And all these conversations followed the same arc: They began with a bad metaphor and ended with the revelation of ulterior motives.
The bad metaphor — which you've surely heard many times — equates the debt problems of a national economy with the debt problems of an individual family. A family that has run up too much debt, the story goes, must tighten its belt. So if Britain ... has run up too much debt — which it has, although it's mostly private rather than public debt — shouldn't it do the same? What's wrong with this comparison? ...
When the private sector is frantically trying to pay down debt, the public sector should do the opposite, spending when the private sector can't or won't. By all means, let's balance our budget once the economy has recovered — but not now. The boom, not the slump, is the right time for austerity.
As I said, this isn't a new insight. ... And ... when you push "austerians" on the badness of their metaphor, they almost always retreat to assertions along the lines of: "But it's essential that we shrink the size of the state." ...
So the austerity drive in Britain isn't really about debt and deficits...; it's about using deficit panic as an excuse to dismantle social programs. And this is, of course, exactly the same thing that has been happening in America.
In fairness to Britain's conservatives, they aren't quite as crude as their American counterparts..., in general, they seem less determined ... to aid the rich and punish the poor. Still, the direction of policy is the same — and so is the fundamental insincerity of the calls for austerity.
The big question here is whether the evident failure of austerity to produce an economic recovery will lead to a "Plan B." Maybe. But my guess is that even if such a plan is announced, it won't amount to much. For economic recovery was never the point; the drive for austerity was about using the crisis, not solving it. And it still is.
Posted: 01 Jun 2012 12:01 AM PDT
Posted: 31 May 2012 11:53 AM PDT
Another one from Tim Duy:
Push Comes to Shove, by Tim Duy: The Spanish banking crisis is forcing another showdown in Europe with the German-led Northern contingent increasingly under siege not just from the South but now from just about everyone else. Spain is under pressure to finance a bank recapitalization, but worries that that path will push them straight into a Troika bailout program. And we all know just how well that has worked for Greece and Ireland and Portugal. And Spain holds real leverage. No one is under the delusion (well, almost no one) that Spain can exit the Euro without significant economic damage throughout Europe. Hence we are seeing increasing pressure on Germany to step-up the timetable to real fiscal integration, starting with a Euro-wide banking rescue using ESM funds. From Bloomberg:
Posted: 31 May 2012 11:52 AM PDT
Cash Exiting China, by Tim Duy: Something that I have thinking about for a few weeks - and was reminded of reading Ryan Avent this morning - is the series of pieces at FT alphaville regarding the outflow of cash from China. See here and here and here. The thinking had been that the renminbi was a one-way bet as China moved forward with capital account liberalization as investors rushed to be part of the Chinese story. The growing exodus of cash, however, is calling that story into question.
Posted: 31 May 2012 11:03 AM PDT
The Economic Costs of Fear, by Brad DeLong, Commentary, Project Syndicate: The S&P stock index now yields a 7% real (inflation-adjusted) return. By contrast, the annual real interest rate on the five-year United States Treasury Inflation-Protected Security (TIPS) is -1.02%. Yes, there is a "minus" sign in front of that: if you buy the five-year TIPS, each year over the next five years the US Treasury will pay you in interest the past year's consumer inflation rate minus 1.02%. Even the annual real interest rate on the 30-year TIPS is only 0.63% – and you run a large risk that its value will decline at some point over the next generation, implying a big loss if you need to sell it before maturity.
That is an extraordinary gap in the returns that you can reasonably expect. It naturally raises the question: why aren't people moving their money from TIPS (and US Treasury bonds and other safe assets) to stocks (and other relatively risky assets)? ...
Posted: 31 May 2012 09:56 AM PDT
Here are some old posts from here and elsewhere that provide rebuttal to recent rebuttal (mostly the usual hacks twisting the data to "prove" that government has expanded immensely under Obama). It would be better for the economy if spending across all levels of government had increased temporarily to a signficant degree, so this isn't necessarily a badge of honor. But nevertheless the charge that Obama has used the recession as an excuse to increase the size of government doesn't withstand an honest look at the evidence:
The Secret of Our Non-success, by Paul Krugman: ... Look at government (all levels) purchases of goods and services, that is, actually buying stuff as opposed to transfer payments like Social Security and Medicare. Here's the past decade:
Obama, far from presiding over a huge expansion of government the way the right claims, has in fact presided over unprecedented austerity, largely driven by cuts at the state and local level. And it's therefore an amazing triumph of misinformation the way that lackluster economic performance has been interpreted as a failure of government spending.From this blog:
Per Capita Government Spending by President, Economists View: Via email:
The Government Investment Drought Continues….., by Michael Mandel: Sometimes things are not what we think they are. The conventional notion is that government has become more important under President Obama, while the private sector has stagnated. Yet in some ways the data tell a different story. Take a look at this chart.
The top (blue) line shows that private nonresidential investment has rebounded smartly since early 2009, when President Obama took office. Residential investment first dropped, and then mostly came back.
The real problem is government investment, which is down 8.3% since the first quarter of 2009, and still falling. In other words, government spending on infrastructure infrastructure, building, and equipment is declining, adjusted for prices changes.
This is just utterly bizarre. In a time when the economy is still sluggish, government investment should be the simplest thing to pump up. We need to modernize our infrastructure and bring government into the 21st century, and it's just not happening.
Here's another angle. This chart shows net government investment as a share of GDP.
According to this chart, net government investment is the smallest share of GDP in more than 40 years, and dropping.Antonio Fatas:
Euro and US Coordinating Austerity, by Antonio Fatas: To add yet one more perspective on how significant the shift to austerity among advanced economies has been since 2009, I decided to add the Euro series to a chart from Paul Krugman's blog. This is real government consumption for both the US and the Euro (17 countries) area.
It is remarkable how the Euro area and the US display a strong coordinated contraction in fiscal policy starting in the first quarter of 2009 that accelerates during 2010 and 2011... No surprise that the recovery is not going as well as some thought and some countries are going back into recession.Kash Mansori:
Government Job Destruction, Kash Mansori: Another jobs report in the US, another month where part of the private sector's job creation was undone by continued job destruction by the government sector.
The 15,000 additional jobs lost in April brings total job losses in the government sector since January 2010 to over 500,000. While the US has not quite been experiencing European-style austerity over the past two years, that's still a pretty tough headwind to fight as it emerges from recession.Another one from Paul Krugman:
Four Fiscal Charts, by Paul Krugman: Here's an exercise I did for my own edification... I wanted a simple answer to the people who always insist that we must be having massive fiscal stimulus because we have a big budget deficit; my answer is that the deficit is a result of the depressed economy...
Well, here's a quick and dirty approach. ... First, most of the surge in the federal deficit is about plunging revenue. In the figure below, the "No recession" line shows what would have happened if federal revenue had grown 5 percent per year after 2007:
That's about an $800 billion per year shortfall.
What about spending? Well, it is higher than you would have expected in the absence of the slump, by around $300 billion:
What's that $300 billion about? Well, they're mainly about the category CBO calls "income security", mainly food stamps and unemployment insurance:
Income security spending is, of course, strongly related to the state of the economy. So are some other forms of spending — Medicaid, of course, but also things like disability insurance, where people on the cusp are more likely to seek the benefits if they can't find work.
So basically, the federal deficit is all, yes all, about the recession and aftermath.
And meanwhile, there has been austerity at the state and local level (calendar years here instead of fiscal, but that's not crucial):
So the reality is that we have deficits because the economy is depressed, but relative to previous policy we've been imposing fiscal austerity, not stimulus.
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