Expansionary austerity – the deadliest of all zombie economics ideas2 September, 2012 at 16:33 | Posted in Economics | 3 Comments
Four years into the deepest recession since the 1930s, it’s high time to assess the “Treasury view” of our time – expansionary austerity. John Quiggin is our ciceron:
The advocates of expansionary austerity make two claims. The first is that our current problems are the result of governments living beyond their means. The claim is absurd on the face of things – there is no plausible link between government budget deficits and the speculative bubble and bust that produced the Global Financial Crisis – but it resonates with deeply imbued beliefs about the virtues of thrift and the need for sacrifice as a response to adversity.
The second, even less plausible, claim is that the way to secure a sustainable economic recovery is for governments to spend less, thereby making room for the private sector. The painfully evident fact that there is already plenty of room for private expansion, in the form of unemployed workers and idle factories, is simply ignored.
As Keynes observed during the depths of the Great Depression, austerity makes sense when the economy is booming, and there is excess demand for resources of all kinds. Surpluses built up in good times can be used to repay debt or create ‘fiscal space’ for an expansionary stimulus in response to an unexpected contraction.
But, as both experience and that of the current crisis have shown, the use of austerity measures at a time when the economy is already depressed will only make matters worse. The contractionary effects of austerity will reduce government revenues and undermine attempts to balance the budget …
This zombie idea … has already defeated any hopes for a rapid recovery from the long slump that has followed the Global Financial Crisis. It is on the verge of destroying the common European currency and, quite possibly, the European Union itself …
Expansionary austerity is the deadliest of zombie ideas.