Expansionary austerity – the deadliest of all zombie economics ideas

2 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.



  1. In many ways, much of ‘expansionary austerity’ type of Quiggin’s Zombie economics is a smoke screen, which I believe is designed to hide the real question we should be asking ourselves; Is the Financial Sector Worth What We Pay It? http://oecdinsights.org/2012/08/29/is-the-financial-sector-worth-what-we-pay-it/

    If the market is the most efficient way of allocating capital resources, we should have seen substantial economic betterment for all parties, given the rapid rate of growth of the financial sector. The only beneficiaries of the ‘expansionary austerity’ flavor of zombie economics is the financial sector, who, as your marvelous Latvia video link showed, put on the public at large.

    From the article. “In a 2006 speech on the growing integration of the financial sector and the broader economy, Rodrigo deRato, Managing Director of the IMF, noted its supposed general stability and growth, and that from 1990-2005 the estimated sum of equity-market capitalization, outstanding total bond issues (sovereign and corporate) and global bank assets rose from 81% to 137% of GDP, while over-the-counter derivatives markets tripled in the latter five years to $285 trillion, six times global GDP, 50 times the U.S. public debt. So if the financial sector has worked, we should see proportional acceleration of growth plus improved consequences for all society.”

    I conclude that once again Keynes was right, and without some modern equivalent of his ‘bancor’, we’ll never be able to control international finance to the common benefit, as attested to by the Euro crisis, especially the Irish gov’ts shift of bank debt onto an unprotected public, despite bondholders already discounting it to a huge extent (50% plus) in anticipation of default.

    By the way, responding to an earlier comment of mine about Pearl and his comments on economics texts, you referred me to Nancy Cartwright’s work. I’m reading ‘Hunting Causes and Using Them’ and find it most informative, though I have a couple of points I question. It was also a delight to find out that she has worked with Reiss, as his comments on simulations and economics as an experimental science were very useful in my work. http://www.jreiss.org/papers/S%26G_42(2)_2011.pdf

    I think that true analog simulations are a special case, even beyond Reiss’ claims for simulation in economics. By the way, our model shows that you Swedes, having had a narrow escape with your banking crisis in the 90’s, are rapidly approaching the same state as the US in the late 70’s, when increasing inequality and shifting of debt burden began to cause loss of economic efficiency and eventual instability. I’d be happy to send you the graphs of the output.

    Thanks for the great reference and a very entertaining blog.

    • Thanks. And sorry to say, I think your probably right on Sweden.

      • Have you read Leeson’s book on A.W.H. Phillips? The section on the Moniac is fascinating, a true hydromechanical simulator. Also, it appears from the original papers, he intended the Phillips Curve only as a short and intermediate term relationship, which is very interesting, considering the long term ‘breakdown’ of the supposed Phillips Curve in the 70’s was used to discredit Keynesian economics.

        Essentially, the stagflation of the 70’s was used as the basis for discrediting both Keynes and Phillips by linking the two together, not the least by Samuelson. As far as simulations, Phillips could not figure out how to make his ‘Moniac’ incorporate a hydromechanical or hydraulic analog of the Keynesian aggregate supply function, (we now can) and by the 60’s, electronic computation, both digital and analog, were well underway, and Phillips went on to his work on control systems theory and stability in economic systems.

        At that point, the monetarists were not paying any attention to either Keynes, except to dismiss him, or Phillips, or control systems and their impact on economic stability, as brilliantly summed up by Phillips in his subsequent work on stabilization and policy.

        Too bad….

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