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Global gloom from excessive austerity

Lenny Bruce once said ‘The only thing that people learn from history is that no one ever learns from history’. It is a nice quip although characteristically exaggerated. But the politicians of the world seem determined to demonstrate its accuracy in relation to the current economic crisis – yes, it is a crisis. The Great Depression of the 1930s was created by exactly the same calls for austerity that are being made now in the United States, China and Europe. The world seems determined to follow past mistaken policies. Austerity urged by the looney right in the United States is inappropriate for a country which risks going into recession now but which has long-standing debt problems. There are also widespread calls for austerity in Europe where spendthrift European countries are having impossible financial and public spending strait-jackets imposed on them. Even the Chinese are acting to curb demand by refusing to expand their local spending by appreciating the RMB.

All this at a time when recovery in the global economy is faltering making a global recession more likely. Political leaders are adding to the economic crisis with a political crisis. We do not seem to learn much from history.

9 comments to Global gloom from excessive austerity

  • ken n

    hc I am not an economist but I have read widely enough to know that the causes of the 1930s depression are contended among economic historians. There is far from a consensus that austerity was the cause or a primary cause. This was generally believed 20 or 30 years ago but many now attribute the depression to many more causes.
    Which makes it very difficult for policy makers – which advice should they follow?
    From what happens in different countries we might learn quite a lot over the next decade or so.
    Are you sure that was Lenny Bruce? My recollections of his wisdom are more scatological than that.

  • KB Keynes

    Remarkable. If Austerity worked then we would have never heard of Hitler only Bruning.

    Even those advocating in the UK told their political masters it wouldn’t make things better for some time as Peter Temin has shown.

    Even today we find evidence both from the IMF and BIS that classical econmics never had any clothes to start with but people still pay attention to these charlatans.

    Has any country that adopted such policies now better off? No both debt and deficits have worsened.


  • wjr

    Well said Harry. This is a point I have been trying to make to anyone who will listen. I don’t have a wide audience, but Paul Krugman in his NY Times column does. He has been trying to get this point across for a long time.

    As far as I am aware, Ken N, there was pretty much widespread agreement on the causes of the 1930s disaster until Friedman and followers offered a revisionist version based on monetarist theory (or ideology). Having seen where other policy prescriptions emanating from this source have led us, I see no reason to give it any credence now. It seems to me that it is ideologically driven.

  • ken n

    wjr – It seems to me that almost all opinions in this area are heavily laced with ideology. Certainly Krugman has a belief that government action, including taxes and spending, are the solution to most problems in macroeconomics.
    hc appears to be more thoughtful and less ideological than many, which is why I am interested in whether he believes that there is an established consensus on the best action in a situation like this: large government debt, continuing large budget deficits and a strong risk of recession.
    I do not know – which is why, more and more, I read blogs and commentary that are not entirely ideologically driven and predictable.
    Sadly, there are few of those about.

  • KB Keynes

    Two doyens of economic history are Peter Temin and Barry Eichengreen.

    Adam Ritschl has done a lot of interesting econometric work in this area as well.

    Of course I recommended these people at Catallaxy but no-one ever read them.

  • John Brookes

    It seems to me (and as a non-economist, I’m almost certainly totally wrong), that we have too little money being used to buy things, and too much money attempting to mate with itself and produce more money.

    Is it in any way possible to take the money which is looking for a good home and just spend it?

  • Fxh

    Homer,, what’s up? How’s tricks?

  • […] Fallacy of composition driving global economy to the brink John Alexander in the London Review of Books gets it right. It is self-evidently good  for an individual who is in excessive debt to cut back spending, less good for a single nation to adopt this stance and downright dangerous for the developed countries as a whole to do so. The Alexander article expresses this idea more eloquently than I did in a recent post. […]

  • […] of thrift risks all That’s what the IMF says and that repeats my earlier claims (and those of all sensible macroeconomists). Increased personal savings, savings by firms and […]

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