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Book of Jobs

Joe Stiglitz nicely summarises the current US macroeconomic dilemma. (HT BR). Modern events confirm that monetary policy failings could not have caused the Great Depression. Policies seeking to avoid such failings – policies to expand the money supply to induce private investment did not work then and have evidently not worked now. Enhanced massive fiscal expansions engineered by the need to finance WW2 ultimately lead to recovery from the Great Depression and analogous policies – targeting infrastructure and a restructuring towards an even more predominantly service-based economy – are what is needed now. Particularly in the US but also in Europe where financial austerity arguments are dominating common sense.

There is no short path to economic recovery  – it will take a decade or more to address underlying problems of global over-indebtedness –  but things will be worse still if current fiscal austerity policies are pursued. The main reform necessary in relation to financial policy is to get the banks back to doing what they do best – simple banking. The emphasis however must be on not engaging in fiscal contractions on the basis of a fallacy of composition argument on getting balance sheets in order. Yes, there do need to be longer-term moves to get public finances into better shape but high unemployment should be the target now.

Similar remarks from Paul Krugman – who repeats well-known views – and our own John Quiggin. I generally  agree with Quiggin’s argument for abandoning inflation targeting – abandoning such targeting as a temporary measure  will inflate away some of the outstanding global debt issues – but more importantly endorse his view that banks should be goaded to perform their key boring role of accepting deposits and making loans.

Right -wing fanatics in Australia are promoting restrictive macroeconomic policies within Australia which will make a bad situation worse here.

13 comments to Book of Jobs

  • Michael James

    Just for the record, in the UK the word ‘austerity’ is used to refer to the present government’s policy of increasing public spending, but by a bit less than previously planned. So public spending and the national debt are still rising. In spite of this, the economy is stagnating. Where is the ‘stimulus’?

  • hc

    Hi Michael, good to hear from you.

    The stance of fiscal policy is normally calibrated as the change in the government deficit rather than changes in its level. A deficit which is smaller suggests a contractionary fiscal policy.

  • Michael James

    It’s worth being clear about what’s really happening as only one Brit in ten understands the difference between budget deficits and the national debt. As the budget deficit edges down nearly everyone assumes the national debt is falling whereas in reality it’s still rising.
    As for stimulus via infrastructure, I believe Japan tried it in the 1990s and it failed. The appropriate test for an infrastructure project is a cost-benefit one, not whether it ‘stimulates’. (But if it passes a cost-benefit test, it will stimulate.)
    I would put more faith in the ‘growth agenda’ being pushed by many supporters of fiscal austerity. Britain’s public services could be opened to systematic competition from the private and voluntary sectors (Tony Blair is Britain’s only recent Prime Minister who was interested in that, and he failed). The existing public services are hugely wasteful and inefficient and suffer from declining productivity. The potential efficiency gains from reform are equally huge. Employment laws need reform (which would probaby mean Britain quitting the European Union). A tax cut financed by reductions in public spending could also encourage private saving, which has to increase as the welfare state faces long-run bankruptcy.

  • hc

    Michael, I agree with the case for making efficiency-based reforms and for trimming the welfare system. I also favour having a stock of projects with high benefit/cost ratios on tap should fiscal conditions warrant them – you then get good stock effects on capacity not only immediate spending increases. But I don’t favour a focus on spending cuts at a time when people are fearful of spending and saving too much. Moreover I think the US has neglected investments in infrastructure for many years and it can now implement those at very low capital costs stimulating the economy and providing good longer-term stock effects. I think tax cuts will stimulate private spending but much of the increased income will be saved so the effects will be weak.

  • hc

    Michael, The Japanese economic situation does not prove the ineffectiveness of fiscal policy nor does the fact that money was clearly wasted in many projects prove this. A core economic problem in Japan is debt and this was more driven by weaknesses in tax revenues than profligate spending. Again debt issues do need to be addressed but a strongly contractionary fiscal regime would be inappropriate in Japan now. The very low interest rates in Japan – and those now prevailing in the US – confirm the Keynesian story that monetary policy cannot be relied on to launch severely recessed economies into recovery.

  • Michael James

    Thanks for the clarifications.
    One more point. The UK government maintains that its austerity programme is being rewarded with bond rates that are historically very low and much lower than those in the eurozone (except Germany’s), thus helping to contain the national debt. Some commentators argue that the low rates represent a market demand for infrastructure spending and would therefore not rise in the wake of such spending. Is it possible to know which argument is correct in the absence of an infrastructure programme?

  • conrad

    “Right -wing fanatics in Australia are promoting restrictive macroeconomic policies within Australia which will make a bad situation worse here.”

    I think fanatic is becoming the new norm, so I’m not really sure they’re fanatics by today’s standards even if they are by standards set a decade go.

    Also, not being an economist, this might be ignorant, but I don’t see the problem with inflation targetting right now in Aus at least. Indeed, even if China goes off course and our housing market carks it, I still don’t see the problem, because presumably the problem would then be deflation. If there really is a problem, why not just increase it a bit (say to 3-5%?)? This would still give the RBA a reasonable goal to work toward, and people wouldn’t get freaked out by the prospect of inflation getting out of hand if they know there is a limit. As for the Euro-zone, I can’t see why a similar strategy couldn’t be used, so they can inflate away their debt a bit quicker without freaking out anyone with assets.

  • JB Cairns

    I must quibble with your definition.
    Austerity is merely when the government is taking away from GDP as opposed to adding to it.

    howard had surpluses but on average added 0.8% to GDP. Ireland’s deficit doubled in 2009 but it took 4.9% out of GDP.

    As Adam Posen has convincingly shown Japan in the 90s shows how potent fiscal policy is. It rose when it was expansionary but also reduced when it was contractionary.

  • NickR

    I certainly agree with the verdict given above (and the appropriate policy responses) but I am a little more optimistic than most about the medium term for the U.S.

    A variety of sources of data over the last month or two have been surprisingly positive. Perhaps the most important of these is the weekly unemployment claims. This has recently declined from about 420K down to 380K which is a very substantial improvement.

    Based upon this sort of data I think that the U.S. could grow at 3% in 2012. Although this is far from brilliant it is consistent with a steadily improving labour market.

    If this eventuates it should be enough to see Obama re-elected at the end of the year.

  • BendigoSean


    the problem for Japan is that for a country with very high savings rates and an ageing population -> very low interest rates have a very strong deflationary effect on consumer spending & corporate investment (funds used instead to top up stagnant pension obligations).

    Though you would think that the US would benefit from very lowing interest rates as a result of having low/negative savings rate -> the US problem is the credit spreads on commercial interest rates for small & medium businesses (powerhouse of US growth) have widened further than Fed interest rates have fallen (which only benefit large corporates), ie. total cost of credit has actually increased as liquidity has evapourated at the small business end of the economy.

    Having worked (banking) & lived (Japanese household) in Japan at various times betweem 2000-2009 at ground zero, the Keynesian approach hasn’t worked either because it hasn’t been linked to structural reforms that will drive long term growth. I’m not convinced the economic “numbers” modeled by US economists reflect the economic reality facing ordinary Japanese…

    From Stiglitz’s article (and contrary to what the UK is doing with education) Keysian funding ideally would be pumped into reskilling the workforce & facilitating new capital investment/innovation at the small/medium business level as the economy undergoes a structural re-aligment. In the US this would be the rebalancing of oversized finance/realestate, health & defense industries. In Japan, one of the main structural reforms should have been the devolution of centralised gov’t authority to local/prefectual levels to increase economic flexibility & innovation for small & medium businesses.

  • Peter Whiteford

    Michael James

    The UK government is planning a massive cut in public spending.

    Have a look at 4th chart on

    This shows a cut in spending of about 7% of GDP between 2011-12 and 2015-16.

    As the UK Treasury notes: ” In the 20 years to 2006-07 and the beginning of the financial crisis, public spending averaged around 40 per cent of GDP. It then increased to a historically high level of 48 per cent by 2009-10. Receipts by contrast did not exceed 40 per cent over the whole period, and fell to 37 per cent in 2009-10.”

    So the aim appears to be get back to spending of around 40% of GDP in four or so years.

    This chart shows government receipts and expenditure up to 2015-16

  • But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program -– but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts -– tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade.

  • derrida derider

    Yep, mercadeo, all of which policy was enabled and applauded by the very same Republicans pushing an austerity agenda now. Aint hypocrisy grand?

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