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[WARCOCK]

An Interesting lecture from political economist Mark Blyth about the dangers of austerity, its historical origins and the ramifications for the Euro. I'm a very strong believer in Europe as a political project but i have to say it's hard to argue against his criticisms surrounding the monetary union. Overall an entertaining and eye opening lecture. I'd particularly like to hear from people who think he is flat out wrong.


http://www.youtube.com/watch?v=JQuHSQXxsjM

 

[BAW]

Here's an argument that is pro-austerity: Don't spend what you don't have.

If you absolutely need to have something, work harder or more hours to get that extra income to satisfy that particular need.

I really don't think watching that video will make me change my opinion.

 

[Bombadil]

Here's an argument that is pro-austerity: Don't spend what you don't have.

If you absolutely need to have something, work harder or more hours to get that extra income to satisfy that particular need.

I really don't think watching that video will make me change my opinion.

Do you have a credit card?

 

[zoku88]

Here's an argument that is pro-austerity: Don't spend what you don't have.

If you absolutely need to have something, work harder or more hours to get that extra income to satisfy that particular need.

I really don't think watching that video will make me change my opinion.

That's not an argument, that's just a statement.

You have to argue why that should be the case for sovereign states.

 

[usea]

Here's an argument that is pro-austerity: Don't spend what you don't have.

If you absolutely need to have something, work harder or more hours to get that extra income to satisfy that particular need.

I really don't think watching that video will make me change my opinion.

That's not an argument, it's an addage.

This isn't about individuals working hours or income. You've shown a lack of knowledge about the matter, but I agree that watching the video probably won't change your opinion.

 

[B-Dubs]

Here's an argument that is pro-austerity: Don't spend what you don't have.

If you absolutely need to have something, work harder or more hours to get that extra income to satisfy that particular need.

I really don't think watching that video will make me change my opinion.

A state doesn't function the same way as a household does, even then households have access to credit cards and loans. It's far far far from a useful analogy.

 

[ClassyPenguin]

Here's an argument that is pro-austerity: Don't spend what you don't have.

If you absolutely need to have something, work harder or more hours to get that extra income to satisfy that particular need.

I really don't think watching that video will make me change my opinion.

That's not the way monetary systems or business work. In monetary systems, taxes drive demand for currency. The deficit has no bearing to that demand.

In the private business model, credit is the fundamental first step to creating and maintaining a profitable business ie the business loan. You get more credit to buy more capital due to your successes in order to grow or for tax reasons (see Google, Starbucks etc. Many economists are in favor of taxing personal and not corporate profit for this reason.)

Even more, the paper that was used to explain why asuterity is important was wrong due an Excel error.

L. Randall Wray explains here:
http://neweconomicperspectives.org/2013/03/l-randall-wrays-presentation-at-lewis-and-clark-college.html

 

[milanbaros]

Here's an argument that is pro-austerity: Don't spend what you don't have.

If you absolutely need to have something, work harder or more hours to get that extra income to satisfy that particular need.

I really don't think watching that video will make me change my opinion.

You are not arguing anything but just showing the kind of dangerous lack of understanding so prevalent in the population, media and some political parties.

 

[BAW]

Do you have a credit card?

Nope. But it doesn't mean I am against the idea of credit, in moderation.

That's not an argument, that's just a statement.

You have to argue why that should be the case for sovereign states.

Is there any particular reason why this can't apply to sovereign states?

The idea is simple, every state should make sure that their budgets turn in a surplus at year's end. I can understand that in the end having constant surpluses is not good for the economy, from a theoretical point of view, but if you have a surplus you can burn it or build more parks, I don't know. It's not that big of a problem.


P.S. I am not ignoring you other guys that also commented in this thread, but I think maybe you are partly covered by what I wrote here. In any case I really look forward to having serious discussions about this (and I WILL watch the video once I get off from work).

 

[Funky Papa]

Here's an argument that is pro-austerity: Don't spend what you don't have.

If you absolutely need to have something, work harder or more hours to get that extra income to satisfy that particular need.

I really don't think watching that video will make me change my opinion.

Congratulations, you just showed the kind of ignorance that allowed austerity to take place.

Also, smarter people know that austerity is not actually about austerity, but a whole different game.

 

[twobear]

Here's an argument that is pro-austerity: Don't spend what you don't have.

If you absolutely need to have something, work harder or more hours to get that extra income to satisfy that particular need.

I really don't think watching that video will make me change my opinion.

I don't really understand how Quantum Field Theory works either, but I probably wouldn't go on a message board, claim that it's wrong and then suggest that education wouldn't change my mind.

 

[ClassyPenguin]

Nope. But it doesn't mean I am against the idea of credit, in moderation.




Is there any particular reason why this can't apply to sovereign states?

The idea is simple, every state should make sure that their budgets turn in a surplus at year's end. I can understand that in the end having constant surpluses is not good for the economy, from a theoretical point of view, but if you have a surplus you can burn it or build more parks, I don't know. It's not that big of a problem.


P.S. I am not ignoring you other guys that also commented in this thread, but I think maybe you are partly covered by what I wrote here. In any case I really look forward to having serious discussions about this (and I WILL watch the video once I get off from work).

Surpluses lead to recessions. It means too much money chasing too few goods.
In a deficit situation, you create the demand for more goods.
Inflationary pressures don't apply until at full employment ( a job opening for a job vacancy). An example is the Clinton era, which, due to the business model, led to the recession of 2001.

 

[zoku88]

The idea is simple, every state should make sure that their budgets turn in a surplus at year's end. I can understand that in the end having constant surpluses is not good for the economy, from a theoretical point of view, but if you have a surplus you can burn it or build more parks, I don't know. It's not that big of a problem.


P.S. I am not ignoring you other guys that also commented in this thread, but I think maybe you are partly covered by what I wrote here. In any case I really look forward to having serious discussions about this (and I WILL watch the video once I get off from work).

Why? You haven't really said why it's better to do that.

And it doesn't seem rational given what you say in the next sentence.

 

[RJT]

People shouldn't try to act as if economic theories are laws or facts. This isn't phisics.

(This comment is directed at both sides of this thread, not at the video)

 

[Bombadil]

Nope. But it doesn't mean I am against the idea of credit, in moderation.

So you're okay with people spending money they don't have as long as it's in moderation?

 

[twobear]

People shouldn't try to act as if economic theories are laws or facts. This isn't phisics.

(This comment is directed at both sides of this thread, not at the video)

If you're referring to my QFT example, I was mainly gesturing at the esoteric nature of economic knowledge rather than its lawlikeness or accuracy.

Besides which, there has been an ongoing natural experiment into the effects of austerity on a depressed economy for the last 3 or so years in Europe, and it has confirmed many of the things that many economists predicted.

 

[Chichikov]

Is there any particular reason why this can't apply to sovereign states?

The idea is simple, every state should make sure that their budgets turn in a surplus at year's end. I can understand that in the end having constant surpluses is not good for the economy, from a theoretical point of view, but if you have a surplus you can burn it or build more parks, I don't know. It's not that big of a problem.


P.S. I am not ignoring you other guys that also commented in this thread, but I think maybe you are partly covered by what I wrote here. In any case I really look forward to having serious discussions about this (and I WILL watch the video once I get off from work).

Deficits are not bad, you need deficits, and in most cases you want them.
In a growing economy (and over time, the US economy is growing) you need to increase the money supply, otherwise you'll have deflation, and that's a very very bad thing.

Surpluses are only useful at very specific situations (generally when the inflation is too high).

Remember, a surplus only means that the government collect more than it needs, and it is literally taking money out of the economy.

 

[ClassyPenguin]

People shouldn't try to act as if economic theories are laws or facts. This isn't phisics.

(This comment is directed at both sides of this thread, not at the video)

It is a social science, we know how various factors affect the economy, therefore due to models and history we can prove that. Predictions are hard, even in "hard" sciences like meteorology or geology because of the environmental factors. Same in economics, though t's due to psychology rather than many geological and atmospheric variables. The fact that this is ignored and that economics has that reputation due to bad fact checking shows how ignorant people are of the principles behind scholarship in the so called "soft sciences."

Also, lots of physics is also merely theoretical hence theoretical physics, a sub-division of physics.

 

[k_trout]

People shouldn't try to act as if economic theories are laws or facts. This isn't phisics.

(This comment is directed at both sides of this thread, not at the video)

but one of those laws of physics does apply here
infinite growth in a finite system is impossible
it is the law lol

and ALL money is credit

 

[BAW]

Why? You haven't really said why it's better to do that.

And it doesn't seem rational given what you say in the next sentence.

You can ask any finance minister in the world if he/she prefers to deal with a major deficit or a major surplus. The answer will be major surplus...

People shouldn't try to act as if economic theories are laws or facts. This isn't phisics.

(This comment is directed at both sides of this thread, not at the video)

I agree that there are no set laws in economics, it's a social science based mainly on opinions.

So you're okay with people spending money they don't have as long as it's in moderation?

Yes? Or states for that matter. Example: If a country is missing a small amount of money, it can close a public service and recoup from there. If there is missing an enormous amount of money however, the state goes bankrupt and everyone starves.

 

[Salvor.Hardin]

While austerity can be a dangerous policy to pursue, targeted austerity can be very useful in helping economies prioritize their needs while trimming their budgets against the often unknown ability of a nation's institutions to produce effective development projects that address the needs of the middle term and the long term.

 

[ClassyPenguin]

You can ask any finance minister in the world if he/she prefers to deal with a major deficit or a major surplus. The answer will be major surplus...




I agree that there are no set laws in economics, it's a social science based mainly on opinions.




Yes? Or states for that matter. Example: If a country is missing a small amount of money, it can close a public service and recoup from there. If there is missing an enormous amount of money however, the state goes bankrupt and everyone starves.

That's because those people are politically motivated. There is much money too be made due to austerity for the rich class.

If deficit spending is wrong, then why is the US (even with sequestration and budget cuts) more profitable than the EU states with austerity measures?

 

[Chichikov]

You can ask any finance minister in the world if he/she prefers to deal with a major deficit or a major surplus. The answer will be major surplus...

That is factually false.
Most countries have a deficit target for a reason.

 

[TrekMonster7]

A state doesn't function the same way as a household does

You're absolutely right, the household can pay off debt by generating wealth. The state can only pay off debt by either taxing people or printing money. In both cases it leads to a loss of private wealth.

 

[zoku88]

You can ask any finance minister in the world if he/she prefers to deal with a major deficit or a major surplus. The answer will be major surplus...

That doesn't really answer the question. What a finance minister prefers doesn't mean that the state/economy is better off.

If a major surplus can negatively impact the state/economy, why would that surplus be good?

Or, do you believe that there is no such situation where a surplus is bad?

 

[ClassyPenguin]

You're absolutely right, the household can pay off debt by generating wealth. The state can only pay off debt by either taxing people or printing money. In both cases it leads to a loss of private wealth.

Wrong.

Public deficit leads to private sector surplus.

 

[Bombadil]

You can ask any finance minister in the world if he/she prefers to deal with a major deficit or a major surplus. The answer will be major surplus...




I agree that there are no set laws in economics, it's a social science based mainly on opinions.




Yes? Or states for that matter. Example: If a country is missing a small amount of money, it can close a public service and recoup from there. If there is missing an enormous amount of money however, the state goes bankrupt and everyone starves.

Why cut a public service when you can ask Starbucks why they decided to pay only 5 million euros in taxes after operating in your country for 15 years? Or about tracking down the 92,OOO people that control 32 trillion dollars of untaxed money and ask them to pay up?

But in all honesty, evryone on gaf is a bit of a fiscal conservative when it comes to certain things.

Some of us would like it if the US government would cut funding to the military industrial complex, while other gaffers want to close down hospitals and privatize schools.

Everyone's in favor of fiscal responsibility to some degree.

 

[ClassyPenguin]

Well, in the Keynesian model, you have to balance a sector cut with another sector surplus. Which is why I am not for just slashing the military budget indiscriminately without those industries given incentives to go into civilian and public work.

Both sides of the political spectrum ignore the empirical evidence before them.

 

[Bombadil]

Well, in the Keynesian model, you have to balance a sector cut with another sector surplus. Which is why I am not for just slashing the military budget indiscriminately without those industries given incentives to go into civilian and public work.

Both sides of the political spectrum ignore the empirical evidence before them.

I did not propose indiscriminate cuts. There can be specific cuts made to funds for military vehicles, aircraft, and weapons R&D.

If cuts can't be made then taxes must go up for some people.

 

[Window]

As someone who is being taught everything largely from a neo classical perspective with emphasis in Ricardian Equivalence in regards to debt (and is aware of the contested nature of these models but not the alternatives yet), this thread makes me feel like my economics education was a waste of time and I should have just picked up some books on behavioural economics along with some books from Wray, Shiller, Minsky instead.

 

[ClassyPenguin]

I did not propose indiscriminate cuts. There can be specific cuts made to funds for military vehicles, aircraft, and weapons R&D.

If cuts can't be made then taxes must go up for some people.

I didn't say you were wrong, but that you are right. Many liberals believe that the economy would recover by just slashing the military budget, which is wrong.
Taxes generally rise when you want to slow down a certain thing though they are not always good at it due to domestic and international loopholes and accountancy tricks.

It's a balancing act.

 

[Gotchaye]

Just to point out a counterintuitive mathematical truth:

As long as GDP keeps growing, a country's debt-to-GDP ratio (which is the number most people really care about) can be held constant while the government perpetually runs deficits. Debt-to-GDP only increases if debt grows faster than GDP. If you're targeting 60% debt-to-GDP, and you expect about 3% annual GDP growth, you can have a typical deficit of 1.8% of GDP. A higher debt-to-GDP ratio can be maintained with even higher annual deficits. So it's absolutely a mistake to think that perpetual deficits will lead to an exploding debt (-to-GDP ratio).

This is mostly independent of the Keynesian notion of counter-cyclical spending - that's about the distribution of spending over time, whereas what I describe above is more about the average level of spending. To the extent that Keynesian policy produces more economic growth in the long-term, though, it enables more total spending too.

 

[phaze]

The video is 1 hour long. I 'll have to go through it in parts.

Even more, the paper that was used to explain why asuterity is important was wrong due an Excel error.

L. Randall Wray explains here:
http://neweconomicperspectives.org/2013/03/l-randall-wrays-presentation-at-lewis-and-clark-college.html

No it wasn't. The Excel mistake was insignificant, more important was the accusation of data omission, even HAP's polemic against that work found that deficits slow growth only less than RR thought.

What most people I think miss is that barely anyone in Europe chose the evil Austerity. At the beginning of crisis everyone went into large deficits. They were forced to go for fiscal consolidation because the borrowing costs increased.

 

[Window]

Just to point out a counterintuitive mathematical truth:

As long as GDP keeps growing, a country's debt-to-GDP ratio (which is the number most people really care about) can be held constant while the government perpetually runs deficits. Debt-to-GDP only increases if debt grows faster than GDP. If you're targeting 60% debt-to-GDP, and you expect about 3% annual GDP growth, you can have a typical deficit of 1.8% of GDP. A higher debt-to-GDP ratio can be maintained with even higher annual deficits. So it's absolutely a mistake to think that perpetual deficits will lead to an exploding debt.

This is mostly independent of the Keynesian notion of counter-cyclical spending - that's about the distribution of spending over time, whereas what I describe above is more about the average level of spending. To the extent that Keynesian policy produces more economic growth in the long-term, though, it enables more total spending too.

Doesn't this also depend on (real) interest rates, which must lower than GDP growth rate for the debt ratio to be 'stable'?

 

[Gotchaye]

What most people I think miss is that barely anyone in Europe chose the evil Austerity. At the beginning of crisis everyone went into large deficits. They were forced to go for fiscal consolidation because the borrowing costs increased.

But it's important to recognize two things about that. First, the US (like any monetarily sovereign country) always has the option to print money instead of borrowing it, so it can never be "forced" to go for fiscal consolidation because of higher borrowing costs. Its main constraint is instead inflation (which will correlate with higher borrowing costs, but we see in Europe some great examples of the two decoupling). Second, borrowing costs went up in various European countries because the EU as a whole failed to credibly promise to back their debt. California's borrowing costs would likewise go through the roof if the US government indicated that they were on their own (this would have made more sense a few years ago; they're running a surplus now, I guess).

Doesn't this also depend on (real) interest rates, which must lower than GDP growth rate for the debt ratio to be 'stable'?

Yes. I was considering interest payments as contributing to deficits. Debt-to-GDP only increases if all revenue - (other spending + interest spending) grows faster than GDP. If nominal GDP grows 3% and your debt has a nominal interest rate of 3%, then your other spending has to equal your revenue in order for debt-to-GDP not to change.

 

[RJT]

It is a social science, we know how various factors affect the economy, therefore due to models and history we can prove that. Predictions are hard, even in "hard" sciences like meteorology or geology because of the environmental factors. Same in economics, though t's due to psychology rather than many geological and atmospheric variables. The fact that this is ignored and that economics has that reputation due to bad fact checking shows how ignorant people are of the principles behind scholarship in the so called "soft sciences."

Also, lots of physics is also merely theoretical hence theoretical physics, a sub-division of physics.

I'm not saying Economics isn't a science, it is because it uses (or should use) the scientific method. But particles don't react do research about them, people do.

Also, most people here seem to treat every spending as if it is the same. Half the posts in this thread make me want to smack someone.

 

[Chichikov]

What most people I think miss is that barely anyone in Europe chose the evil Austerity. At the beginning of crisis everyone went into large deficits. They were forced to go for fiscal consolidation because the borrowing costs increased.

The UK totally chose it for political reasons.

And it worked terribly.

Other countries don't borrow in their own currency (sort of, you know what I mean) and that's the problem.

 

[daviyoung]

Unfortunately I don't have time to listen to the whole thing at the moment. But I can say this guy is a great speaker.

 

[Frankfurter]

I do think that it was fair to expect sth. from the countries that were/are in trouble (mainly Greece/Portugal/Ireland, to a lesser extent Spain/Italy), i.e. take measures to make their economies more productive. But I also think this should have been done 2009 and maybe 2010, but after a certain point the Eurozone as a whole should have put up a "classical" keynesian stimulus. Those that were the best off should have had the biggest stimulus, those that were worst off the smallest ones. Greece etc. would have also been pushed by stimulus in Central/Northern Europe (partly due to exports, partly due to tourism, partly due to wages rising faster in those countries) and we could have atleast sort of had that mess behind us by now.

Unfortunately nothing substantial will happen for atleast another 3-4 months (federal elections ~close to the end of September in Germany this year) and even after that it'd still take a while to cock sth. out (if there is political will to do so). Here is hoping if Merkel wins that she's more concerned about how people will few her in 20 years than being elected again and again.

 

[Simplet]

Here's an argument that is pro-austerity: Don't spend what you don't have.

If you absolutely need to have something, work harder or more hours to get that extra income to satisfy that particular need.

I really don't think watching that video will make me change my opinion.

Amazingly you managed to neatly illustrate everything that makes austerity dangerous in the first post.

Comparing a massive economy to a household? Check.

Substituting protestant work ethics for economic rationalization? Check.

Preemptive unwillingness to let a math-based argument sway your moral outlook? Check.

 

[bonercop]

Here's an argument that is pro-austerity: Don't spend what you don't have.

If you absolutely need to have something, work harder or more hours to get that extra income to satisfy that particular need.

I really don't think watching that video will make me change my opinion.

...And there you go. Empty platitudes like these are what allowed politicians to sell the idea of austerity to the people.

edit:I see this has been addressed several times over already.

 

[twobear]

No it wasn't. The Excel mistake was insignificant, more important was the accusation of data omission, even HAP's polemic against that work found that deficits slow growth only less than RR thought.

I had thought that the major criticism of the paper was not the Excel spreadsheet per se but the fact that they were implying that the causal link is the opposite direction to that which most economists agree.

 

[Ghost]

I'm at work so I can't watch the video so apologies if this is answered there, if austerity isn't the answer how are governments supposed to reduce sovereign debt? Surely it can't be allowed to just continue to rise?

 

[Acorn]

A state doesn't function the same way as a household does, even then households have access to credit cards and loans. It's far far far from a useful analogy.

Yep. Doesn't stop Osborne and the like making credit card bullshit statements.

 

[ClassyPenguin]

I had thought that the major criticism of the paper was not the Excel spreadsheet per se but the fact that they were implying that the causal link is the opposite direction to that which most economists agree.

The error led to that assumption.

 

[Timedog]

Wow this thread went off the cliff way quicker than I thought it would. But maybe in doing so a few posters and lurkers will learn some new things.

 

[Acorn]

I'm at work so I can't watch the video so apologies if this is answered there, if austerity isn't the answer how are governments supposed to reduce sovereign debt? Surely it can't be allowed to just continue to rise?

Keynes my friend.

Support growth through govt expenditure and Tax cuts for the lower and middle classes (whom spend a greater proportion of their income). Then when growth takes hold raise taxes and cut expenditure.

You grow out of slumps, you don't cut out of them.

 

[Lagspike_exe]

Deficits are not bad, you need deficits, and in most cases you want them.
In a growing economy (and over time, the US economy is growing) you need to increase the money supply, otherwise you'll have deflation, and that's a very very bad thing.

Surpluses are only useful at very specific situations (generally when the inflation is too high).

Remember, a surplus only means that the government collect more than it needs, and it is literally taking money out of the economy.

Could you explain how running deficits increase the money supply?

 

[ClassyPenguin]

Could you explain how running deficits increase the money supply?

It increases demand for money, services and goods. The public sector can foot the bill for many private contractors and service providers. That funding in a surplus would not be there because the private sector would slow down production because demand has risen. The IS-LM model.

 

[OminoMichelin]

REALLY not used to his accent, I think Ill grab the book instead.