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AUSTERITY – THE MOTHER OF DEPRESSION (PART II)

May 21, 2012

AUSTERITY – THE MOTHER OF DEPRESSION (PART II)

Two consecutive quarters of shrinkage in an economy make a recession. Britain, a non-euro state, fell into recession recently, followed by Spain (a double dip for the latter). France and Germany are contracting but not yet into recession (French election of a socialist may avoid any recession since he is likely to employ Keynesian tactics to avoid contraction, even though in the euro zone). Other members of the euro zone such as Italy, Greece and Portugal have contracted out long ago and are economic basket cases. Even China’s breakneck growth is slowing. Why?

According to Merkelite Germans and American republicans, it’s because of the “debt crisis.” Is it? True or false? Blatantly and disastrously false! Evidence? Britain had no debt and is in recession, its first since the 1970s. The reason several countries in Europe are in recession is due to the same old problem, a problem the Merkelites and republicans (for their own reasons) continue to dismiss: a lack of aggregate demand in the marketplace. The notion that austerity policies will somehow restore the marketplace to equilibrium and even prosperity is catastrophically false; such policies cut aggregate demand just when such demand needs badly to be stimulated. It is the equivalent (up until a couple of hundred years ago – see George Washington in 1799) of “bleeding the patient” in order to secure his/her recovery, another cup of hemlock for Socrates etc. It is a recipe for disaster.

 So if it isn’t austerity economics that can pull the world back to prosperity, what will? The answer is to apply some of FDR’s pre-1938 programs. Keynesian? You bet! Some of such 75 year old ideas would, of course, have to be modified to suit the particular country’s economic and political history, but the basic idea would be the same – to stimulate aggregate demand. When the private sector fails to provide a setting for stimulating demand (i.e., active in provision of goods and services that provides wages to people and revenues to government), the austerity mantra of “cut taxes, cut spending” is so plainly the wrong way to go that one has to question the veracity of those who insist that this is the panacea to the world’s economic problems. One has to wonder about the motives of such would be policymakers (such as whether it is all a front for the rich and corporate class to enjoy yet further tax cuts under the guise of saving the world from ruinous debt). I am more than suspicious.

So let’s talk debt. Does excessive debt necessarily lead to failure as a nation state?  No. What is important is not the debt but rather the ratio of debt to the size of the economy. When you reduce budgets and taxes, you have not only reduced aggregate demand in the marketplace (jobs lost to budget cuts), you have also reduced government’s ability to respond to the crisis thus created (not enough revenues to fund the increased need for social services such as unemployment insurance resulting from a loss of revenues). It is a double whammy and is the direct result of austerity thinking. Since the obvious solution to this problem involves the ratio of debt to GDP, we and Europe should adopt policies that increase aggregate demand, and since private enterprise cannot or will not fund the means, then government should step in and provide the means. We have plenty of work to do in this country (notably in our crumbling infrastructure). With increased demand due to such government infusion of funds, the increased demand will get private enterprise off square one and back into the game (or so goes the idea – which worked well before 1938 in this country).

Expect screaming republicans (progeny of those in 1935 who screamed that social security would turn us into a nation of communists) to show on TV shows sputtering about such things as socialism, something for nothing and the usual protestations of the rich who are fearful that the concept of sharing might require that they have to share the bounty and who are themselves expert at getting something for nothing. Funny, I don’t remember hearing a peep out of them when George Bush handed them a trillion dollars in tax cuts a few years ago; nor do I remember any complaints when he decided to fight two wars off budget. Talk about spending! Indeed his tax cuts during a war were firsts in American history, and set the stage for some of our economic difficulties today. Apparently spending designed to pad republicans’ Swiss bank accounts and spending to stabilize our economy are viewed very differently. Can you spell greed?

I have one degree in economics. The person I am about to quote has three and is a Nobel Prize-winning American economist. He is Joseph Stiglitz: “Europe is heading to a suicide” because “there has never been any successful austerity program in any large country.” Book closed. End of story.  GERALD E

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