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October 24, 2012


My followers may recall that I blogged on the documented failures of austerity last May in which I criticized Merkel for her heavy-handed austere requirements for those in the EU (which excludes Britain) signatory to a common currency, the euro. Greece is but one of the victims of her austere tactics; all euro states are in varying degrees of economic trouble. Though still a pound and not a euro state, Britain is now in recession, demonstrating that there is a spillover effect from austerity to non-austerity trading partner states. Where trading partnerships are so intertwined, just one rotten apple will spoil the rest, as is now being demonstrated in Europe. The effects are coming across the Atlantic to our shores, and the resulting “rot” of unemployment and a glacially slow recovery are prices we are paying for the austere policies of Germany – and of American Republicans, who have picked up the chant of austerity for political purposes of their own.

I blogged over six months ago in an excerpt from a letter I wrote to a friend that:

As a permanent Keynesian, I have been opposed to austerity from Day One, and the Greek experience (now coming to Spain and Italy courtesy of Merkel) has not changed my mind. Indeed, it has reinforced my long held view that you cannot cheap your way out of an economic crisis. Austerity has never worked; Keynesian tactics have worked. Book closed; decision made!

But no, the Republican and German mindsets have other ideas, though their motives vary. This is a perfect excuse for Republicans to complain about spending, followed by the inevitable and predictable calls for tax cuts (laying off government workers, which means also laying off non-government workers, which means cuts in aggregate demand, which means a downward spiral of repetitive cuts in taxes and employment into at least recession if not worse). I don’t know when politicians are going to recognize the pivotal role of aggregate demand in an otherwise weakening economy, and that if private enterprise won’t do it (lack of demand for its goods and services), then government should step in (in Keynesian fashion) and provide the demand by going to work on the infrastructure and assistance to states for needed projects to build aggregate demand.

Republicans will scream that we Keynesians are going to into deficit financing for such “gummint projects.” That’s funny. I don’t remember a peep from them when Bush gave them a trillion bucks from money he did not have – it was added to the deficit. It apparently is O.K. to go into deficit to pad their Swiss bank accounts, but perish the thought of going into deficit to get aggregate demand (our only hope) back up to snuff so that the economy can recover. Conclusion: The Republicans are greedy liars who think more of their Swiss bank accounts than they do of their country. Such thinking, fleshed out, nears treason. (End of excerpt from letter)

I then added to the foregoing excerpt the following:

I have since blogged on this continuing political travesty of stripping our means of recovery both here and in Europe under the guise of “debt crisis.” It appears that the ones who got us into this mess now claim expertise in getting us out of it. To Europe and American Republicans: THERE IS A WAY. It is the way you are not taking. To American Republicans – just this once, put your country ahead of your pocketbook.  GERALD  E


The intervening months since I published the foregoing blog have, unfortunately, continued to prove my blog’s thesis. Republicans argue that we need tax cuts and deregulation in order to recover. That is exactly the wrong way to go; it’s like throwing gasoline on the fire to put it out. They say that overhanging “debt” is the culprit. Strange, then, that Britain has no debt but is in recession. The two are not necessarily congruent; other less simplistic factors are at work.

Virtually all economists agree that it is the ratio of debt to GDP that is the culprit. It is therefore clear that while we cannot do anything about debt already owed, we can lessen its effects by expanding GDP, thus decreasing the ratio and moving toward equilibrium – and how do we do that? We do it by policies designed to stimulate aggregate demand. When there is more money in the hands of consumers, aggregate demand will go straight up, and when the factories and shops and offices of America have people with money knocking on their doors, they will open them and employ the now unemployed to handle these new bursts of business. Everyone involved in our new prosperity will buy more goods and services and will pay more revenues into our Treasury, thus lessening the debt’s effects as a drag on our economy and enabling us to budget (at long last) to reduce the debt as well.

Republicans argue that we should sit around in laissez-faire fashion and wait for “the market” to sort things out, as though the economy were some sort of a “natural phenomenon” – a system built in stone. That view is, of course, hogwash. The “economy” was designed by mortals and is subject to adjustment by mortals to meet the needs of a given society at given times.

Now is such a time. If private enterprise cannot or will not provide aggregate demand in the marketplace, then government should provide the demand so that we can get our economic house in order. It worked well with FDR’s New Deal. The demand of that day included work on public buildings, our infrastructure, parks, the Great Flood of 1937, and many other such projects of lasting importance.

Economies are inert. They don’t care where demand comes from or the philosophies of those who are arguing about how to provide it. The time to cut taxes is when the economy is roaring and big revenues are being provided to the government – not now – not when we are in such a tepid recovery as we are currently experiencing. Don’t believe any politician of any party who tells you he or she will cut taxes and balance the budget. Any such attempt would ensure a deep recession – or worse.

We need every dollar possible in circulation in our economy so that the benefits of demand can be realized. Romney’s plan to remove 5 trillion dollars from our economy in the form of tax cuts and other non-productive reductions is the one of the worst pills I can imagine for what ails us. Such money removed from our economy for venues offshore is the economic equivalent of a pill composed of thalidomide and strychnine and could well be a fatal blow that could bring on a depression, perhaps like the one I experienced in the 30s (it was a daily disaster – for years). We need MORE money (demand) in circulation in this economy, not LESS, and if private enterprise cannot or will not provide that demand, then we the people should supply it in FDR/New Deal fashion. This is no time to be sitting around Waiting for Godot, or waiting for Adam Smith’s “magic of the marketplace” to rescue us from economic oblivion. Such so-called “magic” does not now and never has existed. We have to handle our problems ourselves in the real marketplace of brawling competition – magic is not involved.

It is the time for the people to demand that their politicians of whatever philosophical stripe end their political chatter and boldly grab the bull by the horns and provide the means for our economic recovery, either via free enterprise or government intervention or both – whatever works. We are at a point where we do not have the luxury of philosophical disagreement anymore.

As Joseph Stiglitz, Nobel Prize winning economist and professor at Columbia noted, “Austerity has never worked in big economies,” so that alternative is not in play. There are no magic potions for an economic cure other than this: Either we stimulate aggregate demand and recover, or we do not stimulate aggregate demand and do not recover (or stumble along to a recovery 30 years from now). We know what we need to do to get this economy back on track. What are we waiting on?  Let’s go!  GERALD  E

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