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EUROPE, AUSTERITY AND KEYNESIAN ECONOMICS (A REPRISE)

March 27, 2013

EUROPE, AUSTERITY AND KEYNESIAN ECONOMICS (A REPRISE)

There is much consternation sweeping this country now as we engage in austerity economics which, as I have repeatedly blogged, has never worked in large economies (on the authority of Joseph Stiglitz, Nobel-Prize winning professor of economics at Columbia University).  Austerity economics is also poised to either bring down or at a minimum cripple the economies of the European countries whose common currency is the euro. Even the economic powerhouse of the euro cabal, Merkel-led Germany, is feeling the heat with negative growth of its economy (though just very lately it is turning positive, but for how long no one knows). Germany may be gradually coming to understand that bondholders, their safety as investors and their yields are not sacrosanct; that there are millions of unemployed and thousands of business failures extant among their customer base in euro-land who also have an intense and abiding interest in the health of their respective countries’ economies as well.

Merkel may be also coming to understand that austerity economics forced upon Germany’s fellow euro members results in less money in the pockets of the latter’s citizens, money thus not available to buy German exports. Could that have anything to do with the recent slowdown of the German economy; that and the general world slowdown and reduced demand in old economies and those of newly-emerging economies as well? Isn’t it obvious?

With globalization, we are not only in the same boat but in the same ocean as well. Brussels and Brasilia and Madrid are hopelessly and forever interconnected, and nobody has elected Merkel to run that show just yet, whether the currency base is pound, euro, peso, dollar, or the notoriously adjustable currency of China. Merkel’s doctorate is in chemistry, not economics, and it shows.

We are all in the same boat but have not elected a captain to date. If I were in that boat and had a vote, I would not vote for Merkel or anyone else who stood for austerity. I would vote for a Keynesian candidate and expansion of the economy. Bondholders do not buy exports en masse – ordinary citizens do. It is the aggregate demand in the marketplace that makes economies hum. Austerity economics suppresses demand and Keynesian economics expands demand; it’s that simple, and so is the choice between them in the present economic environment.  Put another way, when nobody is buying, then nobody is selling, and if nobody is selling, then nobody is producing, and if nobody is producing, then. . . This goes on an on – to a Merkel-orchestrated end, and it is not a pretty sight (nor was it ever a necessary one). Massive unemployment (and thus even less demand) is a guaranteed result.

Reduced demand has never been a successful tool for either economic recovery or an economy that hums; it is rather a rarely-used tactic employed when the economy is overheated and/or when inflation is running amok, i.e., when demand is too strong, when “too much money is chasing too few goods” etc. Do we have too much money chasing too few goods these days? Is demand overheated? Is inflation running amok? Quite the contrary – we are badly in need of Keynesian expansion policies rather than the austerity model of suppression of demand. This is not one of those rare instances when suppression of demand is indicated; it is rather the polar opposite. We are nearing world-wide recession.

When is our global leadership going to recognize that expansion rather than suppression of demand is the way out of this recessionary swamp and adopt policies that drain that swamp? When?  GERALD  E

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