Since I have a problem shifting focus to things I ought to be doing when something else is preying on my attention, the only way I could get around to my syllabus-making and house painting is to go ahead and give my take on the Nation article, “Beyond Austerity,” by Australian economist William Mitchell. Lacking time to write a thorough, well-structured response, I’m just going to fisk it, claim by claim. I have not included all of his article, but I think most of it is in here.
To summarize up front, the article is devoid of any actual argument. It contains only an onslaught of claims, most designed to stimulation an emotional response, with almost nothing in the way of logical explanation or evidence. When he does invoke historical evidence–the Great Depression, the inflation of the 1970s, monetary policy in the 1980s—he gets his facts precisely wrong.
… The global economic crisis might suggest that the neoliberal promise—that markets can self-regulate and deliver sustained prosperity for all—was a lie. But that doesn’t seem to have registered with governments, which have, without exception, built their responses to the crisis on a series of myths—the same myths that caused the crisis. …
A) The fact that we had a recession doesn’t mean markets can’t self-regulate and deliver sustained prosperity. There is a time-scale issue here that he wholly ignores.
B) The assumption here is that the recession was wholly a consequence of the market and, his bogeyman, neoliberal policies. Yet he never demonstrates those claims.
C) He never demonstrates that the myths are in fact myths—he just repeats the claim of myths and false theories over and over. He seems to think that his preferred approach is so obviously true that it needs no real defense, and despite claiming that the neoliberal approach isn’t easy to refute because it is “seductive” and filled with “opaque jargon,” he never does make a serious effort to explain why it is wrong—he just asserts it, and apparently we’re just supposed to accept it. Given that his target audience is readers of The Nation, who in general are eager to accept arguments that the market is bad and government is necessary to sustain it, I suppose most of his intended audience did just accept it.
D) He criticizes neoliberal economic policies and their resulting austerity budgets for the economic crisis. This suggests that he thinks the Bush era budgets were austerity budgets, ignoring the fact that their large deficits are a large proportion of the economic prescription he is arguing for.
Austerity will worsen the crisis, because it is built on a lie. Public deficits do not cause inflation, nor do they impose crippling debt burdens on our children and grandchildren. Deficits do not cause interest rates to rise, choking private spending.
It’s true that public deficits do not necessarily cause significant inflation or impose debt burdens on future generations, but that’s dependent on the size of the deficits. There seems to be an assumption here that private sector growth will inevitably be sufficient to enable us to pay off any size debt without either having to significantly increase the money supply (causing inflation) or raise taxes (burdening our children and grandchildren). His explanation for that? Read on.
Governments cannot run out of money.
True–they can always do what Zimbabwe did and just print more. Although he doesn’t delve deeply into this assertion about ability to repay government debt, he seems to imply that governments can just print more without any ill effects. That is, he is exceptionally cavalier about governments’ ability to create more money and later on treats inflation as a non-monetary phenomenon.
The greatest lie—endlessly repeated by neoliberal economists and uncritically echoed by the mainstream media—is the claim that if governments cut their spending, the private sector will “crowd in” to fill the gap.
Why is this a lie? Why won’t the private sector fill the gap in spending as more money becomes available to it at a reduced price (if not immediately in the short run, over time in the medium and long runs)? He doesn’t tell us. There is no explanation, merely assertion. The quote that follows is the basis of his argument that private sector crowding in is a lie, but it doesn’t actually address that claim; rather it addresses a different claim, about the effect of high government debt levels. It’s a bait-and-switch moment—he seems to provide an explanation, but in fact he has shifted issues without notice.
The neoliberal narrative has run into some inconvenient facts. Interest rates remain low, and governments—even those of deeply troubled Greece and Ireland—have not defaulted on their debts.
Governments have struggled mightily to avoid debt default, ergo default can never happen. The logical fallacy there is self-evident, is it not? Note that he’s not saying the chance of default is small because governments make great efforts to avoid it, which would be entirely legitimate. He is saying that default cannot happen, and the cases of Greece and Ireland are evidence of the impossibility of default.
In most of the developed world inflation is falling, and where it is rising, it is due to rising energy and food costs rather than excessive deficits.
Yes, central banks around the world are learning that controlling inflation is a good thing. And in most cases they have the last move, so they are able to offset some of the fiscal policy moves of legislatures. I don’t see that as evidence that governments can’t default or that inflation can’t reignite. We’re dependent on those banks remaining independent—which they might not if legislatures tire of being countermanded (Brad DeLong makes the same point in an article which I reference below)—and the central bank governors continuing to make wise decisions. Notice how he constrains his sample to the developed world, though? That allows him to exclude the problematic case of Zimbabwe. Why are only developed countries relevant? Perhaps there’s a plausible justification, but he doesn’t even attempt to provide one. And he may not have taken notice of Brazil, where inflation has again become an issue.
Further, despite what they might say in public and what they demand of governments, bankers’ private actions show they know better—why else would long-term bond yields remain at historic lows?
Because for all the increasing risk of government securities, they remain less risky than most private investment opportunities at this time? Or at least that’s the best guess I’ve seen from economists, who are admittedly puzzled by this and trying to figure out why. Of course investors will compare options, and so it’s possible that they are choosing government securities out of a high level of confidence, or it could be that their confidence in government is not so high as before, but that their confidence in alternative investments is even lower. But the author simply treats this factoid—presented devoid of any context—as proof.
The Great Depression taught us that without government intervention, capitalism is inherently unstable and prone to delivering lengthy periods of unemployment.
No, it taught us no such thing. That’s simple unexamined mythology. Granted, capitalism—markets in general—are inherently unstable, but that’s mostly a good thing (creative destruction, and so on). But evidence that the market, absent government policy bungling, is “prone to delivering lengthy periods of unemployment?” Not there. In fact it’s not hard to take from the Depression the lesson that it’s government invention that is prone to delivering lengthy periods of unemployment. After all, as Lawrence Summers recently noted (albeit in an argument in favor of more stimulus), if FDR had left office in 1941 he would have left with an unemployment rate still at 15%.
The Hooverian orthodoxy of balanced budgets, tried during the 1930s, failed.
Here’s one of the author’s errors of historical fact. While the 1930 budget was balanced, the budgets in Hoover’s last two years, 1931 and 1932, had significant deficits. The claim that Hoover ran balanced budgets is an important evidentiary point for him, because we all know Hoover failed to fix the depression. But the claim is false, so it cannot prove his point.
[Update: To be fair, it is true that Hoover secured a tax increase in an effort to balance the budget. Nevertheless he failed to avoid deficits. The actual outcome, rather than the effort, should be what matters for the argument here, because even though raising taxes during a recession is not what Keynes recommended, the author here is arguing that government spending does not crowd out private spending–whether it pulls that money into the private sphere through taxes or borrowing may matter at the margins, but not in the essence. The tax increase was on the top marginal rate, an increase on the wealthy, taking in money that otherwise would have been available for the purchase of government securities.]
Full employment came only with the onset of World War II, as governments used deficit spending to prosecute the war effort.
I’ve previously expressed my objections to this myth. Full employment suggests something sustainable, but simply making every unemployed person a government employee is not sustainable. The command and control economy of WWII was so radically non-normal that it makes no sense to use terms appropriate to a market-based economy to describe it.
The challenge was how to maintain this full employment during peacetime.
And somehow the U.S. government managed it while dramatically reducing budget deficits in the post-war years. (Although I do give credit for some government initiatives, such as the GI Bill.)
Western governments realized that with deficit spending supplementing private demand, they could ensure that all workers who wanted to work could find jobs.
Just take his word for it, because he’s not going to provide any more evidence for this than he does for any other claim in this article. In fact that’s what’s most noticeable about this essay—it’s a long sequence of assertions passed off as so obviously true that no supporting evidence is necessary.
All political persuasions accepted this commitment to full employment as the collective responsibility of society. As a result, very low levels of unemployment in most Western nations persisted until the mid-1970s.
And the task of rebuilding war-devastated countries had no significant role? Again, we’re talking about an unusual time. Although the economy, at least in the U.S., was shifting back from command-and-control to a market-based one, it took at least two decades to rebuild what 7 or so years of war had destroyed. It’s not that destruction is good for an economy, but it does mean there’s a lot of work to be done. Yes, a good portion of that spending came from government, but few economists argue against government spending on large-scale capital projects. And keep in mind that the purpose of the U.S. government’s spending, through the Marshall Plan, was not about providing jobs per se but about deterring Soviet influence. In short, the story is much more complex than he’s making it sound here.
While private employment growth was relatively strong during this period, governments maintained a buffer of jobs for the least-skilled workers. These jobs were found in the major utilities, the railways, local public services and major infrastructure functions of government.
Oh, lord, I’m amazed he’s trying to pass this off on people. First there’s the assumption that markets don’t provide low-skilled jobs (which is delightfully contra the current American liberal fear that our economy is only providing low-skilled jobs!). Second, there’s the assumption that jobs in utilities, railways, local public services and major infrastructure projects are primarily low-skilled ones. Third, there’s no hint of recognition that any portion of this government spending might have been inefficient and a drag on an economy—in his world, it appears that providing make-work jobs for the unskilled is pure economic boost.
By absorbing workers who lost jobs when private investment declined, governments acted as an economic safety valve.
True, but safety valves are not supposed to stay open all the time; if they do they merely become drains. And his broad argument is not just for a safety-valve function of government spending, but that it is an on-going necessity to keep employment levels up.
In addition, welfare systems provided income support and other public services (such as health and education) to citizens in need. While there were significant differences across nations in the scope of these systems, they all shared the view that the state had a role to play in providing economic security to citizens.
I have no argument here. I’m critical of how welfare systems may be structured, but I’m not anti-welfare or opposed to certain public services, even if the author and I might quibble over details. But this is a side-line argument that does little to support his main point. True he’s criticizing conservatives who don’t want spending on social services, but he’s conflating two separate groups here, that type of conservative and all economists who don’t buy into Keynesianism. There is overlap, to be sure, but the two groups are not synonymous, and it’s a pretty cheap rhetorical trick to lump them together like this. He’s playing on people’s emotional responses by suggesting that anyone who disputes the role of government spending in boosting the economy also wants poor people to be deprived of education and health care services.
However, conservative resistance to the use of budget deficits grew in the late ’60s, particularly in the United States, as inflationary pressures mounted because of spending associated with the Vietnam War.
Wait! Full stop! “[I]nflationary pressures mounted because of [government] spending associated with the Vietnam War.” But he’s already said government spending doesn’t cause inflation. And he praised WWII spending—which was far greater than Vietnam spending as a proportion of our GDP—for its full-employment effects. So why isn’t he praising Vietnam spending (and Afghanistan and Iraq spending while we’re at it)? Is he even paying attention to his own argument?
And conservatives believed that trade unions had become too powerful. But the full-employment consensus didn’t collapse until the escalating inflation that followed the OPEC oil-price hikes of the ’70s. This marked the beginning of the neoliberal era, which has dominated the political debate ever since.
Now he blames the inflation of the 1970s solely on OPEC. It’s hard to figure out whether he’s simply ignorant (despite being an academic economist) or willfully misrepresenting facts for his own benefit. Nowhere does he recognize that the loose money policies of central banks—purposeful policies designed to ensure the author’s holy grail of full employment—had any role to play in causing inflation. If he disagrees with Milton Friedman that “inflation is always and everywhere a monetary phenomenon,” he ought to say why he thinks that view is wrong. But you don’t need to be an anti-Keynesian to think the OPEC price-shock argument is wrong–Brad DeLong thinks so, too.
Rather than a failure of the system to create enough jobs, an idea that underpinned the New Deal consensus, mass unemployment was now depicted as an individual problem—poor work attitudes leading to a lack of job-seeking—exacerbated by excessively generous welfare payments.
A simplistic and misleading description of the view of neoliberal economists. Those are elements, to be sure (especially social welfare systems that create disincentives to work), but there is also a recognition that structural changes can be slow and that government regulation can discourage job creation.
Policy-makers also adopted the neoliberal theory of unemployment, which claimed that Keynesian-style spending could no longer deliver lower unemployment without causing inflation.
And was there ever any real evidence for this understanding of the Keynesian theory? Most Keynesians, I think, don’t buy this interpretation of it. They don’t treat government spending on job creation as a necessary on-going measure but as a special short-term measure, and they don’t deny the risk of inflation but treat it as an acceptable risk under the circumstances (which I think is a very reasonable position).
The only way the government could reduce this “naturally occurring rate of unemployment” was to further free up the labor market. So if governments were unhappy about the level of unemployment, their only alternative was to make it harder for workers to get income support payments and to eliminate other “barriers” to hiring and firing (for example, unfair dismissal regulations). Attacks on trade unions and statutory protections for workers began in earnest.
If the author’s ideological, rather than analytical, motivations weren’t clear before, they should be now. It’s reasonable to take the ideological position that things such as statutory protections for workers are worth the cost in decreased job creation, but it’s anti-analytical to pretend that such things don’t in fact have some effect on job creation. The harder it is to fire an employee, the more cautious a firm will be about adding employees—when business is booming they will have an incentive to ask current employees to work more before they add new employees, because if the boom subsides it’s easier to cut back on existing employees hours than fire any employees they hired. And of course those hurt most by this are the least skilled. So the author prefers A) a government policy that limits job opportunities for the least skilled, and B) government job programs to employ them because the market won’t. Seems unnecessarily Rube Goldberg like to me.
These same ideas had driven the failed policies that led to the Great Depression.
Once again, assertion without evidence.
As the neoliberal train gathered pace, the debate became focused on so-called “microeconomic reforms”: cutting expenditures on public sector employment and social programs and dismantling what were claimed to be supply impediments (such as labor regulations, minimum wages, Social Security payments and the like). Privatization and outsourcing accompanied these policy shifts.
This is just a set of descriptive statements without explanation. The wickedness of these things is supposed to be so self-evident he need not explain. But it’s not, and he does.
Fiscal policy (spending tax revenues to achieve social aims) was actively used during the full-employment era, with monetary policy (the government’s power to set interest rates) being considered less effective.
Well, yes, because Friedman’s arguments were still percolating through the academy and the world of policymakers. The author doesn’t actually demonstrate that the considerations of that time were correct, and that economists were wrong to be, to a large degree, won over by monetary theory. It’s worth repeating that even the world’s most famous Keynesian thinks monetary policy works just fine in normal recessions. Why is Krugman wrong about that?
The neoliberal assault on the use of fiscal policy began in the ’70s, with the rise of monetarism. Politicians seized on the ideas of Milton Friedman to claim that their sole objective should be to control the money supply in order to manage inflation. Although various experiments at controlling the money supply failed dismally in the ’80s (remember Reaganomics?),
Here he combines an astounding confusion between fiscal and monetary policies with a flagrant falsification of historical fact. Reaganomics (supply side economics) was a fiscal policy, not a monetary policy. Reagan didn’t even understand monetary policy until Paul Volcker explained it to him (Reagan had asked him why the Fed mattered). And in fact far from “experiments at controlling the money supply” in the ‘80s “failing dismally,” Volcker succeeded quite well in controlling it, purposely slashing it (and causing the twin Carter and Reagan recessions of the late 1970s and early 1980s) in a successful effort to crush inflation. Does this author really not understand that?
the dominance of monetary policy in mainstream economics was complete. Fiscal policy was demonized as being inflationary and its use eschewed, depriving liberally inclined governments of the tools to advance a more progressive agenda.
Fiscal policy is not necessary to advance a progressive agenda. It’s one tool in that quiver, but not the only one, and the other tools remain intact. In fact fiscal policy remains firmly in the hands of government. The U.S. government, at least, uses it regularly because the President and Congress play no role in monetary decisions and fiscal policy allows them to demonstrate to voters that they are not sitting on their hands during economic downturns.
The public justifications were all about creating more jobs and reducing poverty, but the reality was different. Since 1975 most nations have failed to create enough jobs to match their willing labor supply.
I don’t know about most nations, but the U.S. unemployment rate was very low, and declining, throughout the late ‘80s and ‘90s. This was true even as the U.S. population expanded substantially—jobs were being created even faster than the population was growing. The author is again, falsifying the historical record.
The assault on regulation and the attack on workers’ rights brought about a growing gap between labor productivity and real wage growth. The result has been a dramatic redistribution of national income toward capital in most countries. For example, in the G7 countries between 1982 and 2005 there was a 6 percent drop in the share of national income paid as wages (as opposed to interest or dividends). This was a global trend.
There is on-going debate among economists about the cause of wage stagnation. There is no consensus. So he might be right, and at the least it might be an important part of the story. But he doesn’t provide an explanation for why his theorized causes are the actual causes of the effect—again he just asserts it is so and feels no need to explain why.
In the past, real wages grew in line with productivity, ensuring that firms could realize their expected profits via sales. With real wages lagging well behind productivity growth, a new way had to be found to keep workers consuming. The trick was found in the rise of “financial engineering,” which pushed ever increasing debt onto the household sector. Capitalists found that they could sustain sales and receive an additional bonus in the form of interest payments—while also suppressing real wage growth. Households, enticed by lower interest rates and the relentless marketing strategies of the financial sector, embarked on a credit binge.
He ignores that federal borrowing and policies also helped make this credit binge possible. And by saying debt was “pushed” onto the household sector he absolves consumers of all responsibility for their decisions.
The increasing share of real output (income) pocketed by capital became the gambling chips for a rapidly expanding and deregulated financial sector. Governments claimed this would create wealth for all. And for a while, nominal wealth did grow—though its distribution did not become fairer. However, greed got the better of the bankers, as they pushed increasingly riskier debt onto people who were clearly susceptible to default. This was the origin of the subprime housing crisis of 2007–08.
Yup, just those greedy bankers. The federal government’s policy of pushing lenders to make loans to lower-income homebuyers had nothing to do with it. The desire of homebuyers to have 2,500 square foot starter homes had nothing to do with it. Nobody bears any responsibility but corporations and neoliberal economists. Those bastards.
As the worst of the recent crisis abated, neoliberals launched a massive propaganda campaign to reinforce their claim that budget deficits are bad and should be avoided. Austerity is now viewed as inevitable. But is any of this true? The short answer is no, but it needs careful explanation, because the neoliberal arguments against deficits—at least some of them—are seductive.
It damn sure does need careful explanation, but he only has a few paragraphs left in his article, and those few remaining paragraphs are primarily dedicated to more rhetorical attack on the neoliberal bogeyman, with no actual explanation of his view ever proffered.
Neoliberals claim that governments, like households, have to live within their means. They say budget deficits have to be repaid and this requires onerous future tax burdens, which force our children and their children to pay for our profligacy. They argue that government borrowing (to “fund” the deficits) competes with the private sector for scarce available funds and thus drives up interest rates, which reduces private investment—the “crowding out” hypothesis. And because governments are not subject to market discipline, neoliberals claim, public use of scarce resources is wasteful. Finally, they assert that deficits require printing money, which is inflationary.
OK, they say this. And the careful explanation for why it is wrong is….?
But they go further than this. They claim that quite apart from these alleged negative impacts, deficits are not required to achieve the aims of the Keynesians. It used to be considered noncontroversial that government deficits could stimulate production by increasing overall spending when households and firms were reluctant to spend. In a bizarre reversal of logic, neoliberals talk about an “expansionary fiscal contraction”—that is, by cutting public spending, more private spending will occur. This assertion comes with the fancy name of “Ricardian Equivalence,” but the idea is simple: consumers and firms are allegedly so terrified of higher future tax burdens (needed, the argument goes, to pay off those massive deficits) that they increase saving now so they can meet their future tax obligations. Increased government spending is therefore met by reductions in private spending—stalemate. But, neoliberals argue, if governments announce austerity measures, private spending will increase because of the collective relief that future tax obligations will be lower and economic growth will return.
OK, and the careful explanation for why cutting public spending increases private spending through making more money available more cheaply is illogical is….? The careful explanation for why the theory of Ricardian Equivalence is wrong is…?
Economic policy is now clearly being driven by this idea that austerity is good. The only problem is that none of the propositions that support austerity are true.
And the careful explanation for why those propositions are untrue is…?
It is difficult to expose the underlying myths because the assertions are framed in an opaque jargon.
So he’s abandoning the effort to provide a careful explanation because it’s too hard?
Further, the language of austerity has become ingrained in public debate by decades of miseducation and daily onslaughts from Fox News and its ilk. Those networks feature conservative politicians and denigrate those who challenge their views. Anyone who dares advocate larger deficits is shunned as being incompetent and/or a dangerous socialist. However, constantly shouting that government deficits are bad doesn’t make them so.
True, simply shouting it doesn’t make it true. But of course simply shouting that they’re untrue doesn’t make them false. So where is that careful explanation? It’s coming any moment now, right? No, the article ends here. And I have quoted every single word that follows the author’s claim that careful explanation is needed; I have cut out nothing after that point, and yet we see not actual explanation. That’s the quality of the argument in this article—a polemic full of assertions with no explanation and a sequence of false historical claims. Even if the author’s underlying economic theory is correct this article is still a mess from beginning to end.