Sunday, March 6, 2011

Austerity: The New Cross of Gold

Some human beings are charismatic and spell-binding orators. William Jennings Bryan (1860–1925) was such a person. He can be seen in the photo below.

Bryan’s speech to the Democratic National Convention in 1896 was one remembered in history, for good reasons. Of course, human beings are human beings. I suspect that no human being can be right on every social, economic and cultural issue of his/her day. William Jennings Bryan was wrong on prohibition and in his opposition to Darwin’s theory of evolution, though not in his opposition to the vile Social Darwinism that was popular in his time.

He was also absolutely right in his denunciation of the gold standard. To this day, his speech opposing it remains one that will inspire all those fighting against wrong-headed, false, and pernicious economic doctrines. His metaphor of the “cross of gold” is a vivid one, which invokes images that will move anyone with a Christian cultural background. You do not need to believe in god (I personally don’t) to find the metaphor and speech poignant and powerful.

The metaphor has also been used by Post Keynesians and progressive New Keynesians like Paul Krugman in denunciations of modern neoclassical economics.

The crescendo of William Jennings Bryan’s speech can be heard in an audio recording he made later in 1921 that captures the mesmerising spirit of that speech. You can hear it in the YouTube link below.

At the end of his address he proclaimed:
“If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.
Now, while many of the “commercial interests” of the world may well line up behind the advocates of austerity these days, just replace the words “cross of gold” with “austerity” and you have a perfect denunciation of the madness that is gripping policy-makers all over the world today.

If we want a good example of what extreme domestic wage and price deflation does to a country, then we need look no further than the brutal neoliberal austerity in Estonia and Latvia. In a somewhat less extreme form, it was been pursued in Ireland too, although Irish voters recently delivered their rather vehement rejection of the neoliberal assault on them.

That means nothing to Obama and the US Democrats, who announced a budget on February 14th, in which there are plans to cut $1.1 trillion in spending over 10 years, including heating subsidies for the poor. Do we need any further proof of the moral bankruptcy of the US Democratic party? But, then, they have always essentially been a party of business. What do they care if U-6 — the most reliable government measure of unemployment — stands at about 16%, and the estimate (perhaps more accurate) has hit a shocking 22%? After all, they have more important things like non-problem of the deficit (which, at any rate, would just fall naturally if the economy returned to full employment and progressive tax reforms were implemented in the next boom period). But let us move on.

In the UK, austerity is being pursued by the coalition government. And, while we expected this economic illiteracy from the Tories, the more insulting development, to many people, is the behaviour of the Liberal Democrats, who may well go down as the worst sell outs in British political history (though I personally doubt whether the Lib Dems were ever progressive on economics).

It is of course a shame to see the political descendants of Lloyd George’s 1929 Liberal party morphed into a neoliberal party in bed with the Tories. Contrast today’s “liberals” with those of 1929 who, when the UK was experiencing high involuntary unemployment, took advice from John Maynard Keynes and announced their radical plan to use fiscal stimulus and employment programs to cure the economic malaise (see Bill Mitchell, “We can conquer unemployment,” Billy Blog, September 24th, 2010).

The Liberals’ stirring election manifesto in 1929 was called “We can Conquer Unemployment!,” and it proclaimed:
“The word written to-day on the hearts of British people, and graven on their minds is Unemployment. For eight years, more than a million British workers, able and eager to work, have been denied the opportunity. At the end of 1928 the total reached a million and a half; a quarter of a million more than a year before. These workers with their dependants, represent four or five million souls. They are a very nation, denied the opportunity to earn their daily bread, condemned to hardship, to wearing anxiety and often to physical and mental demoralisation. What a tragedy of human suffering; what a waste of fine resources; what a bankruptcy of statesmanship!”
Indeed. But one will look in vain for a major party like that in the UK today.

In Australia, the ruling Labour coalition government is pursing a fiscally conservative policy of levying special taxes to pay for the reconstruction after the disastrous floods and cyclone, while the clueless Liberal party wants to cut spending to pay for reconstruction. The only sensible policy is more fiscal stimulus in Australia (or just restore Australia’s former tap system of issuing bonds), which is needed anyhow given the country’s relatively high involuntary unemployment.

In fact, all these countries are badly in need of further stimulus and major reforms in economic policy. At this point, the banks may as well be nationalised and turned into public utilities. Financial regulation needs to be imposed on the financial sector, even investment banks to some extent. Commodity buffer stocks are also a must — the world requires an effective policy to stabilise the price of food and other basic commodities, before we have a repeat of the food riots and chaos that broke out in 2008.

The beginning of austerity should set off alarm bells. These developments signal a turn to deflationary, contractionary folly in the major Western countries. The task of progressives and left wing people everywhere is to oppose this, with uncompromising rejection.

We have seen what it did to Latvia:
“Neoliberal austerity [sc. in Latvia] has created demographic losses exceeding Stalin’s deportations back in the 1940s … As government cutbacks in education, healthcare and other basic social infrastructure threaten to undercut long-term development, young people are emigrating to better their lives rather than suffer in an economy without jobs. More than 12% of the overall population (and a much larger percentage of its labour force) now works abroad. Children (what few of them there are as marriage and birth rates drop) have been left orphaned behind, prompting demographers to wonder how this small country can survive. So unless other debt-strapped European economies with populations far exceeding Latvia's 2.3 million people can find foreign labour markets to accept their workers unemployed under the new financial austerity, this exit option will not be available.”
Michael Hudson and Jeffrey Sommers, “Latvia provides no magic solution for indebted economies,” Guardian, 20 December 2010.
It is obvious that austerity Latvia-style has succeeded wonderfully, don’t you think? (see also Bill Mitchell, “When a country is wrecked by neo-liberalism,” Billy Blog, October 23rd, 2009).

The problem, unfortunately, is that one’s measure of success has to be causing depression, mass unemployment, 12% of the whole population working abroad, a brain drain, falling birth rates, and mass poverty.

I say in response: God damn that — and God damn neoliberalism.

The most extreme neoclassicals — and please don’t doubt that they exist — would impose this on us. They would demand much the same policies that were pursued by Weimar Germany from 1931 onwards. We must remember that it was not hyperinflation that turned Germany into the arms of a genuine lunatic: it was deflationary depression. And, while that historical episode might have been an extreme case, its lessons should not be forgotten.

Neoclassical economics is all based on totally flawed, dangerous and incompetent macroeconomics, and moral bankruptcy. Its policy prescription is domestic wage and price deflation and (in real terms) economic contraction. In a word: depression.

Welcome to the new cross of gold. Coming to an economy near you.



  1. Great post. Hopefully, figures like William Jennings Bryan can help Christian populists and secular progressives work together on economic issues even if we may strongly disagree on social or cultural issues.

    As a recovering U.S. Republican, I now see how the Right manipulates people of faith to get them to vote against their own economic interests while usually doing nothing to make the country more family friendly. Indeed, GOP economic policy is usually quite anti-family. Unfortunately, the U.S. Democrats aren’t much better.

  2. Jennings Bryan says, "There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it."

    I wish I were a politician, so I could convince the masses of totally arbitrary dichotomies that I pulled out of my heinie. Well actually, no, I don't.

    The truth is not a halfway point between two untruths. It is a total rejection of all untruths. It does not fall in the center of a spectrum, like a Golden Mean of all untruths.

    It is wrong to legislate to make the well-to-do prosperous. It is wrong to legislate to decide what one's arbitrary prefered class distribution should be.

    Modern day governments do both, in order to "reconcile" two sets of untruths, in the name of "bipartisanism".

    They will pass protectionist tarriffs and subsidies to put money in the pockets of the richest capitalists in the country at the expense of higher cost of living for everybody else.

    And they will also give subsidise nearly all the cost of fuel (up to 90% of its cost, sometimes), as they do in Iran, to keep the masses content and unrebellious with cheap fuel that is never economically utilised and with kettles running all day long.

    With this "moderate centrism", we get both wasteful tarriffs and wasteful subsidies, until we get chaos till the next election.

    And then all can be blamed on capitalism.

  3. "And they will also give subsidise nearly all the cost of fuel (up to 90% of its cost, sometimes), as they do in Iran, to keep the masses content and unrebellious with cheap fuel that is never economically utilised and with kettles running all day long."

    No, heating subisidies for the poor is about stopping people - the elderly, the poor - from freezing. It called morality.

  4. "Hopefully, figures like William Jennings Bryan can help Christian populists and secular progressives work together on economic issues even if we may strongly disagree on social or cultural issues."

    I hope you are right.
    The left's turn to moronic postmodernist and post-structuralist theories was a disaster:

    Bizarre obsession with cultural issues, some of which are not even very serious problems, is also a failing.

  5. Talking of depressions, I was wondering why "Austrians" don't discuss how Austria did during the Great Depression.

    After all, during the early 1930s in Austria, Mises served as chief economic advisor to the authoritarian regime of Engelbert Dollfuss, including when he imposed the Austrofascist

    With the Great Depression, unemployment in Austria reached 25%. Interestingly, there was a rise in unemployment from about 280,000 in 1929 to nearly 600,000 in 1933. You know, when
    von Mises was implementing the deflationary policies "Austrians" advocate now.

    I think I'll need to visit the library and see what I can find out about the Austrian economy when Mises was the chief economic advisor!

    This was after he made those infamous comments about fascists being "full of the best intentions and that their intervention has, for the moment, saved European civilisation. The merit that Fascism has thereby won for itself will live eternally in history."

    Mises left when Dollfuss was assassinated
    by Nazi agents in 1934 as he feared, due to his Jewish ancestry, the kind of repression he was happy to see inflicted on workers.

    An Anarchist FAQ

  6. Firstly Iain, von Mises as a wonk prescribed deficit budgets and increased spending. Why? A wonk's own views do not matter - he was expected to tow the line.

    Mises' reports advocated corporate taxes, a more centralised bureaucracy to make up for inefficiencies of various layers of local to central governments, and larger issuing of government bonds in the capital markets. It did not matter what he personally believed.

    Secondly, LK, you could check some of The Economist's report on the slow withdrawal of subsidies in Iran. The benefit of subsidies is very much to even incomed middle class, who get to drive their cars for purely leisurely strolls and clog the streets with traffic, while wealthier houses in Iran waste inordinate amount of electricity. This waste is not justified.

    This is the mistake of assuming historical data a priori. Where scarce fuels are wasted by everybody, including the affluent, even in a large oil producing country where production is enough to make it affordable for everyone otherwise, it is unusual to strike images of elderly poor freezing from death. The question of people not affording something in large supply does not come up at all.

    Iran is not Siberia but a region between West and Central Asia. It is fairly warm. And the rural populace in Iran has had plenty of access to firewood that they have chopped and burnt since a long time.

  7. Regarding Richard M. Ebeling's "The 'Other' Ludwig von Mises: Economic-Policy Advocate in an Interventionist World, Mises Daily, March 26, 2010, it is certainly an interesting article.

    You say:

    "von Mises as a wonk prescribed deficit budgets and increased spending."

    The post says he advocated:

    "designing a new fiscal order for Austria, Mises proposed eliminating all income taxes and many — but not all — corporate and business taxes. But how, then, do you finance the costs of government? He presents an agenda for implementing indirect taxes on a wide variety of consumption items, and especially what today would be called "sin taxes" and "luxury taxes." ....

    But Mises raised a different point in favor of certain benefits to debt financing for the government's war expenditures. Many who would not have the liquid assets to pay lump-sum wartime taxes would either have to sell off less liquid properties to pay their tax obligation, or would have to borrow the required sum to pay the tax. .... This would impose a financial loss on those forced to sell these properties and assets to the benefit of those who were able to buy them at prices that would not have been so abnormally low if not for the war and the need for ready cash to pay the tax obligation.

    Secondly, to the extent that some citizens would need to borrow to cover their wartime tax payments, the private individual's creditworthiness undoubtedly would be much lower than that of the government's. As a consequence, the rates of interest these private individual's would have to pay would be noticeably higher than the rate at which the government could finance its borrowing. Thus, the interest burden from government borrowing that would have to be paid for out of future taxes would be less for the citizenry than the financial cost from them having to borrow the money in the present to cover all the costs of war through current taxation. Hence, it was both patriotic and cost-efficient, Mises said to those listening to his lecture, to buy war bonds in support of the war effort."

    In other words, Mises was defending deficit spending during times of war - there is not one iota of evidence that he supported deficits as countercyclical fiscal policy during recessions/depressions, or that he supported deficits 1929-1934.

    The above passage also reveals Mises as a patriotic Austrian civil servant - defending his Habsburg master's war effort.

    The comments on Mexico's protectionism reveal a moment when the real world got the better of his praxeological rubbish:

    "took as "given" that the politics of Mexican society was not ready to fully privatize, say, the national railway system or the oil industry. So as a "second best," Mises proposed transforming the railway system into a government-owned but privately managed corporation with strict rules and procedures to assure it was run in a relatively "business-like" manner with the least likelihood of political interference. He even supported limited and temporary subsidies to assist poor Mexican farmers to establish themselves as more-successful private enterprisers.

    And on tariffs, he did not propose immediate abolition of trade barriers in Mexico. He accepted that there were many industries that had grown up behind the tariff walls, and that they would resist immediate repeal of trade protectionism. So, instead, he advocated "incrementalism," i.e., a gradual reduction of the tariff barriers over several years."

    If there are any other Austrians who endorse
    him on that, then I would love to see them say so.

  8. Check the comments for Austrian endorsment.

    "He sounds awfully practical. This must be disconcerting for all the purists who deem the likes of Friedman et al to be statists… and hence dismissed and ostracized."

    "He goes on to state that determining the level of security is debatable and questions whether those who receive the community support should enjoy the same liberties. I found these thoughts from Hayek quite refreshing from the narrow minded political ideology that abounds in Austrian circles. I know this ruffle the feathers of my brothers to the south, but the current health care debate in the U.S. is an application of the aforementioned quote."

    Secondly, I endorse Mises' gradualism. He once wrote in Omnipotent Government, "All of today's doctrines are condemned by the unappealable sentence of history." Mises was not the "dogmatic" character he was falsely accused of being. He was, rather, totally anti-ideology and anti-doctrine.

    Thirdly, it is well known that von Mises was a patriot. He served as an artillery officer once in his life, and while condemning protectionism, nationalism, and chauvinism, he greatly believed in the need for national pride.

    I point these things out, because men like Iain and far too many of today's progressives simply know von Mises from his followers. What they don't know is that Mises considered himself a "progressive". Same with Hayek, even though Hayek was a former Fabian Socialist quite sympathetic to his previous lot.

    Iain's conspiracy theories about the plutocratic von Mises greedily working against workers are just convenient fantasies, not truth.

  9. Iain’s statement:

    “With the Great Depression, unemployment in Austria reached 25%. Interestingly, there was a rise in unemployment from about 280,000 in 1929 to nearly 600,000 in 1933. You know, when von Mises was implementing the deflationary policies "Austrians" advocate now.”

    A quick quotation from a reliable, academic history of his period in the specialist literature:

    “In tackling the economic crisis the Dollfuss-Schuschnigg dictatorship pursued harsh deflationary policies designed to balance the budget and stabilize the currency. The government’s program featured severe spending cuts, high interest rates, and frozen wages. From an orthodox economic point of view there was considerable success: by 1937, both industrial and agricultural production had surpassed the levels of 1929; trade was more favourably balanced; the National Bank had liquidated most of its foreign debt and even accumulated reserves of gold and foreign exchange. In a sense the Christian Corporative regime demonstrated the viability of the Austrian state, but it did so at the cost of alienating a majority of the Austrian people. On the eve of Anschluss a third of the population was still out of work, while those fortunate enough to have jobs were bringing home paychecks considerably smaller than before the Great War.”

    Evan Burr Bukey, Hitler's Austria: Popular Sentiment in the Nazi Era, 1938-1945 (University of North Carolina Press, 2000), p. 17.

    Iain is correct. Unless Mises was giving them advice opposing the policies described above (which is – to put it mildly – hard to believe!), I think it’s a safe bet Mises supported them – perhaps even helped design them.

    This was typical neoclassical austerity: brutal, contractionary, deflationary policy that caused mass unemployment and an assault on real wages and living standards.

    There is no “conspiracy theory” here from anyone - just historical truth.

  10. I merely responded to Iain saying, "the kind of repression he was happy to see inflicted on workers."

    I saw that as a suggestion that this was a man who deliberately wanted to make the poor poorer in order to serve narrow interests. That's where I felt the rhetoric went into conspiratorial territory.

    I don't think there was an act of **deliberate** brutal repression. Even if we accepted all the premises that these policies were a disaster and not the least worst solution possible, there is nothing to establish von Mises as a labour baiter only out to cut wages and serve the selfish interests of those close to him.

    And where his own words establish him as a man putting pragmatism above principle, I am somewhat inclined to believe that he wouldn't have done it if he thought it was damaging to all broader interest.

  11. Lord Keynes you are the best.

    Keep it up man...


  12. I'm interested in learning more about Social Democracy. Could you recommend some book(s) on the subject? I'm interested in learning how a Social Democracy could/would be organized. I just read After Capitalism by David Schweickart. I don't know if you've read this book but in 200 pages he laid out the entire structure of a Market Socialist economy/society. I'm interested in something similar.

  13. I would have to do some searching to find a good list of books on Social Democracy.

    A stating point for Social Democracy, in my view, is the type of economy seen in Sweden, Norway and other highly progressive states in Western Europe.

    Now I mainly talk about economics on this blog, not social/cultural issues.

    In my view, a Social democratic state would pursue economic policies advocated by Post Keynesian economics.