Friday, April 29, 2011

A New Post at Cynicus Economicus

I see with some interest that the Cynicus Economicus blog has a new post, which I urge people to read:
“An Occasional Return,” April 27, 2011.
There are some comments on the UK, as follows:
“The simple fact of the matter is that, despite talk of austerity, the UK government continues upon its binge of borrowing and spending …. The UK economy is still sitting upon the life support of government borrowing, and has yet to face what might happen when the borrowing stops, and repayment starts. Even with the linked inflation and currency devaluation, the UK debt position remains in a dire position.”
In reality, the UK government-debt-to-GDP ratio is about the middle of the range and (for the UK) not historically that large:
List of sovereign states by public debt

UK National Debt Charts, Three Centuries of the National Debt.
Both Germany (at 83.20%) and France (at 81.70%) have worse government-debt-to-GDP ratios, yet the sky is not falling in those nations.

The fact that government borrowing has continued and the government-debt-to-GDP ratio has risen under the Tories is not even remotely surprising. Why? First, the real effects of austerity are only kicking in this year, and, secondly, there is already ample evidence that, without truly extreme cuts, austerity causes the budget deficit to get worse, as economic activity and tax revenues plunge, and more people become unemployed and claim social security from the state.

Take a look at Ireland. Ireland rejected Keynesian stimulus, and implemented austerity early. The result? By 2009, it already had the biggest budget deficit in Europe in terms of the percentage of its GDP. The country suffered a depression and the government-debt-to-GDP ratio is now 123.80%. Stunning proof of the success of this type of austerity?

The apologists for austerity will perhaps complain that the cuts weren’t deep enough. To really cut government spending and debt the austerity has to be so brutal that the country is plunged into severe depression and people are driven overseas. This is what has happened in Latvia:
“Neoliberal austerity [sc. in Latvia] has created demographic losses exceeding Stalin’s deportations back in the 1940s (although without the latter’s loss of life). 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.
Perhaps there are some who want to claim that this is actually a vindication of their approach to economics.

Fortunately, the economic theory behind austerity of any type is deeply flawed, and an alternative is available to us: Post Keynesian economics.


  1. I remember that one Baltic government even had a constitutional requirement to have a balanced budget. I believe it was either Lithuania or Latvia.

    Since it is constitutional, it can't overturn such a mandate without difficult, rigourous procedures.

    It seems Baltic governments in the post-Soviet were formed on radically fiscal conservative policies, that could not be altered by ordinary politics.

  2. "Perhaps there are some who want to claim that this is actually a vindication of their approach to economics."

    Well, Joana Gorjão Henriques wrote an article in "The Guardian" claiming that the high unemployment that is forcing many young Portuguese abroad is actually a good thing because it will make the Portuguese people less spoiled and more adventurous.

    I suppose the same arguments can be applied to the citizens of Latvia by neoliberals defending austerity. By the way, blogger Karl Naylor has a very good post on the Henriques article and on austerity in general at this link:

    What I find really interesting about the arguments for austerity is that they are often buttressed by shallow ethnic stereotypes. For example, the lazy Southern Europeans need austerity to make them more adventurous and individualistic, turning them from a bunch of coddled Mama’s boys into tough neoliberal pioneers!

    This strikes me as similar to the arguments used by neoliberals to explain away the failures of their policies in the developing world, for example, blaming the failure of neoliberal development models in Africa on the supposed culture of laziness there. But as Prof. Ha-Joon Chang points out, similar things were said about Germans, Japanese, and Koreans when they were living in developing societies.

    The neoliberals are strenuously trying to avoid any real discussion about their system and their ideology which is why they are utilizing “blame the victim” arguments.

  3. Why is it that you take this guy so seriously? He seems to systematically mistake the economy for a morality play.

  4. John,

    Thanks for the links, and your comments, which I endorse.

    Also, Ha-Joon Chang has done some outstanding work on development economics.