Saturday, May 26, 2012

Steve Keen on Irish Austerity

A quick radio interview here with Steve Keen when he was in Ireland, where he discusses the myth of expansionary austerity*.

* I hasten to add of course that any Keynesian would admit that, if the private sector is booming (including export booms), then government austerity does not necessarily mean recession. But the neoclassical/neoliberal idea of expansionary austerity when the private sector is in crisis or the global economy is itself depressed is a ridiculous fable.


  1. LK,

    I was just reading a wonderful book by Frank E. Newman on why China is surpassing us:

    "Six Myths that Hold Back America, and What America can Learn from the Growth of China's Economy"

    His points? Well, basically he takes apart 6 myths that constrict policymakers in the US, all 6 of which are shamelessly enthused by Austrian fanatics....

    A good book.

  2. While we all should take abstract models with a grain (or kiloa) of salt, what do you think about applying the Mundell-Fleming model to Ireland, which is a small open economy?

    The model would imply that a fiscal expansion in Ireland would be offset by lower net exports from rising real exchange rate, and a fiscal contraction in Ireland would be compensated by higher net exports from a falling real exchange rate - thus making fiscal policy partly helpless in aiding Irish recovery?

  3. LK,

    Very interesting interview with the post-Keynesian Steve Keen, thanks for the link. Some comments and impressions:

    1) Main problem with the 2008 recession is private debt causes by the banks lending money to individuals who were not qualified to receive the loans. (To prevent a future recession like the one in 2008, banks should not lead to unqualified individuals? How would one determined unqualified for someone with a 30 year mortgage?)
    2) Individual in debt who cannot pay should have debt relief. Keen hypothetical example would be to give all individuals 100,000 Euro’s. To prevent moral hazed give 100,000 Euro’s to individual with debt problems as well. (How would a government institute such a program?)
    3) Neo-Classical economics, which Paul Krugman the new Keynesian is classified as well does not include debt, money, or banking in there models. (Is Paul Krugman part of the neo-classical school?)
    4) Inflation will not occur because most of the new money will go to paying down debts and not to causing a large increase in aggregate demand.

    1. "To prevent a future recession like the one in 2008, banks should not lead to unqualified individuals? How would one determined unqualified for someone with a 30 year mortgage?"

      Eliminating liar's loans and NINJA loans would be a start.

      " Paul Krugman part of the neo-classical school?"

      Ye, he is: he is a neoclassical New Keynesian.

  4. Thanks LK but how would a lending institution know the income stream for 30 years? How can one qualified for a loan that far out in the future with that much uncertainity?

    1. The fact that you cannot be certain that someone will still be creditworthy in 30 years does not change the fact that you can minimise risk by stopping obviously poor lending practices now.

      As I said, the place to start is short term risk: that is why the obviously fraudulent loans should be stopped, by ensuring that debtors have actual employment and savings and so on.

      Banks should not be lending for obvious speculative purposes such as creation of asset bubbles.

      Abolishing uncertainty is not required anymore than it is for insurance companies, which also take measures to minimise risk.

  5. I guess we are talking past each other, (Not surprising since we do not know each others paradigms and conceptual frameworks), but giving out 30 year loans seams to me a very risky venture. How many individuals in there life time are layoff or downsized in there employment and cannot meet the monthly mortgage, an empirical study would be interesting to this point. Also how inflated are house prices given that payments are spread out for 30 years, another interesting study.