In yesterday’s blog – A nation cannot grow without spending – I challenged a view that dominates the European debate which says that fiscal austerity (choking discretionary net public spending) supplemented with vigorous so-called “structural reforms” (aka ransacking wages and working conditions) will promote growth. The corollary of this view is that fiscal austerity alone will fail and the reason Europe is going backwards is not because of the austerity but rather, because the structural reforms process has not been implemented quickly or deeply enough. In all of this there is a basic denial of the fundamental macroeconomic insight – spending equals output which equals income. An economy can only growth if there is spending (aggregate demand) growth. That requires a demand-side solution irrespective of the state of the supply side. Supply improvements might reduce the danger of inflation or improve the quality of output but people still have to purchase the output for growth and innovation to persist. A related argument is that fiscal stimulus aimed at fostering growth will cause inflation and be self-defeating. This view prevails in mainstream macroeconomics as taught in the universities of the world. Some mainstream economists do qualify this view and give conditional support to the fiscal stimulus solution by appealing to what they term the “liquidity trap”. This blog is about that argument.

On Saturday (March 24, 2012), the Sydney Morning Herald published an article by University of Chicago economist John Cochrane – Austerity or stimulus? What’s needed in the US is structural reform. Earlier, on Thursday (March 22, 2012), Bloomberg published an Op Ed by Cochrane – Austerity or Stimulus? What We Need Is Growth. Different title but same article. However, the title, in each case, conveys a very different message to the reader. In either case, though, the content is the problem. A nation cannot grow without spending.

I keep reading news reports that claim that Apple (the company) has more cash to spend than the US government. For example, this ABC News report today (March 20, 2012) – Apple goes on massive spending spree – perpetuates this myth. I noticed a similar report was spread throughout the Internet overnight. Apple might have 90 odd billion US dollars in cash reserves at present which it could draw on at its leisure. But once its reserves were gone that would be it. Notwithstanding, the labyrinthine accounting arrangements, which obfuscate its true capacity, the US government could spend 90 billion tomorrow, 90 the next day, and 90 the day after that if it wanted to. I am not advocating that just noting the capacity. This example highlights how poorly we are served by the financial press which reinforces the ideologically-motivated lies the government’s and the corporate elites use to maintain their hegemony. Inflexible governments undermine our standards of living.