I read this morning that there were riots in Spain overnight – Arrests, clashes amid general strike in Spain. I thought that, ultimately, this may be the only way that the neo-liberal economic madness that has beset the world, amidst the worst economic crisis in 80 odd years, will be curtailed. By people power. It is a pity that we have allowed the political class to move so far beyond what is required to introduce policies that enhance the well-being of the citizens. How that happened is a separate question which I hope the political scientists and other experts shed some light on soon. It seems totally bizarre that popular support is given to political parties that introduce policies which undermine the prosperity of the supporters. In Australia, the Treasurer delivered a speech yesterday that confirms that even though we are a long way from the European maelstrom, our intellectual underpinnings are the same. Our Government is currently about to walk the plank because it is engaging in a “seriously reckless” act – trying to cut public spending by around 2.6 per cent of GDP when the economy is already in decline.

I have had very little time today (worse than usual). I gave a 3 hour lecture today on Modern Monetary Theory (MMT) and unemployment to a final-year class in the Social Work program at the University of Newcastle. It was interesting trying to work out how to explain all these concepts, which are intrinsically hard, to a group that has no background in economics. Just the language we use is not universal and so I spent quite a bit of time working out how to communicate. Anyway, the following blog is short as a consequence. But knowing I didn’t have much time, and the blog I am thinking about will require some more digging, I decided to take the chance today to write an Op Ed that was requested from a newspaper in Buenos Aires and which I am late in delivering. They only wanted 5,000 odd characters so it forced me to be disciplined. It is about fiscal austerity and will be translated into Spanish for their readers.

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.