And at that point, we consider the article in The Economist Magazine (June 10, 2010) – Budget cuts in the euro area – Nip and tuck<\/a> – which argued that “Europe’s plans for fiscal austerity are not quite the threat to recovery they seem”.<\/p>\n The essence of the article was that the wholesale budget cutting that is being undertaken throughout the EMU nations has spooked the bond investors who “now to fear that crisis has spurred too much austerity”.<\/p>\n It says:<\/p>\n \nJudged by the claims of those who welcome the new fiscal austerity, as well as those who fear it, a gigantic fiscal blow is about to land. The true picture is not quite so dramatic.\n<\/p><\/blockquote>\n Their argument is simple: The nations making the largest cuts in discretionary spending have the lowest weight in overall EMU GDP. So, as an example, Greece will cut the equivalent of 11 per cent of GDP over the next two years but accounts for only 2.6 per cent of Eurozone GDP. If you look at the graphic you can see that Ireland is cutting discretionary spending by 5 per cent of GDP over 2010 and 2011; Portugal 5.6 per cent; and Spain 5.4 per cent.<\/p>\n So for these nations, the austerity programs will have harsh impacts on their economies and their labour markets.<\/p>\n This is the graphic that the Economist provides to back up their argument. For the EMU as a whole the cuts are only 1.2 per cent of GDP spread over 2010 and 2011.<\/p>\n The Economist concludes that:<\/p>\n \nThat is big but not excessive for a block that is forecast by the European Commission to have an average budget deficit of 6.6% of GDP in 2010.\n<\/p><\/blockquote>\n They also try to argue that the multipliers attached to these cutbacks are closer to zero than unity because consumers may save less and firms may invest more because they realise the fiscal situation is being fixed.<\/p>\n They cite economic research (the article they refer to is Alesina and Perotti, 1996 – Fiscal Adjustments in OECD Countries – Composition and Macroeconomic Effects, IMF Working Paper 96\/70 – which you can only get in hard copy) that claims that:<\/p>\n \n… budget adjustments that rely on cuts in welfare payments or the government’s wage bill are more likely to produce lasting benefits – lower public debt and faster GDP growth – than those based on tax increases or cuts in public investment. The least harmful taxes were on firms’ profits or on consumer spending.\n<\/p><\/blockquote>\n If you have read this paper you will understand how qualified the results produced are. The models they work with are pre-disposed to considering that welfare benefits and taxes undermine growth. These results are assertions and fail to stack up in sound empirical research. As a result, the empirical work they do perform is already biased by the incredulous theoretical models and so their conclusions are highly dubious. One can easily conclude that their results are basically meaningless. But it is an often cited article because it delivers the sorts of results that suit the neo-liberal agenda.<\/p>\n The Economist also concedes that:<\/p>\n \nExamples of such “expansionary fiscal contractions” are much harder to replicate now. Countries that managed to grow strongly in the past while cutting budget deficits were often aided by a falling exchange rate or were rewarded by a big drop in borrowing costs. Most rich countries today already enjoy low bond yields. And not everyone can devalue their currencies.\n<\/p><\/blockquote>\n In fact, the examples of successful austerity programs which have delivered an early return to robust growth without leaving a trail of havoc behind are difficult to find. Of the countries cited (for example, Denmark in the 1990s) other factors not connected to the austerity measures were responsible for the return to growth.<\/p>\n The Economist supports the “certain kinds of austerity … [which] … are less harmful to growth” and include cuts to wages and entitlements (particularly public servants); cuts to welfare and unemployment benefits; cuts to pension entitlements; and job cuts in the public sector.<\/p>\n The conclusion that “Europe’s austerity drive could have been a lot worse”. So no mention of the massive job losses and the fact that long-term unemployment and poverty will rise. No mention of the fact that the demographic cohorts that have already borne the brunt of the crisis will get further hammered as governments cut back welfare and pension entitlements.<\/p>\n No, it just could have been worse!<\/p>\n So what is the agenda?<\/strong><\/p>\n This article in the Sunday’s UK The Observer (June 13, 2010) – The Conservatives call it ‘pain with a purpose’. What purpose, exactly?<\/a> – started to ask the correct questions.<\/p>\n The journalist William Keegan (former Financial Times economics correspondent) asked:<\/p>\n \nIs a crisis brought about by deregulation just what the Tory doctor ordered to put “welfare recipients” in their place? I would like to think not. But I wonder\n<\/p><\/blockquote>\n Keegan muses that while the mainstream are arguing for austerity to repair the ailing economies overburdened with public debt – exemplified by the new Tory PM’s slogan – “Purpose behind the Pain” – this sort plea has been “the rationalisation of sadistic masters throughout the ages”.<\/p>\n He gets a little lost when he concludes that the period during which the previous Labour government was frugal (when Gordon Brown was the chancellor) – “the long period of rectitude” … “meant that Britain was still better placed than many other industrial countries on the eve of the crisis – by the criterion, for instance, of net debt as a proportion of GDP”.<\/p>\n Britain is a sovereign nation that issues its own currency. It past “rectitude” gave the government no more or less capacity to defend the economy via expansionary fiscal policy when the crisis came. Past budget positions and debt ratios are irrelevant.<\/p>\n There might be a case made that is is easier politically to expand fiscal policy when the public debt ratio is low but that is not based on any intrinsic financial constraints. And one would have to wonder how Japan gets away with it year after year anyway.<\/p>\n Despite that misgiving, Keegan promotes the line that the deficit terrorists are dangerous:<\/p>\n \nOnly last week, amid the chorus of deficit hysteria, Darling pointed out that, without economic growth, neither the borrowing nor the debt would come down, and “there is absolutely no sign that this government grasps that”.<\/p>\n On the contrary, we have a coalition of Thatcherite Conservatives – thinly disguised by a carapace of “care” – and Manchester Liberals. It is misleading and injudicious for Osborne to compare the UK’s position to that of Greece. Greece had to “roll over” its debt within months. The British government’s debt is longer term, with what is known as a healthier “maturity distribution” than the vast majority of industrial countries. Moreover, much of the debt is owed not to foreigners but to ourselves.\n<\/p><\/blockquote>\n First, the message is that the austerity will be harsh.<\/p>\n Second, Keegan’s criteria for differentiating the UK from Greece are not the differentia specifica<\/em> which sets the two nations apart. Greece is a non-sovereign nation that cannot set its own interest rate, issue its own currency or float its exchange rate. The UK is fully sovereign in that respect.<\/p>\n So the question then is if the austerity (“atmosphere of fiscal masochism”) is going to be damaging is there some broader purpose to it?<\/p>\n Keegan says that:<\/p>\n \nIs Pain for a Purpose what the right wing of the Tory party is traditionally suspected by the left of wanting? Is a crisis brought about by deregulated bankers just what the rightwing doctor ordered to put “welfare recipients” in their place?\n<\/p><\/blockquote>\n So the neo-liberal attack on welfare and unions and the public sector over the last three decades (variously) was damaging but not emphatic. Public sectors survived and welfare states resisted widespread retrenchment. Now we have the situation that a major economic crisis brought about by the near-collapse of the financial system is being used to finish the agenda off.<\/p>\n If you think about it for any more than a nano second you will wonder why we are all being duped.<\/p>\n You have a period of vigorous promotion of the self-regulating capacities of the “market” and intense lobbying of governments to relax long-standing rules that protected the financial system from excess and meltdown. The lobbying was universally successful and the regulations tumbled.<\/p>\n Then the excesses started appearing and a few economists (including the Modern Monetary Theory (MMT) camp) started to ring the warning bells (like, back in the late-1990s!). But the lobbying continued and the bell-tollers were vilified in various ways by the arrogance of the mainstream economists.<\/p>\n They even coined terms to describe how the business cycle was dead – please read The Great Moderation myth<\/a> – for further information.<\/p>\n The strutting arrogance of my profession was something to behold as the underlying conditions for the crisis were being created by their policies.<\/p>\n Then it crashed and the hands of those who had been the most vociferous opponents of government fiscal initiatives were quickly held out to receive their bailouts. Many of the large banks that are once again highly profitable would have gone under had not the governments provided the fiscal support.<\/p>\n A much deeper crisis that the one the world is already enduring was prevented by fiscal intervention – the type hated by the neo-liberals. Once the financial interests and their support clubs (Peter Peterson Foundation etc) realised they were safe they unleashed a massive and on-going campaign of deficit terrorism.<\/p>\n Virtually nothing has been done to reform the banking sector. We are still essentially operating with the regulative environment that brought us unstuck. There is a massive resistance in all nations to any changes which would stop the free-wheeling bankers from getting as much of the real output as they can.<\/p>\n![\"\"](\"https:\/\/billmitchell.org\/blog\/wp-content\/uploads\/2010\/06\/Economist_June_10_2010.gif\" "\\"Economist_June_10_2010\\"")
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