{"id":20011,"date":"2012-06-28T17:33:33","date_gmt":"2012-06-28T07:33:33","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=20011"},"modified":"2012-06-28T17:33:33","modified_gmt":"2012-06-28T07:33:33","slug":"the-on-going-crisis-has-nothing-to-do-with-a-supposed-liquidity-trap","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=20011","title":{"rendered":"The on-going crisis has nothing to do with a supposed liquidity trap"},"content":{"rendered":"

\t\t\t\tI was going to write about the so-called fiscal cliff today and would have shown that the only thing that might fall of the said cliff would be real GDP growth should the US Congress actually not extend the tax cuts and impose the spending cuts. The US economy would follow the lead from the British economy and double-dip in 2013 as sure as day follows night (or is it the other way round). The most elementary exposition of what we might call – ECO101 Macroeconomics – would tell us that. One person’s spending is another person’s income and so on. I note that some economists are arguing that ECO101 Macroeconomics is alive and well because it has had a an impeccable record in the current crisis. In my recent blogs – Fiscal austerity damages real growth and prolongs the financial downturn<\/a> and Neo-liberalism has failed but we still don’t get it<\/a> – I have argued that the mainstream of my profession has failed – both in anticipating the emerging crisis and providing credible solutions to remedy it. So have I overstated that claim, given that ECO101 Macroeconomics is the go-to approach at present? The problem is that while there are some leading economists who are arguing against harsh fiscal austerity at present at the basis of their reasoning is a thoroughly mainstream approach which has helped create the problem. I don’t think their version of ECO101 Macroeconomics provides the answers. There is some common ground with Modern Monetary Theory (MMT) but an even deeper incongruence.
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\nMany readers of this blog have E-mailed me about my recent claims about “the mainstream macroeconomics paradigm has failed.” I have been told that economists such as Jonathan Portes and Paul Krugman (and others) consider mainstream macroeconomics to be the number 1 game in town. I obviously disagree but read or re-read the articles and blogs that I was referred to so that I could make a reasonable response.<\/p>\n

The UK economists (and head of the NIESR), Jonathan Portes says he is a Keynesian because he believes that fiscal policy affects aggregate demand and that fiscal consolidation is a drag on the economy. But then he asserts that “pretty much everyone else whom one would take seriously” would also be a Keynesian in this sense.<\/p>\n

In this article (February , 2012) – Fiscal policy: What does ‘Keynesian’ mean?<\/a>, Jonathan Portes said that:<\/p>\n

\nNobody, and I mean nobody, really believes that it is impossible by definition for fiscal policy to affect aggregate demand.\n<\/p><\/blockquote>\n

Well it all depends on what one considers to be an “affect” – direction and size of impact, temporal period being considered etc. There are many who think fiscal policy has not short-run positive impacts. There are others who argue that fiscal policy might provide short-term boosts but in the long-run these disappear. There are others who claim that fiscal stimulus is always damaging.<\/p>\n

Fiscal austerity is predicated on the view that, while short-term losses might be incurred (the most reasonable concede that) the medium- to long-term benefits are positive.<\/p>\n

So there are lots of different views on this that divide the profession.<\/p>\n

Rather curiously, given his previous remark, Jonathan Portes then (selectively) quoted from the 2010 UK Budget suggesting that the doctrine of ‘expansionary fiscal contraction’ had been embraced by the British Treasury. The quoted portion was:<\/p>\n

\nThese [the wider effects of fiscal consolidation] will tend to boost demand growth, could improve the underlying performance of the economy and could even be sufficiently strong to outweigh the negative effects.\n<\/p><\/blockquote>\n

He suggested that the “Treasury has not as far as I am aware repeated this argument, since the evidence shows precisely the opposite” and then argued that the Treasury had been debunked by bodies such as the IMF who he quoted as saying “Fiscal consolidation typically lowers growth in the short term”.<\/p>\n

I have dealt with the folly of Ricardian equivalence extensively in a number of blogs – Pushing the fantasy barrow<\/a> – Even the most simple facts contradict the neo-liberal arguments<\/a> – Deficits should be cut in a recession<\/a> and We are sorry<\/a>.<\/p>\n

But I found all that to-ing and fro-ing by Jonathan Portes to be rather curious because when I read the first Tory Budget delivered by the current Chancellor in June 2010 (just after the election), there was a section – Box 1.3 Economic impact of fiscal consolidation<\/em>, in Chapter 1<\/a> – that said:<\/p>\n

\nThe overall economic impact of fiscal consolidation depends on the combination of:<\/p>\n