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Hullabaloo


Monday, January 28, 2013

 
Do exactly the opposite of what your gut tells you

by David Atkins

Can we all just admit that austerity doesn't work?

The U.K. economy shrank more than expected at the end of last year, leaving Britain at risk of its third recession in four years and putting more pressure on the government to ease austerity measures as it tries to turn around the country's economy.

Official figures published Friday showed gross domestic product fell 0.3% in the fourth quarter of 2012 compared with the third, due largely to a drop in mining, quarrying and manufacturing output. The consensus among many economists was that the economy would shrink by 0.1% on a quarterly basis. Annual economic growth was flat, even as nations such as the U.S. and Germany show signs of growth.

Obviously, government spending cannot increase ad infinitum and deficits can have dramatic negative consequences if allowed to spin violently out of control. But the very last time to curb either is in a recession. This is a point Paul Krugman has made again and again, but it doesn't seem to resonate.

Human beings are simple-minded creatures. Even--and especially--those at the elite levels of finance and government. Moving beyond simple venal and greedy efforts by a great many elites to use deficits as an excuse to bolster their own obscene wealth, there are a significant number of Very Serious People who do truly believe in the austerity nonsense as beneficial for an economy to avert long-term collapse.

The rapacious greedheads cannot be reached, of course. But to those ill-informed but well-intentioned people whose concern about deficits comes from heartfelt good will, here's the deal: when it comes to deficits and government spending, the key is to do the opposite of what your gut tells you.

When there's a recession, contraction in GDP will cause deficits to soar. Your gut will tell you to panic and contract spending. This is in fact the opposite of what you should do. It is in recession that spending must increase and some demand-focused taxes be cut, even if it seems wildly irresponsible in the face of growing deficits.

When there's an expansion, by contrast, your gut will tell you to let it all hang out, give people their money back in the form of tax cuts, and ride that rocket to maximum prosperity. Again, this is the opposite of what you should do. It is precisely in boom times that excess spending should be trimmed and taxes be raised, in order to curb deficits that will otherwise be potentially problematic during the next recession.

This is called countercyclical fiscal policy. You should have learned this in Economics 101, but forgotten it when your Chicago School professor declared it hogwash in the era of Milton Friedman and permanent growth. Countercyclical fiscal policy is correct. Austerity during recession doesn't work. Feeding the bubble monster during periods of growth is disastrous.

Basically, you should do pretty much the opposite of what your gut and everyone from the University of Chicago economics department tells you to. Unlearn what you have learned. And until you do, please stop jabbering on the teevee. It's unbecoming, and makes you just a tool of the rapacious greedheads who do know better and are using deceptively intuitive procyclical arguments to line their own pockets.


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