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Gems from John Lanchester:
In the October edition of its regular World Economic Outlook, the IMF studied the question and announced that governments had been basing their calculations on the effects of austerity using a multiplier of 0.5. So for every £1 billion removed from government spending, GDP would contract by £500 million. The IMF looked at the relevant historical data, and concluded that the real multiplier for austerity-related cuts was higher, in the range of 0.9 to 1.7. So that same package of £1 billion in fact removes as much as £1.7 billion of output. This was a jaw-dropping thing to discover, not just because it was surprising in itself, and because it explained the surprising-to-governments economic damage being done by austerity packages, but also because the people saying so were the IMF. . .
. . .The fact that the people in charge of recommending huge cuts in public spending don’t, at this basic level, fully understand the economic effect of those cuts, is surprising only if you’re unfamiliar with just how little certainty there is in the world of macroeconomics.
If the objective is to deflate a bloated government, precision austerity that is heavily monitored works. If the objective is to shore-up the economy and increase employment, austerity is idiocy.
Full text of review here:
http://www.lrb.co.uk/2012/12/21/john-lanchester/lets-call-it-failure
Happy New Year all – which is pronounced ‘twenty thirteen’ here in the US.
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@GarySFBCN wrote:
Gems from John Lanchester:
In the October edition of its regular World Economic Outlook, the IMF studied the question and announced that governments had been basing their calculations on the effects of austerity using a multiplier of 0.5. So for every £1 billion removed from government spending, GDP would contract by £500 million. The IMF looked at the relevant historical data, and concluded that the real multiplier for austerity-related cuts was higher, in the range of 0.9 to 1.7. So that same package of £1 billion in fact removes as much as £1.7 billion of output. This was a jaw-dropping thing to discover, not just because it was surprising in itself, and because it explained the surprising-to-governments economic damage being done by austerity packages, but also because the people saying so were the IMF. . .
. . .The fact that the people in charge of recommending huge cuts in public spending don’t, at this basic level, fully understand the economic effect of those cuts, is surprising only if you’re unfamiliar with just how little certainty there is in the world of macroeconomics.
If the objective is to deflate a bloated government, precision austerity that is heavily monitored works. If the objective is to shore-up the economy and increase employment, austerity is idiocy.
Full text of review here:
http://www.lrb.co.uk/2012/12/21/john-lanchester/lets-call-it-failure
Happy New Year all – which is pronounced ‘twenty thirteen’ here in the US.
He pin points some nice things about how politics works and that reductions in government spending is in reality only lowering the levels of how it grows. Exactly what critics critized both parties in the US when they brought up some scams about those supposed cuts.
1. GDP Is a faulty way of measuring of how well off a nation is. Governments likes it because it means lots of extra tax revenues which gives them more room to spend it unwisely. That tenner would be a penny after a few transactions. The broken window fallacy explains this together studies on how useless government spending is compared to private spending.
2. IMF can not be trusted which have been proved time and time again. They have been one of the biggest culprit in where we are today. They are only there to secure the FEDesters and few other vested interests. Iceland did almost the opposite of their “demands” and they are way better off than for example Ireland. Look at who owns the IMF and the world bank and who funds it and you will understand it’s motives. They love bailouts of their loving owners on the tax payers salaries. Idebted people work harder and complain less to a certrain level.
3. There are lots of studies that shows that every unit that the government spends it’s done very badly. There is one area where the government actually doesn’t waste that much and that is on infrastructure. Take point 1 in account and one of the best way to make the economy better is to limit the involvement of the government.
4. That the government becomes poorer doesn’t mean that the population becomes less wealthy rather the opposite some might argue.
5. Growth in the way we have seen in the last couple of decades will never be seen again because it’s been based on mortgaging future generations and basicly stealing value from poorer nations. Those poorer nations have gotten smarter and future generations will not put up with it anymore… mostly because they can see that the government loaning more money will be spent unwisely. Real honest growth can only occur by a nations private sector becoming more effective in producing stuff either through knowledge/technical breakthroughs. The whole western world will not be able to freeride anymore.
6. The UK and a few other countries can survive a while longer by printing more money but as soon as they stop or the populace gets tired of endless inflation they are back to square one again. It’s in reality just transfering wealth from the poorer to the banksters. Here you can talk about the multiplier effect when it comes to how banks drive on inflation. The closer you are are in the chain to the banks or the governments the less you will be robbed. Idebting other nations by wars and non fair trade and forcing them to hand over valuable commodities for stupid FIAT-currency won’t work forever. External debt levels per GDP together with debt level per GDP can be used to figure who will be worse off. http://www.usdebtclock.org/world-debt-clock.html.
Austarity will ofcourse in the shorter term limit growth but it’s only because it lowers how much future generations will be mortaged. It will further down the road lead to real growth which leads to a more prosperous society in general.
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Excellent analyses Ardun.
Last year a declassified IMF paper written by one Guillermo A. Calvo, and entitled “Is Inflation Effective for Liquidating Short-Term Nominal Debt?”
It suggests that if a country devalue it’s currency by a sufficiently large margin to convince markets there would be no further such moves it would have the effect of reducing it’s debts with hyper inflation and lower nominal interests rates.
I have a gut feeling that in Washington, faced with the enormity of the national debt this option may on the face of it look quite attractive. In these recent fiscal cliff negotiations the American politicians have shown they are equally inept as their European counter parts in dealing with what really needs to be done and simply kick the can down the road. In the case of the US the road is a very short one and my long held faith in the US Dollar has now consequently evaporated.
Devaluation of the US Dollar would of course send shock waves around the world and there would be many other associated difficulties and risks. However for the US it seems to me it’s the least worst option to finally get to grips with an unsolvable dilemma.
You can read the paper here. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=884512
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In these recent fiscal cliff negotiations the American politicians have shown they are equally inept as their European counter parts in dealing with what really needs to be done and simply kick the can down the road. In the case of the US the road is a very short one and my long held faith in the US Dollar has now consequently evaporated.
Actually, the lesson learned is that the Republicans are idiots, a party divided by strident ideology. Obama’s original proposal had more than $2.4 trillion in cuts and $1.6 trillion in new tax revenue. Obama also floated some trail balloons for the Republicans to seize: Reducing increases in Social Security, decreasing the amount of tax revenue and in general, he was looking for negotiation with Republicans. But what we all discovered is that the Republicans could not even support an all-Republican plan, called Plan B and proposed by the Speaker of the House. Because the Republican leadership did not lead, they didn’t get anything, no net deficit reduction, something that Obama wanted.
Long story shortened, if idiot Republicans still have some control (note: this is not all Republicans), there is little hope of having reasonable economic policy emerge.
However, what gives me hope is this: It is true the Republicans retained control of the House in the last election. But what isn’t discussed is that they lost seats in the last election, plus they lost seats in the Senate, which remains in control of the Democrats and of course, Obama won. And they will lose more in 2014 if they continue on this path. But what this means in 2013 is that instead of the House Democrats needing 49 Republican votes for anything, now they only need 18 Republican votes. This, combined with Obama’s successful use of the ‘bully pulpit’ will ensure that the Speaker of the House will introduce bills for consideration.
The Republicans have one more chance to rescue their ‘brand’ and help the US economy: The debt ceiling. If they choose to indulge their more extreme members and screw things up, your assessment of the dollar will hold. But if they wake up to reality, the dollar with strengthen and the Republican brand will be less tarnished.
While this spat was ugly and idiotic, it still pales to what is happening in the EU. I don’t see the euro emerging as a highly-sough currency anytime soon. Actually, I wondering just what will happen when the Spaniards, who are tired from the inequity and stupidity in their own government, let alone the euro policies, turn to revolution to solve their problems.
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Gary you are making a great point about the republicans. They are trying to use this situation to win support but I think most people are seeing right through it. My republican friends which are quite few compared to how many of them that are democrats are very angry about how “their” party is acting but they are not the norm of their voter base either. I would class them as fiscal conservatives.
I don’t like Obama that much but if I had to choose between him and most of the republican party I much rather have him at the helm and that’s how the voters seems to have seen it too.
I’m not going to protect the EMU since it was setup in a naive way from the start but they have at least tried to stay away from just trying to inflate their way through this ordeal but since how huge the gaps are between the different nations in the eurozone I have a hard time understanding how they will manage to keep it together because of public preassure. People shouldn’t be angry with Merkel because of her stance but angry at these supernational bankers trying to enslave them. In theory though I wouldn’t be opposed of union but much further down the road. Starting with grouping similar economies together for a minimum of 20-30 years.
The US is the IMFs biggest lender together with all other bank heavy nations and they have everything to gain from ensuring that their nations banks investments are secured/survive on other nations tax payers cost though it’s those banks that should go under. If they succeed it will be the biggest scam ever taken place.
Ireland and the UK are the ones that will take the heaviest hit if these bailouts doesn’t occur. If you from an egoistical stand point wants whats best for you as a tax payer in either of these nations you should be cheering the IMF and the bankers on but I hope even tax payers in these nations agree upon that it shouldn’t be done.
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If you from an egoistical stand point wants whats best for you as a tax payer in either of these nations you should be cheering the IMF and the bankers on but I hope even tax payers in these nations agree upon that it shouldn’t be done.
And you hit on just why an “inflation solution” will not work. Many people suffer a lot when inflation is high. It is much better to look for other policies that consider the long-term goals of erasing debt, creating jobs and having a robust economy, but that also consider a ‘suffering index’ to gauge who will be affected, how severely they will be affected for what the long-term effects will be.
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I agree ‘the inflation solution’ is not a great idea and I’m not particularly in favour of it. Debt reduction and fiscal conservatism is a more sustainable option in the long term but given the crisis we inhabit, politically it may be time for more ‘none standard’ measures as Trichet once coined.
In fact many ordinary people stand to gain from the inflationary route as asset prices rise but an equal number I admit would lose. If austerity condemns nations to years of misery and social unrest which is the inevitable consequence the idea must be tempting for politicians in danger of losing their grip on power. The inflationary route would also create a degree of misery but it may be more short lived and contained.
Governments seem to have few other ideas other than austerity and political extremists will gain more authority and credibility the longer it continues. UKIP has already forced DC into making moves to change the UK’s status within the EU. The extreme left in France gained power and are currently making a complete horlicks of government. The fascists are close to power in Greece and in Spain the current government are looking increasingly authoritarian.
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Governments seem to have few other ideas other than austerity and political extremists will gain more authority and credibility the longer it continues. UKIP has already forced DC into making moves to change the UK’s status within the EU. The extreme left in France gained power and are currently making a complete horlicks of government. The fascists are close to power in Greece and in Spain the current government are looking increasingly authoritarian.
What needs to happen is that we regain control of our governments. They should serve us, the people, and not banks, not ideology, not the highest bidder. I live my life with optimism but I’ve never been anything but pessimistic about the state of the world and ‘the future.’ But that has changed. It seems that here in the US we are finally maturing (politically), and the next two years will be quite interesting. I predict that this is taking root in many parts of the world and certainly, Europe is ripe for something like this.
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2. IMF can not be trusted which have been proved time and time again. They have been one of the biggest culprit in where we are today. They are only there to secure the FEDesters and few other vested interests. Iceland did almost the opposite of their “demands” and they are way better off than for example Ireland.
Sorry, thats bullshit, a nice fantasy to fit your theories but completely untrue. Iceland did exactly what the IMF told them to do and the IMF approved of Iceland’s actions re: capital controls. The capital controls are a very drastic solution (and illegal) but Iceland had no choice. However, Iceland is ****ed. It cannot find a way to remove the capital controls and allow a free floating currency and the distortion is causing long term damage to the economy.
Ireland is starting to recover, its certainly got a beter future than Iceland as at least its got a convertible currency.
Blaming the IMF medicine as the cause of the disease is quackery.
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@peterhun wrote:
2. IMF can not be trusted which have been proved time and time again. They have been one of the biggest culprit in where we are today. They are only there to secure the FEDesters and few other vested interests. Iceland did almost the opposite of their “demands” and they are way better off than for example Ireland.
Sorry, thats bullshit, a nice fantasy to fit your theories but completely untrue. Iceland did exactly what the IMF told them to do and the IMF approved of Iceland’s actions re: capital controls. The capital controls are a very drastic solution (and illegal) but Iceland had no choice. However, Iceland is ****ed. It cannot find a way to remove the capital controls and allow a free floating currency and the distortion is causing long term damage to the economy.
Ireland is starting to recover, its certainly got a beter future than Iceland as at least its got a convertible currency.
Blaming the IMF medicine as the cause of the disease is quackery.
LOL did I say they did everything right?
Iceland got trashed for what they did but you seem to have forgotten about that. What they did was not guarantee any of these bonds that these private banks issued. A figure that was around 11-15 times their countrys GDP. They let their banks fail and never injected any capital.
They have made misstakes after that but that’s not what this was about.
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