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The Forum > Article Comments > Austerity and growth can coexist > Comments

Austerity and growth can coexist : Comments

By Samuel Clench, published 25/6/2012

Krugman et al are indifferent to the plague of debt sweeping across the continent, and ignorant of Keynesianism's historically lukewarm results.

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The lefty economists just don't get it. The party's over, it's austerity or World War 3, take your pick - as if we've evolved so much in 80 years to not be pissed off when other people take our property and wealth, lol.
Posted by progressive pat, Monday, 25 June 2012 12:27:15 PM
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Austerity and growth cannot coexist.
If you've ever run a business, you'll understand that less customers with more frugal spending patterns affects the bottom line; and always will, regardless of the eternal prognostication of ivory tower dwelling academics, with heads chock-a-block-full of untried, untested intellectual concepts.
I'd have more respect if those bagging Keynesian economics actually understood it, or indeed, the period of unprecedented post war prosperity it ushered in! [Well, the Great Depression was created by too much of our finite wealth winding up in too few hands!] Ditto the more recent GFC!
Post war Japan was patently in a far worse position than any part of comparable Europe today, yet it went on utilising Keynesian socialistic principles,[cooperative capitalism comrade, and cradle to the grave care and commitment] to not just recover, but become a powerhouse economy, the second largest in the world.
It basically stumbled and fell when it replaced superior Keynesian economic principles, [cooperative capitalism,] with dog eat dog extreme exploitive capitalism.
There is a way out for Europe and maybe the USA.
Europe needs to set aside the debt created by derivatives or the trillions it can't possibly ever repay.
Then increase tax revenue, through the imposition of an entirely unavoidable expenditure tax. 5% of all expenditure, [no exceptions or exclusions,] ought to collect more revenue.
This will end the need for costly compliance and free up scarce income, for business expansion or consolidation.
Bailing out private banks out with 3% loans, that then incur a 7% impost for the lender/taxpayer, is more of the madness that must simply stop.
Govts need to nationalise their banks, to at least keep them in the game or finance business!
They also need to live within their means, and inject any and all surpluses into income earning infrastructure projects.
Unfinished buildings etc, ought to be finished as work for the dole projects and tenanted. Low rents/low cost holidays etc. And rent returns can be improved with the economy.
50% of something is far better than 100% of the nothing these empty unfinished buildings/projects are earning now! Rhrosty.
Posted by Rhrosty, Monday, 25 June 2012 12:52:02 PM
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Samuel said;
So if the current austerity policies have failed, and stimulus is an
equally ineffective option, what is the answer to this growth puzzle?

Unfortunately, almost all economists are unaware of the cause of low
growth. As you say they have tried austerity and pixel money in very
large amounts all to no effect.
They are still flapping around trying for an answer.

As a very few economists have pointed out the cause of low growth is
not money but energy.
Without a surplus of energy you cannot have growth and without growth
you cannot pay interest and repay capital. This the bind that Europe
and the US have got themselves into.

Crude oil production peaked in 2006 according to the International
Energy Authority and while the US, Europe, as well as Australia have
reduced their demand, demand in other areas has increased.
Since 2006 oil production has been around 89 million barrels a day.
At sometime in the next one to five years annual production will
start to fall. An alternative might be that demand due to worsening
economic conditions will reduce demand further.

Either way growth cannot be increased and is more likely over the next
couple of years to contract below zero.
Posted by Bazz, Monday, 25 June 2012 2:35:53 PM
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Samuel, you cite Germany, Sweden and Switzerland as three examples supporting your argument. Germany enjoys an effective devalued currency through the euro, hence it's export success. Switzerland is not part of the eurozone but did fix its exchange rate recently to avoid the currency appreciation (and consequent damage to its industries) that Aust is experiencing. Sweden is also not part of the eurozone and had its banking crisis (real estate crash) in the early 1990s; it emerged from that with a stronger banking system by not supporting zombie banks (unlike the USA, Japan and eurozone countries) but through regulation & reorganisation.

The unspoken premise that austerity will lead to growth is based on the simple assumption that when the economy hits rock bottom and things are so bad that starvation & death is knocking on the door then people will work for a pittance so that the only way from there is up!

You need to read a little more - and get some life experience.
Posted by Thor Hammer, Monday, 25 June 2012 4:18:14 PM
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Hi Thor Hammer, thanks for the response.

You make good points about the cited examples, though there is easily room for both of us to be right.

You have assumed "an unspoken premise" that was left unspoken for good reason - I do not accept it. I was not arguing that austerity leads to growth, at least not in the short term. I was suggesting that austerity is necessary, due to the debt situation in Europe, but that it must be complemented with entirely separate pro-growth reforms. Otherwise growth will not eventuate.

Posted by SAM.C, Monday, 25 June 2012 7:14:01 PM
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Hi Sam,

Very well written article. You obviously have thought a lot about the issue. However, I think your argument misses a crucial point. With your focus on government debt etc. you do not address what caused the crisis in the first place.

It is not possible to treat all countries the same and assume the same medicine will cure what are effectively very different illnesses. In Greece, Spain, Portugal and other Southern European countries it is obvious that debt has reached unsustainable levels. However, this is not a result of the proliferate spending behaviour of governments and citizens as much as it is a result of the structural flaws in the Euro. As is argued in one of the above comments, Germany has benefited from a devalued currency, whereas Greece has struggled under an effectively overvalued currency. The answer to solving this structural problem lies certainly in promoting growth, but this will never happen until the structural problems of the Euro are fixed. The Germans will have to compromise as much as anyone if the Eurozone is truly to be saved.

In America and Britain the situation is very different. Their crisis was not caused by government debt but rather by the thing you seem to think will fix the problem - deregulation. In England massive deregulation of the finance industry, begun under Margaret Thatcher and continued under Blair, made the City and the whole country incredibly vulnerable to a finance and banking collapse. The country had no other competitive industries other than finance and banking so after 2008 its economy was left shattered with nothing to fill the gap.

In the US austerity would not be an appropriate response. It is true that the budget deficit is unsustainable and must be tackled, but this is a medium term goal. The US is not in the same situation as Greece. It can afford to borrow money and this will be necessary in the short-term. It did have an impact. It prevented the economy from going into the biggest depression since the 30s.
Posted by dora.the.explorer, Monday, 25 June 2012 7:44:37 PM
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