In Focus

Austerity versus growth (again)

Friday March 01, 2013 Dr Ganesh Nana

I often wonder why there is not a much louder call from the populace for an apology from economists given the mess that is the global economic system.  Curiously, some economists still wield significant influence in the corridors and power – influence that also continues to be possessed by institutions that were close to the centre of the latest debacle.

 

Yes, we all make mistakes. But, the likelihood of repeating the mistakes of the past should, rightly, haunt economists.

So, while I wonder, I’m not really that surprised.  Indeed, I am reminded of Keynes parting shot in his General Theory

 

“... the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood.  Indeed the world is ruled by little else.  Practical men, who believe themselves to be quite

exempt from any intellectual influences, are usually the slaves of some defunct economist.”


Officials and economists accept plaudits, and rightly so, for avoiding a catastrophic depression that was staring us in the face in late-2008 and through 2009.  But, an apology that we got so close to total implosion wouldn’t go amiss.

 

A particular example that frustrates is the ongoing austerity versus growth debate.  I believe it appropriate to apologise that we still haven’t settled this one yet.  But its presence is probably a fair reflection of why some (many?) economists still cling to the precepts they held dear since about, say, 1980.  That is, our reluctance to learn from history, against a preference to remain with one’s textbooks.  Yes, we all make mistakes.  But, the likelihood of repeating the mistakes of the past should, rightly, haunt economists.

 

One would have thought that the austerity versus growth argument was well settled in the immediate aftermath of the 1930s debacle.  But, unfortunately there remain a body of economists, officials, advisors, and the like that continue to believe that bad-tasting medicine is the only way to force misbehaving children to see the error of their ways.

 

And so, despite, innumerable debates, meetings, papers, threats, and deals, European powers continue to dispense the austerity medicine.  Unfortunately, there is a fairly overwhelming flaw in their strategy.

 

Those being made to swallow the medicine may not have been those that misbehaved in the first place.  And with austerity showing through as youth unemployment rates in excess of 50% in some areas, the costs of austerity this time around are set to be with us for the next generation (at least).

 

It is indeed ironic that the austerity faction remains strong within European institutions.  One of the strongest arguments against austerity would be to ask “How did Europe recover from the catastrophic damage post-WWII?”  It was not an austerity program.  Actually, I find it difficult to name an economy, area, or nation that has become prosperous on the back of an austerity program.

 

Strong and concerted programs of public and private sector investment in infrastructure, new technology and training tend to be at the core of recovery and step-changes in outcomes for economies.  Examples range from the investment in railroads that pushed the United States frontier westwards, the New Deal in the United States of the 1930s, the Marshall Plan reconstruction of post-WWII Europe, the development of Japan in the 1950s/60s, and to the more recent investments in communications, transport, and energy across Asia that has seen that hemisphere rise to become the growth engine for the global economy.

 

 

Sadly, the austerity versus growth debate (albeit a paler version) continues within New Zealand officials, commentators, and decision-makers.  Its clearest reflection is in those that believe the government balancing its books is our best contribution to the nation’s recovery program.

 

The counter evidence is crystal clear.  The late-1980s/early-1990s return to government budget surplus didn’t put the economy onto a sustainable growth footing; nor did the government surpluses recorded over the 2000-2008 period.  Now the latest incarnation is set to fail, again, as the nation’s current account is predicted by Treasury to sink further into deficit and, consequently, see the nation’s debt balloon further.

 

To err may well be human; but, to not learn from past errors is just plain unprintable.