Thursday, 8 March 2012

That’s not “austerity,” dickhead. *This* is austerity, and it works.

New York Times columnist Paul Krugman, from whom Bernard Hickey* and Gareth Morgan seem to learn their alleged economics, reckons the British government’s “austerity” programme has hindered Britain’s recovery—that if it had followed instead the profligate deficit spending model it did in the 1930s, that it might have enjoyed seeing recovery in the four years it did then.  Says the dickhead:

_Quote5It turns out that by one important measure — changes in real GDP since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British GDP had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.… Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy. And it's a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

The difficulty for this analysis is that it’s both wrong in fact and wrong in theory.  In short, it’s a fiction. A complete pack of lies. Let me explain.

The first point to note is that on the two occasions he cites, Britain has followed precisely the opposite  approach to the one he describes.

Despite some very modest spending cuts [records Sean Rosenthal at the Mises Daily], it is now taxing more and spending more than it ever did. Although British spending as a percent of GDP fell mildly from 51.1 percent in 2009 to 49.8 percent in 2011, this level still signifies a massive increase in spending from 2007 levels of 43.9 percent of GDP. Similarly, although the British deficit as a percent of GDP fell from 11 percent in 2009 to 9.4 percent in 2011, this deficit still amounts to a huge surge compared to the 2007 level of only 2.8 percent and, with the exception of this recession, exceeds all other deficits in Britain since World War II.

This is not austerity. And in the 1930s it reduced spending, balanced its budget and lowered its debt. To be precise:

After leaving the gold standard in 1931, the British government balanced its budget and reduced spending as a percent of GNP every year until 1935, reducing government spending from a high of 28.8 percent in 1931 to 24.4 percent in 1935.[1] Although not ideal — because part of the reduction included tax increases — this policy succeeded in creating small budget surpluses every year from 1929 through 1936…

This is not deficit spending.

To grasp this first point then: the historical record is precisely the opposite to the one this lying sack of shit Nobel-Prize-winning laureate describes.

imageThere is one point however that the lying sack of shit Nobel-Prize-winning laureate does get right however: Four years into the Depression, the British economy had indeed regained its previous peaks (even while the deficit-spending US was about to go into another trough).

But this recovery--in Britain as in Canada, Australia and NZ—and in the US in the now-forgotten 1920/21 Depression—was not begun by the prescription of profligate deficit spending proffered by this Keynesian crank. It was due to the very austerity he writes to decry.**

* * * * *

* Bernard Hickey maintains NZ’s newly minted Reserve imageBank began money printing in 1936 to build houses, and this not only put a roof over every head and a steak on every plate it was the singular cause of NZ’s economic recovery.
The trouble for this  lying sack of shit second-rate business columnist is the same as it is for Mr Krugman: the facts simply don’t bear his story out.
The fact is, as the table above and graph below suggest, that the Commonwealth countries were already heading out of the Depression when the First Labour Government and Reserve Bank began their experiment (real GDP in 1933, before the Reserve Bank had been invented, had already exceeded the figure for 1929), and the local recovery continued despite (not because of) the Reserve Bank’s irresponsible paper printing producing an inflation rate of around fourteen percent!
Here as elsewhere, the reason for the recovery was not profligacy, but austerity.

* * Thus, in a different world, we might say with more authority than the lying sack of shit Nobel-Prize-winning laureate, that had the prescription of austerity actually been followed today here and elsewhere we might have seen recovery in February 2009!

* * * Just for the record, or perhaps for the enlightenment of Messrs Hickey, Morgan, Tom Cobley and all, here below are seven methods by which to delay recovery. All of which have already been followed! 

When markets need to correct, when real savings are being consumed on malinvestments that urgently need to be closed off, then here's what you can do to make sure the necessary correction won't happen:

  1. Prevent or delay liquidation by propping up shaky businesses and shaky credit positions.
  2. Further inflate the money supply, creating more malinvestments and delaying the necessary correction.
  3. Keep wage rates up --or keep money wages constant when prices start falling (which amounts to the same thing) -- which in the face of falling business demand is a sure recipe for unemployment.
  4. Keep prices up (by means of the likes of green-plated building regulations) or add new costs to struggling businesses (such as the dopey Emissions Tax Scam), delaying the necessary corrections that will make businesses profitable again.
  5. "Stimulate" demand by spending on "infrastructure" projects just to make it look like the government is doing something -- when what that something actually does is to take money from profitable businesses in order to bid resources away from struggling businesses.
  6. Discourage saving and investment by increasing government spending (all of which is consumption spending) and maintaining high tax rates.
  7. Subsidise unemployment with make-work schemes paid out of money from profitable businesses that bid resources away from struggling businesses, delaying the shift of workers to fields where genuine jobs would otherwise be available.

As Murray Rothbard points out in America's Great Depression (from which I draw the above seven points) when you list logically the various ways that government could hamper market adjustments and hobble the adjustment process, you find that you have precisely listed the favourite "anti-depression" arsenal of government policy—and of lying sacks of shit.

But then, stimulus is really motivated by economics, but politics.



  1. If I was as much a misanthrope as Krugman, Hickey, et al, I'd advocate that Western governments should continue to follow their prescription, knowing that it will hasten the inevitable complete economic and social collapse, because it will bring about the opportunity to build a free, prosperous world from the ashes.

  2. The problem with that Kiwiwit, is that from those ashes it is normally despotism that arises.

    In almost all cases colapse is followed by communist/socialist/national socialist/fascist government.

  3. You are right Dolf. History shows us that human advancement moves towards freedom and rationalism over the long term but with ups and downs along the way. As I say, I am not a misanthrope so I agree that total collapse and the despotism that arises in the short term is a steep a price to pay for ultimate freedom. The problem is, Western governments are as hellbent on getting there anyway and sometimes you just want to get it over with. I imagine Churchill felt like that in the 1930s.

  4. Not opnly that but the UK is starting to see the first growth in the manufaturing sector and reduction in its trade deficit in years and jobs being transferred from the public to the private sector.
    Even if the current austerity measures are not austere enough, they are having a positive effect.

  5. Just one query on item 5 (infrastructure development): I would expect sensible projects such as motorway extensions to aid the economy by reducing transport costs etc & providing work for existing assets (machinery & skilled staff). I'm not talking about braindead projects such as Len's rail loop, but things like the Newmarket viaduct improvements and the SH16/SH18 extensions. I also realise that in boom times the aforementioned assets will be in demand, but not so much in a recession.
    Please correct me if/where I'm wrong.

  6. I agree it is political rather than economic.

    Governments struggle to slash spending, because you inevitably throw some of the baby out with the bathwater, it is bad for morale for the armed forces, as it is for the public servants. Slashing too quickly and deeply can be detrimental. Slow and steady efficiency gains, moving the ball forward an inch at a time is what is needed.

    The UK have instead printed money and talked up their austerity to appease the markets about their astounding levels of debt. Arguably their austerity is really about not increasing spending at previous rates rather than reducing it. With lower tax take in a slower economy, with more demands on the welfare system, even maintaining a target of no increases in spending feels like austerity.

    The printing has worked in the sense that the pound has dropped in value significantly, reducing the buying power of the consumer, and making British manufacturing more competitive compared to the rest of Europe and Asia.

  7. In almost all cases colapse is followed by communist/socialist/national socialist/fascist government.

    Please explain how NZ's government differs from a
    communist/socialist/national socialist/fascist government.

    The PM openly admits NZ's current policies are Communism (sure by stealth, but still communism).

    Apart from marching people in to the gas chambers, how could NZ actually be any worse after the revolution?

    No schools for bludgers, no dole for bludgers, no codger-dole, no mommy-dole --- hell all of that is progress! No more "free" health! that's what needs to happen in NZ - and it will happen one way or the other!

    I would expect sensible projects such as motorway extensions to aid the economy by reducing transport costs etc & providing work for existing assets (machinery & skilled staff).
    Please correct me if/where I'm wrong.

    Where you are wrong is considering roads as "assets". They are liabilities that cost us billions every year just to maintain. Private for-profit road-building would be something quite different.