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Not Even Keynes Can Help Us Now Vs The fatal error of austerity

The famous economist’s guidance about how and when governments should spend money doesn’t seem to apply to the current moment.

High rates of inflation around the world have pretty much ended the popularity of MMT, or Modern Monetary Theory, and its proposition that sovereign governments can spend as much as they want. 

But current economic conditions also call into question the usefulness of a much more established and accepted theory: Keynesian economics.

The recent history of the UK government is a paradigmatic example. Under Prime Minister Liz Truss, the plan was to boost spending on energy subsidies and cut some taxes. Whatever else you might say about the details of those policies, they did fit the Keynesian recipe for fiscal expansion in tough times (though it is noteworthy that many leading Keynesian economists strongly opposed them).

The problem is that markets didn’t like the policies, and the British pound fell and borrowing rates on government bonds rose. Financial markets were roiled, and now the Truss days are over.

A final problem is that rates of inflation are likely to stay relatively high for some while to come. I am relatively optimistic about the ability of many Western economies to get inflation down to the range of 3% or 4% within a few years. 

Tyler Cowen Bloomberg 14 november 2022


The fatal error of austerity

Here we go again. The Office for Budget Responsibility (OBR) has discerned an enormous deterioration in public finances

Upon this macroeconomic conjecture, it is bouncing the British Government into pro-cyclical fiscal tightening just as the country enters what is forecast to be the most protracted slump since the Great Depression

They deserve our national gratitude for eliminating the sovereign risk premium on the Truss mini-Budget but they now risk committing the greater and longer lasting error of Austerity 2.0. 

Let us clear up one misunderstanding before it becomes lodged in the public discourse: the UK does not face a sovereign debt crisis, any more than it faced the “Greek” fate alleged by Mr Osborne in 2010.

It is beyond depressing that the dismal Treasury View is once again in the ascendant, and worse yet George Osborne’s austerity overkill is being dusted off as a successful template. 

Is there no recognition in Treasury circles that this episode is viewed by the global economic fraternity as an awful misadventure, a policy error on a par with the self-defeating fiscal retrenchment of the 1920s, but without the excuse of pre-Keynesian ignorance or the Gold Standard.

Dario Perkins, a former Treasury official now at TS Lombard. “It is all absolute nonsense. We have tried a decade of austerity and if they seriously do it again, they will be unelectable for a generation,” he said.

Chancellor Jeremy Hunt has even gone so far as to recruit the architect of that fiscal squeeze, Rupert Harrison, to help formulate Austerity 2.0.

There is a revealing conversation with Mr Harrison in Aeron Davis’s new book on the Treasury – Bankruptcy, Bubbles, and Bailouts – that captures what happened. 

Indeed, the fiscal squeeze from 2010 to 2015 never had anything to do with economic science. It was an ideological use of the global financial crisis to shrink the state, creating the OBR along the way as a screen of policy legitimacy, and all dressed up with the discredited theory of “expansionary fiscal contractions”.

Ambrose Evans-Pritchard Telegraph 15 November 2022 

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