Stiglitz: spending cuts won't cure recession

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58 Responses to “Stiglitz: spending cuts won't cure recession”

  1. Xenu says:

    The problem with experts is you ask five of them and you get five different answers.

    And the problem with politicians is they don’t care to listen to the experts, unless the expert is a major campaign contributor.

    • Anonymous says:

      The problem with economics experts is that they’re wrong all the time, and nobody cares. If they weeded out ones who don’t match reality, the ones left would probably be in closer agreement.

  2. Tourbot says:

    I always see these comment approaching the subject as a black-white issue. In my opinion it is more of a male-female-hermaphrodite issue. While a good deal of it may be heterosexual, the homosexual, bisexual, transsexual, etc. components are left out. I think that there is an economic Mason-Dixon line (or maybe a Prince John-Robin Hood line, hereafter referred to as the John-Robbin line) in the economy that applies to government spending, tax cuts, and trickle theory. Money on the Robin side of the line tends to circulate and grow the economy. Money on the John side of the line tends to stagnate in ever increasing pools of wealth. The Robbins who get a small contract or tax break will spend it on materials and labor, or goods and services with people and suppliers who will in turn spend it on other Robbins. The Johns who get huge contracts or tax breaks siphon off large amounts of profit and invest in markets, bonds and commodities which don’t help the economy. A million purchase of a stock sits there and grows fatter without requiring more labor or materials to increase in worth. Only IPO investments inject capital into expansion in terms of equipment, facilities, jobs, and materials. It’s the same with the trickle theory. Money on one side of the John-Robin line will trickle down and fuel the economy. Money on the other will trickle up and choke the economy. That’s why in the 60/70′s a candy bar cost a dime, a car 2-3 thousand, a house 20-30 thousand, executives made 50 times a workers salary and there were millionaires. Today a candy bar costs dollar, a car 20-30 thousand, a house 200-300 thousand, executives make 500 times a workers salary and there3 are billionaires. On the one side of the John-Robin line things are ten to twenty times what they were in the 60/70′s on the other they are hundred to a thousand times what they were. I think it’s time to eat the rich.

  3. gummywerewolf says:

    Yet another BB topic in a short span where economic/political conservatives are out in full force, and they’re darn sure they know more than Krugman, Stiglitz, Shiller and other economists. In the US, consumer spending is 70% of the economy. Other than the wealthy, the rest of the economy is hurting– there is very low demand. If the government does not keep up spending, the economic death spiral will resume. As far as deficits are concerned, the immediate deficits are caused by lack of economic growth. With low/no consumer demand, cutting govt spending right now would put us in a nasty crunch. The comfortably affluent don’t see this though; they see a just-world outcome on their iPads and iPhones.

    • Notary Sojac says:

      “In the US, consumer spending is 70% of the economy.”

      That’s the -problem-.

      We are where we are right now as a result of ten years of taking on more and more consumer debt to (1) buy and sell houses from each other at insanely upward-ratcheting prices, and (2) buy more and more bling bling. (“Let your house work for you! Buy a boat, buy a Harley, take a cruise!”)

      Neither political party can claim any credit for trying to slow this process. They were both very happy to play Santa Claus, not in the least because they were and are both in the hip pocket of the banks who adeptly socialized their losses.

      We need a strategy to reduce the sector of our economy which is comprised of consumer spending, rather than keeping it artificially inflated.

      • turn_self_off says:

        problem is that the US economy dont do real production, it do IP renting to factories in asia that then do the actual production for sale in US and elsewhere.

        the asian workers may benefit from this in the long run tho, but US workers will loose out over time. The real winners are the merchants and IP “landlords”.

        Heck, thinking about it that way reminds me of this: https://secure.wikimedia.org/wikipedia/en/wiki/Tenant_farmer

        • Notary Sojac says:

          The deeper problem is that the US economy as it existed roughly 1945-1980 was due to a one time combination of circumstances, and it’s never coming back.

          Joe and Jane Sixpack are under the illusion that they are entitled to the same ever-increasing standard of living as they were when American manufacturing (1) bestrode the world and (2) was based on 1940-60 labor intensive methods.

          The GOP has tried to convince Joe and Jane that we can borrow and tax cut our way into keeping that gravy train rolling. The Democrats have tried to convince them that we can tax and regulate (and now borrow) to achieve the same thing.

          Both are wrong. I suppose it’s futile to hope for any political candidate to tell America that we’ve been living off the seed corn for quite a while now, and it’s time for the pain.

  4. gummywerewolf says:

    Amazing that some believe that higher unemployment (which is a given if spending decreases) can be effective policy for paying down personal debt. How many of you people think you could pay off your debts when you’ve got no job and there are 5+ job-seekers in the market for every open position? By the way, an unemployment check is about 30% of your present salary.

    High unemployment exacerbates the weak consumer-demand problem (and puts the formerly employed on public assistance). Which leads to lower GDP and lower tax revenues to the government. And the ever-weakening consumer demand perpetuates the downward cycle. Government cuts right now reduces GDP, which makes our GDP to debt ratio even worse– and the finanicial markets aren’t going to reward us for that.

  5. danegeld says:

    Under the policies of the last government, the national debt of the UK was growing to exceed the GDP of Britain, which is clearly an untenable position – either we would need to default on our debt and devalue the currency, or we would have effectively sold the country to our creditors.

    The problem is that all manufacturing is performed in the ex. soviet states in eastern Europe, in China, and in special economic zones in Malaysia, etc. where the workers can be forced to do things cheaply and in conditions that we wouldn’t accept in the rich west. Our standard of living is too high, we’ve gutted our country of most genuinely productive activity, and replaced it with busywork (the NHS document digitisation scheme), and financial services that add almost no value.

    George Osbourne may be driven by ideology, but the alternative of business as usual is not tenable – foreigners will stop lending, either before we devalue the pound, or after, or they will recall the debt and own everything of value in the UK.

    Basically, until Chinese workers demand roughly equivalent conditions, or we figure out how to manufacture on UK soil cheaply, and with working conditions that are acceptable to people who can’t be shot if they disagree, or we adopt regressive policies that lower our standard of living until we’re competitive with the far east, the problem will not rectify itself.

  6. tim says:

    national debt of the UK was growing to exceed the GDP of Britain, which is clearly an untenable position

    Is it? Many of us have mortgages, which would typically be a debt significantly in excess of our personal GDP. It doesn’t seem to cause catastrophe in most cases. I don’t think it’s the amount of debt that is the problem in and of itself, so much as the (perceived) ability to support that dept. If you do something that reduces that (perceived) ability I suspect you might get into all sorts of trouble.

    Of course, a sovereign body can always do something a bit more drastic than the average homeowner – say invade some other country, declare an empire, colonial rule, strip-mine the victim, er, colony, and $$$profit$$$!

    • danegeld says:

      If the borrowed money is spent on infrastructure that could enable the country to produce more in the future, there could be an argument for state borrowing, but I don’t think that was the case.

      in terms of $$$profit$$$, technology has made war too efficient – unlike the days when most of the map was pink, now places can defend themselves effectively.

      + we have this posturing morality that prevents us from simply sticking to the script of invading a foreign country and taking the assets – we can’t conscience being cast as the ‘bad guys’

      The Iraq war may have been a war about resources, but if so, we weren’t nearly ruthless enough.

    • scisco says:

      One difference I see between government debt and a mortgage is that a mortgages tend to be a one time creation. Government debts tend to be continuously created through promises that cannot be funded or revoked. A great example is to take a look at public pensions. Many states, if not all, are expecting a minimum return of 8% in their funds and the pensions are still underfunded. To make that 8% requires the taking on of enormous risk when a 30 year treasury is paying out ~4%. The shortfalls are staggering and cannot be raised by increased taxes. Reducing those pensions is considered by many politicians political suicide. Therefore, to eliminate the debt they have to fund the continuous expenditures and interest before they can even touch the principle.

    • Anonymous says:

      We already have the “mortgage” – that’s the current national debt. That’s not the real problem, the real problem is year upon year we aren’t paying it off, we are re-mortgaging and adding to our debt, deficit after deficit. Reducing this negative balance of payments each year means we can maybe, just maybe…. in 6 or 7 years time even think about actually earning more than we spend and putting that surplus into reducing the mountain of debt we have.

  7. dculberson says:

    I always find it difficult to swallow when someone says “increase the tax the economic activity that I do not participate in, and decrease it in the activity that I do participate in.” I.e. Stiglitz on real estate vs research.

  8. ZippySpincycle says:

    I worry that we may be facing a replay of 1937.

  9. Anonymous says:

    What has to go down, will go down.

    People arent spending as much money as they used to. This is because they are in massive debt. They are going to pay that personal debt down, and the government can either lower taxes, in which case people will pay down their debt sooner, or keep taxes high, where people will take longer to pay down their debt.

    Encouraging spending right now is pushing on a string.

  10. Anonymous says:

    furthermore, I must add its a bit weird to see typical liberals who, I assume, have a typical anti-materialistic attitudes (if not actual behaviour), and pro-green and all that, get worked into a lather about a reduction in spending!

    People are buying less! Shouldnt you all rejoice in this forced austerity? Arent we extending the planets life by keeping those Xboxs on the shelves?

  11. scisco says:

    Thank you dculberson, couldn’t say it better myself. I am sick and tired of speculators getting blamed for what has happened. First, no one knows the future but everyone is forced to guess it. So every time you pop a vitamin you are speculating that it will cause more good than harm! Or, by buying a GIC you are speculating that locking in your money for X years is better than putting your money in another investment/cash. Second, speculation has a very important economic activity, it attempts to even out future supply and demand. For example, when speculating in oil one can horde it for a later date. Yes the present cost of the oil is raised because the demand increased but if the speculation was correct, the oil can be sold as a premium in the future for a profit. However, despite the fact you are able to turn a profit, the overall cost for the oil is lower because the speculator has increased supply when it was needed more. If one speculates incorrectly then you are taken to the cleaners and the price is lowered even further because again, supply is increased by the speculator’s horde.

    • Ernunnos says:

      I agree, but this assumes that speculators don’t get bailed out when they speculate wrongly. At that point, speculation ceases to perform any function except wealth transfer from the public at large to a favored group.

      Privatize profit, socialize losses.

      This is, unfortunately, where we are today. In this environment, speculators are indeed the scum of the earth, and should be hung from the nearest lamp post, along with the politicians who allow it. Then maybe we can reclaim the terms “speculator” along with “capitalism” as positive terms. Until then, your time is better spent boiling rope than arguing semantics.

      • scisco says:

        Very true except why not go after the root of the evil. As you have pointed out, speculating where losses are socialized but profits are privatized is a major problem and I do consider it theft. I would go as far to say that any activity where in such a framework is unjust and should be abolished. Wouldn’t it be easier to curtail the ability to gamble with other people’s money than to go after each and every group or person that does so?

        • Ernunnos says:

          Who says the two are mutually exclusive? One of the purposes of punishment is deterrence. Laws only work to the extent that the majority follow them voluntarily. We don’t each have a cop following us around, and most of us don’t need one. We curtail our own ability to break laws. This gives the police more time to pursue the minority that do not.

    • Anonymous says:

      Speculators provide some function, but it’s not much compared to the cut they take. They aren’t the root of all evil, but I don’t see why speculation should be promoted over other activities, which is essentially how taxes work right now.

      Comparing it to vitamins is such a distant analogy, it looks almost disingenuous. Yes, you’re “speculating” when you take them. You’re also administering supplements to improve health, but that doesn’t make you a doctor.

  12. Anonymous says:

    “But in a national economy, if you cut back on your spending, then economic activity goes down, nobody invests, ”

    Stuck on stupid this is. The government isn’t the totality of investment. In many ways the government drives out normal investment because government investment doesn’t have the same strings (i.e. demanding results) that private investment has. This is just the usual socialist cant that never makes any sense.

  13. Anonymous says:

    Taxes remove money from the economy, money that could be spent on hiring and paying people, creating product and services, marketing products and services, etc. People can’t buy houses, cars, etc. if they don’t have income unencumbered by taxes. The only other option is to borrow and look where that got us. If this is the best quality of thinking Nobel winning Stiglitz can come up with the world is in deep problems. Reduce taxes, remove the crooks, and the economies will recover. Grow government and increase taxes and economic recovery will only happen when and where the bureaucratic elites wish it to happen. I’d rather march to the tune of my own drum, thank you.

  14. Anonymous says:

    Japan’s public debt is already twice its GDP. It is considered to be one of the countries less badly impacted by the crisis, and is coming out of the long recession of the 1990′s. High public debt does not automatically mean that a country is in trouble.

    Why?

    First of all, it matters where the debt comes from. Most of Japan’s public debt is domestically held-this means that the national economy as a whole including the government has a decent balance sheet.

    Secondly, and more importantly, the geopolitical and economic position of a country matters. Greece was small enough in the EU to bully into austerity measures: if the US ever developed a ‘really’ dire debt problem, it’s unclear who is powerful enough to demand that it be paid.

    Finally, many organizations-the IMF, the World Bank, the Tories, et. al, do in fact think that government debt (and government regulation) is inherently bad. It’s their policies, not the debt itself, with the capacity to create destruction.

    What’s curious is that these same people do not believe that the government has an active and irreducible role in the economy.

  15. Nylund says:

    “While there may be some legitimacy to this position, the spending cuts in this budget are almost entirely to things which won’t generate revenue anyway – most of it is just government waste.”

    What is this magical waste? Every cent of “waste” eventually ends up as someone’s salary down the line. The money is not thrown into a fire. Every spending cut results in someone, somewhere, either not making as much money, or outright losing their job. This person then has less to spend on the things they buy. That hurts another seller/producer of a good or service. They too must then cut back, which hurts someone else, so on and so forth in a very nasty negative feedback loop.

    As another comment pointed out, other non-government groups could arguably do more “productive” things with that same money. There is validity to this point, IF, AND ONLY IF, private companies WANT to borrow to expand and cannot because they are being “crowded out” of the market for borrowing. Presently, there is no evidence that the private industry wants this money as expansion during a recession isn’t a winning proposition. In fact, by the government spending more, the same negative feedback described above could happen in reverse, increasing aggregate demand and the result of government spending during a recession may actually create a “crowding in” effect.

    As a side note, imagine this parable:

    There is a young bachelor who spends all his time frolicking and never once does his groceries or stocks his pantry. A neighbor, knowing this, comes over every night offering food. The bachelor says, “I’ll pay you back, I promise.” This continues for quite a time and eventually the bachelor finds himself quite indebted to his neighbor.

    Then, a terrible hurricane hits and every store and restaurant are shutdown or destroyed. The poor bachelor has no food in his house, and sits there starving as the city lays in waste from the storm. He thinks to himself, “what a fool I was to not stock the pantry when I had the chance! Now I may starve to death!” Just then, the neighbor shows up and offers to lend him some of his extra canned goods. The starving bachelor, emaciated and dying of hunger, looks at the neighbor and says, “Borrow more food? That is the dumbest thing I’ve ever heard! The fact that I always borrowed from you is the reason I have no food now! I will not borrow one more thing from you.” The neighbor shrugs and leaves. Later that night the bachelor starves to death.

    Was the bachelor wrong to never save up food in his pantry and always rely on being able to borrow from his neighbor? Yes. Does that mean he shouldn’t have borrowed some food while he was starving? No.

    • peterbruells says:

      Of course, your parable is quite faulty.

      The bachelor isn’t a bachelor, but a family man. And he borrows food, because after paying medical bill he still wants that nice, shiny television set. And he’s perfectly fine with borrowing, since he figures that his kids will pay up.

      Yes, the money isn’t burned – it flows very nicely into the hands of people who already have all the money they need.

      • Anonymous says:

        I understood the basis for Nylund’s parable a lot more than I understand how you think it needs to be changed.

        Would you steal bread to feed your starving family? Trick question: the bread is poisoned, and it’s not your family.

  16. Gilgongo says:

    While the UK’s emergency budget did raise VAT, it was generally intended encourage consumer spending by doing things like not raising taxes on alcohol and tobacco, raising the non-taxed income threshold, and other things. Meanwhile, it cut spending in the public sector (managers in the NHS has doubled in number in the last 10 years, for example), which won’t really impact economic activity in general.

  17. TheMadLibrarian says:

    Heavystarch, your friend’s blog is one that says that nothing good can come from the government. There are some things that the government does well, because we as a community have decided we like clean water, roads, and fire departments. Could the government cut back in some areas? Undoubtedly. Comparing government to private industry is a fail, though, because the goals are different.

  18. asuffield says:

    What is this magical waste? Every cent of “waste” eventually ends up as someone’s salary down the line.

    Firstly, UK government waste is not measured in cents.

    Secondly, it is not entirely spent on salaries. That would assume labour is the only product of the country.

    Thirdly, it was mostly being wasted on paying rich people to provide unnecessary products. That’s waste.

    The money is not thrown into a fire.

    It does if the rich people need to light a fire.

  19. Anonymous says:

    People need to remember the economic multiplier effect.

    -I buy a loaf of bread from the baker along with many others.
    -The baker pays his suppliers and staff.
    -The bakers suppliers and staff buy goods from other merchants.
    -The other merchants pay their suppliers and staff
    repeat.

    Show at the wash up a loaf of bread that cost say $1.00 will generate $1.60 of economic activity. The economic multiplier in this case would be 1.6. That is to say that every $1.00 spent will generate$1.60 in economic activity.

    So you might think that cutting spending in an area that does not generate a direct economic benefit does not affect economic activity. Wrong. I sit in an office all day punching numbers (no direct economic benefit). I am paid by my employer who in turn is paid by the client. I spend my pay on the necessities of life plus I buy things I want. The merchants I buy from pay their staff and suppliers. If I lost my job I would not be able to buy things I want and I would need to limit buying of the necessities of life. Me losing my job effects the merchant I buy from and the staff and suppliers of the merchant.

    See how cutting spending in an area of no direct economic benefit effects the economy directly.

    The mantra of any government should be make every dollar count.

    • peterbruells says:

      Ah, but the government doesn’t spend all that money on goods and services. A large part of the money gets spent on interest.

      It’s trickle-down-fairy-thinking that these monies in turned get spent or invested, generating economic activity.

      • Ugly Canuck says:

        Ah, but interest rates are at close to szero percent, and no increases on the horizon: so never a better time to borrow.
        And if bonds are held by the citizens, like granma, they get to clip the interest coupon and spend it: so who cares what the interest paid is, so long as that interest is spent?

        So long as the gov debt is held by its own citizens, and the interest paid on such is not “exported”, there is no problem at all with gov borrowing to spend on the public – on actual public welfare, food, shelter, clothing – not on the military weapons prisons and cops.
        If corps aren’t spending, and workers are broke, then who’s left to spend and get the economy circulating?

        The important thing for gov to change imho is to heavily tax corporate retained profits which are unused within two years of their being booked.

        It’s the corps that are not spending, that is the problem.
        No re-investment of profits by firms in the communities where they make their profits.

        • Ugly Canuck says:

          And the corps should indeed be re-investing their profits back into the community which generated that profit, in every case.
          “Globalization” just seeks to assuage the guilty consciences of those who would simply take the profits, take them away, and spend them in their own countries: instead of amongst the people whose labor or natural endowment of metals, minerals, or agriculture, or natural situation with respect to channels of transport, realized that profit.

  20. turn_self_off says:

    it would appear that ayn rand is the progenitor of the first borganism…

  21. gummywerewolf says:

    “We have to live within our means” is sound advice for individuals, but it’s not a basis for public policy. Conservatives often assert their individual work ethic should scale to work for the whole of society. There should be little debt, no substance abuse, no corruption, no sloth; just hard work and the American dream.

    Meanwhile back here in reality, if you look at that conservative’s extended family (or anyone’s, for that matter), you’ll usually find someone who’s sick or elderly, someone who’s unemployed or destitute, who’s addicted to pills or alcohol, who’s depressed or endured serious misfortune. Conservative platitudes do not scale well into public policy, even though it sounds like good horse sense.

    Likewise, this rich-dad-poor-dad advice does not work for managing economies either. The economy should be managed counter-cyclically, with revenue surpluses during good times being saved to offset demand gaps in bad times. The notion that we can return to good times by cutting loose the unemployed and other safety net programs is about as wise as using a bucket of water to put out a grease fire.

    • Julien Couvreur says:

      “you’ll usually find someone who’s sick or elderly, someone who’s unemployed or destitute, who’s addicted to pills or alcohol, who’s depressed or endured serious misfortune.”

      True.

      But, although things are considerably better than two centuries ago, life is difficult. That’s the default state of nature, which we struggle against.
      Also, government does not improve on this state of affairs.

      Regarding the sick: healthcare would be cheaper if it was left to the competitive pressure of the market. Instead, we have heavy regulation (insurance tied to employment due to tax benefits, licensing of doctors and nurses, etc.) and over half of medical spending coming from government.

      Regarding the elderly: becoming old is not a surprise to anyone, you have to plan ahead. There is no magic dust to avoid it.
      Right now, we have the worst situation, where people planned and count on social security benefits which are insufficient (inflation) and endangered (unsustainable Ponzi scheme, longer lifespan and higher costs of healthcare).

      Regarding misfortune: again the solution is not government safety net, but the private safety net. Before the public safety nets grew (during the Great Depression), there was a strong network of charities and communities, which voluntarily helped. This is a more healthy situation than having taxation and bureaucrats to (badly) administer support programs.

  22. heavystarch says:

    Joseph Stiglitz is another nobel winner like Paul Krugman who are both horribly wrong.

    For complete refutation of their logic simply start reading Michael Shedlock’s economic blog.

    We got into this mess due to spending more than we earned. So how does stiglitz think that spending even more is going to get us out of debt? See the problem with his logic? It doesn’t work. We’ll end up just like Japan and prolong this recession even further.

    We need to allow companies to fail, borrowers to lose homes, stop the insane wars and to cut Public Employees FAT FAT salaries/pensions/benefits.

    Of course Stiglitz/Krugman will tell us that the Stimulus wasn’t big enough – that we need to spend more to “kick start” the economy.

    Look it’s really simple – we have to live within our means. That translates to some initial pain right here and in the short term. The in the mid to long run we’ll be far better off because we’ll be living inside our means instead of way beyond it.

    So take our medicine now or suffer more pain later and then have to take much stronger medicine to fix it (think collapse Greece style – which is happening to California, Illinois, Oregon and many other states here at home).

    Any go read Mish’s blog – it’s far better at explaining the ills that have befallen us.

    • nutbastard says:

      “we have to live within our means.”

      ding ding ding ding! everyone thinks they deserve a new car and a nice house and all the other bullshit that goes along with it. Well, most people don’t. beyond that, the only way government can spend more is either by taking more from the people (which forces them to borrow in order to maintain their lifestyle) or print it (which devalues the currency, reduces purchasing power… and forces the people to borrow in order to maintain their lifestyle)

      even those who DO live within their means, then, get dragged down by those who don’t in the form of higher interest (to compensate for the walk-outs) and just plain higher prices for goods (to compensate for inflation which, by the way, hits the consumer market instantly while salaries lag behind by years, compounded by the fact that corporate profits fall during downturns, which doesn’t give the people upstairs much incentive to give raises)

      I’ve done the math – I make less now (in terms of buying power) at my job than i did when i started 5 years ago despite having fairly regular raises… but I now have a significantly heavier work load on account of some layoffs which reduced our already understaffed office from 7 people to 4. Oh and my current project? Duplicating the equipment we have here so they can move our whole operation overseas. You can imagine how inspired and motivated I must be.

      All of it from panic. It’s absurd – the popular reaction to economic downturn is to fire people. Ok, you might be helping to save your own ass, but god damn is it short sighted.

      OMG the economy is in the shitter (I heard it on the news so it must be true!) so all these people are going to be out of work and unable to buy our product! Quick, put more people out of work! So they won’t have much room to bargain and will have to take whatever job they can at whatever salary they’re offered! So that they have less money and are less able to buy our stuff! Unless we give them loans and government subsidies! Yeah, that’s the ticket!

    • Anonymous says:

      The stimulus wasn’t too big or too little to help the economy. It was aimed wrong. Nobody actually lives within their means; people borrow money to make investments like houses, and governments like infrastructure. The important thing is to actually invest in something that will pay back, while failure to do so is what’s causing collapses. Is that so hard to understand?

  23. Nylund says:

    “Ah, but the government doesn’t spend all that money on goods and services. A large part of the money gets spent on interest.”

    So the budget cuts you want to see is to stop paying interest, thus defaulting on the loans?! Is that the budget proposal being suggested? Not a single one of these budget cuts will affect libraries, parks, maintenance workers, educators, or anyone like that? All these budget cuts will solely affect the rich who have no links to the rest of the economy? If that is truly the case, go take from them, they do have enough already. I just don’t think that is how these cuts are structured. A lot of people, struggling people, will be directly (or indirectly via the multiplier effect) will suffer.

    But sure, go ahead. I just won’t be surprised when the UK’s GDP falls, unemployment rises, tax receipts shrink even more, the debt gets even larger, and the interest rates on the existing debt increases.

    Do I like big debts? No! But I hate unemployment even more. Fix the debt when things get back to normal. Its like a hiker with cancer falling and breaking his leg in a ravine, sitting there, worrying about a chemo treatment next month. Fix the leg and get out of the ravine first, then worry about the cancer!

    • peterbruells says:

      Of course not, the debt should be paid. Well, probably. When countries default, they do not vanish from the face of the Earth. Only their government do.

      We heard the “fix the debt when things get back to normal” spiel all too often. Yet somehow that never happens, because once things get better, everybody seems to think that the new boom will never stop and, wow, wouldn’t it not be awfully nice the have that new airport *now*?

      And again, a strange parable. It’s not a biker with broken bones and cancer. It’s a biker with with a broken bike considering buying a new bike and hoping that someone else will fix the pothole which were instrumental in his accident.

  24. TheAntipodean says:

    Stiglitz is more monetarist than Keynesian, but he is still woefully wrong. Real economic growth is always underpinned by saving, not printing or borrowing more debt to spend. See Rothbard’s http://mises.org/books/fed.pdf for a layman’s introduction to Austrian economics and why our major problem remains central banks making vast amounts of debt that we have to pay off in the future. See http://www.youtube.com/watch?v=d0nERTFo-Sk for an 8 minute historic hip-hop battle of Hayek vs Keynes which explains this nicely too!

  25. glaborous immolate says:

    NPRs This American Life did a story on how doing what the IMF wanted (sorta), basically worked in Barbados. It worked because of the shared sacrifice and the workers and management all pulling together to make it work.

    Barbados is now doing very well, and Jamaica, which started in the same place, is doing terribly, and lost their middle class in the 70s.

    Give it a listen.

  26. Sal Paradise says:

    I called bullshit when I saw this :
    “We have lots of experiments which show this, thanks to Herbert Hoover and the IMF,”

    Mr. Hoover did not cut spending after the crash of 1929, in fact, he increased it.

  27. Julien Couvreur says:

    “But in a national economy, if you cut back on your spending, then economic activity goes down, nobody invests, …”

    For people to invest they need savings. Laws of physics and economics still apply, even when you put many people together.

    The root problem is that the bubble wasted too many saved resources, because of expansionary and risk-inducing policies.

    Those policies (low-interest rate, fractional reserve banking, various insurance programs, historical bailout precedents, etc.) achieved a temporary illusion of wealth as people felt there was more money around, but since there was no corresponding resources, the projects they started only added more demand to existing resources and got them committed to misaligned projects.

    The only way out, while minimizing unemployment, the decrease in economic activity and more social pain, is to let the prices adjust down, including wages. Yes, this is painful, especially for borrowers and lenders.

    But the alternative is even worse, as repeating the same expansionary policies will dig a bigger hole rather than bring us back to prosperity.

    • nutbastard says:

      “Those policies (low-interest rate, fractional reserve banking, various insurance programs, historical bailout precedents, etc.) achieved a temporary illusion of wealth as people felt there was more money around, but since there was no corresponding resources…”

      Yep. Quid quo pro. The people in charge think that money == wealth, and that they can print wealth. You can’t. You can print money.

  28. coryisgreat says:

    What I love about this thread is the welter of simplistic analogies used to demonstrate how easy it is to solve macro-economic problems. It isn’t easy, and what applied in the past doesn’t necessarily apply in the future.

    Re: Stiglitz, there are some important reasons to be suspicious of his interpretation. First, when he criticises Osbourne’s budget as ideologically motivated rather than based on sound argument, he neglects to highlight the fact that his opposition to it is also ideologically motivated, but does highlight the fact that he hasn’t done the sums for the UK, so no sound argument there either.

    Second, Stiglitz helped Clinton formulate the ‘third way’ economic policies that triggered deregulation of the US mortgage market that resulted in the subprime mortgage calamity that brought us to where we are today. No wonder he saw it coming. He had a big hand in making it happen.

    Third, his major claims to credibility are the fact that he predicted the credit crunch and his Nobel prize. He isn’t unique in predicting the credit crunch. Nouriel Roubini and Robert Shiller also leap to mind. And the Nobel for Economic Sciences is only marginally less Mickey Mouse than the peace prize, for which see Obama, Barack (“What the hell did he do to deserve that?”)

  29. zyodei says:

    What’s really twisted about Keynesianism is that this:

    What is the collateral that the debts are being loaned against?

    The answer is…YOU. YOUR future earnings potential is the collateral against which these loans continued to be made.

    If you want to control somebody, a great way is to loan them lots of money.

    I can’t see anything progressive about anything that gives banks more power and leverage over America.

    This fundamental economic ignorance is where Progressivism has gone totally off the rails.

  30. jdollak says:

    I have some serious concerns that the US will be following suit in this fashion.

  31. asuffield says:

    While there may be some legitimacy to this position, the spending cuts in this budget are almost entirely to things which won’t generate revenue anyway – most of it is just government waste.

    There was only a handful of things been cut which would have actually led to economically valuable activity, and most of *those* should never have been funded from the government anyway – they’re the sort of thing you would normally get commercial bank loans for.

  32. coryisgreat says:

    PS Cory, Osbourne’s budget is intended to cure the budget deficit, not the recession. The recession is already over. For now.

  33. Ernunnos says:

    Nothing will “cure” this recession. It’s the direct result of hitting peak oil, and trying to replace cheap energy with cheap credit. The question now is, do we learn to live within our new, reduced means, or do we continue to blow the credit bubble bigger and bigger until we get multiple sovereign debt crises and quite possibly war?

    I see Stiglitz is throwing his vote for denial.

    What will he suggest next year, when oil production is still stuck at 75 billion barrels/day like it has been since 2005, the jobs haven’t come back, consumers still can’t afford to keep spending, and we have a couple trillion more $ in debt that will never, ever be repaid. What about the year after that? And the year after that? Where does he see this ending? How does he thinks this ends?

    I think austerity and recession is about the best we can hope for. And we’d better grab it while we still can.

    • Anonymous says:

      don’t you think shale oil and shale gas has pushed back “peak oil” for many decades at least? Also while defaulting on loans is bad- it’s hardly unprecedented and certainly not apocalyptic. And no one is trying to replace cheap energy with cheap credit- apples and oranges.

      • KeithIrwin says:

        What do you mean we can’t replace cheap oil with cheap credit? With gas going up in price, I’ve started running my car on credit instead. I just write it an IOU for the gas I’ll be buying it later (including noting appropriate terms and interest I’ll be paying it), put that IOU in the tank, and there you go. It runs great. I’m sure that that’s what economies are doing on a larger scale, too. They’re just replacing energy and petrochemicals with credit. It’s easy. You just put a few bonds in the reactors and it’s all right as rain.

  34. tygr20 says:

    I tried to read this article so hard, but all I could hear was the rock guitar riff when we met HUGO STIGLITZ

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