Austerity pitfalls and alternatives

Austerity measures are very much part of economic policy discussions around the world, more so in Euro land but also in the US as part of the recent so called fiscal cliff stand-off.

The recent uncovering of some shoddy research by two prominent Harvard economists, Reinhart and Rogoff used to justify austerity measure has also reverberated around the economics blogsphere.

Nobel laureate Paul Krugman has just posted an informative overview of the austerity debate in a recent article How the Case for Austerity Has Crumbled.

The blogsphere has also been littered with exchanges between conventional neo Keynesians like Krugman and the growing band of Modern Monetary Theorists (MMTers) who have a different view of money, how it's created and how deficits are financed  than does much of conventional textbook theory particularly as it relate to countries who issue their own currencies such as the US, UK, Japan and Australia. Their approach to analysing an economy using the sectoral balance approach (government, private and overseas sectors which each may be in deficit or surplus but as a whole must inevitably be in balance) has appeal to someone trained , as accountants are, to look at transactions as comprising both credit and debit entries.

Whilst Krugman and the MMTers largely agree on the folly of austerity they differ on the future ramifications of deficit spending.

Krugman is gradually giving ground whilst not admitting as much. A quote from the above article highlights the gradual shift.  “The crucial difference ........ seemed to be whether countries had their own currencies, and borrowed in those currencies. Such countries can’t run out of money because they can print it if needed, and absent the risk of a cash squeeze, advanced nations are evidently able to carry quite high levels of debt without crisis.”

MMTers don’t talk in terms of ‘printing money’ for money is created these days by computer keystrokes.

But the essential point that Krugman makes is one MMTers agree with--- that the surplus fetish and the avoidance of deficits where possible, ideas embraced by most economists and politicians, may be leading us to a sub optimal future.

One of our leading MMT advocates Bill Mitchell has posted his views on last Tuesday’s Federal Budget. If one has a nagging suspicion that all the talking heads we see in the main stream media haven't adequately understood and explained the situation we are currently confronting and the way forward, this article is well worth a read.