The Fallacy Of Stimulus vs Austerity

We are now six years into our global economic crisis which began in 2008, and from which most western countries still suffer acutely to varying degrees. And yet our political leaders are still having the same argument that they were having when the crisis began. The argument has not matured, developed or sprung new offshoots; it remains exactly the same.

Austerity versus Stimulus. With deficits exploding as government revenues collapsed during the great recession, should we spend more taxpayer money to create new demand in the economy, or tighten our belts and trust that an immediate return to fiscal rectitude would be the answer? Should we be Keynesians or not? And, whatever ones personal point of view, we have pretty much stuck to them since that time; and by and large we have trodden a middle ground that has delivered at best anaemic growth rates and jobless recoveries, or at worst has failed to stem the tide altogether.

Those on the left, such as Guardian columnist Polly Toynbee, castigate the British conservative-led government’s efforts to do anything to reduce the deficit – not to eliminate it so as to begin paying down the national debt, but just to reduce the deficit – as heartless and cruel. Not a day goes by without some new stricture on the harm that government spending cuts (read: reductions in the rate of increased government spending) will cause to the weakest and most vulnerable in our society.

Conservative politicians on the right, such as German Chancellor Angela Merkel, bristle at being labelled dispassionate and unsympathetic to those in need, and claim that their harsh medicine is the only way of saving the ailing economic patient.

Semi-partisan people such as myself tread an unpopular middle ground, arguing that this time of weak to negative growth is the worst possible time to be cutting spending (though radical rethinking of spending priorities is certainly needed), but worrying that moderate left-wingers and fair weather conservatives will not fulfill their end of the bargain and actually begin rolling back government spending and the boundaries of the state when healthy economic growth is eventually restored.

And so we all sit in our respective ideological trenches, lobbing the occasional rhetorical grenade into no-man’s land, and nothing changes.

Enter Shinzo Abe, prime minister of Japan.

Japan has been wrestling with stagnation and it’s terrible consequences for much longer than most western countries, and after 20 or so lost years, have come up with a new solution which might just actually work.

The Guardian reports:

Japan’s central bank has been ordered to print money at twice the rate that even the US is doing, to go on more spending by government and private firms. It must get inflation up by two percentage points at once. Firms must increase wages. Taxes will come down before rising to ease the deficit. Structural change will impede inflation and short-term debt may rise, but the risk must be taken. The economy must grow, at all costs.

Wow, growth at all costs rather than half-hearted measures and finger-pointing when it doesn’t work.  What a novel idea. The report continues:

As David Graeber put it in the Guardian this week, austerity is no longer an economic policy but a moral one in which someone must be found to pay for past profligacy. It is “a politics of crime and punishment, sin and atonement”. It seems almost to appeal to Protestant countries. They regard Greeks and Cypriots as singular sinners, but are all guilty.

Britain has less excuse. It could print money, inflate like Japan and let the exchange rate take the pressure. The government has already printed about £375bn, but has given the money exclusively to banks. The money has vanished on boosting bank reserves, inflating the stock market and buying more government debt. None of it has “pumped”, or even leaked, into the productive economy, whatever Bank of England handouts say.

If every pound George Osborne had printed had gone on consumer spending, it defies belief that the British economy would be still be in acute recession. As in Japan, sales would be rising, order books filling, jobs returning, tax revenues expanding and the deficit shrinking. Banks are not stupid. They lend against profits, not against Vince Cable speeches. Their retail customers need real rising demand to restock, instead of relying for turnover on benefit recipients. Austerity in recession is the nadir of economic illiteracy.

The wisest words on economic policy that I have heard in a long time, and I have to hear them from a left-leaning newspaper. Conservative outlets, talking heads and think tanks should be ashamed.

The reason that “stimulus” has failed (or at least has not resulted in a return to robust growth) is because we have been attempting to stimulate the wrong thing. If we are going to print money and run the risk of inflation, is it not far better to put that money into the hands of actual citizens, taxpayers, who need it and who will immediately go out and spend it, rather than using it to shore up the balance sheet of a bank that was probably involved in all manner of dodgy activities leading up to the financial crisis, and which has no intention of lending that money to individuals and businesses who want it?

But the killer lines from the article are these:

Japan is taking a gamble. The gamble is not with inflation but whether state spending and bank lending will actually get money into rapid circulation. The country’s past experience with big infrastructure projects (as favoured by Osborne) is that they yield little short-term stimulus. More roads and railways are a glacier when what is needed is a torrent. The torrent comes from consumer wallets, filled by lower taxes and higher wages. It comes from the fastest possible cash infusion. Any resulting inflation is a problem for the day after tomorrow.

The joy of a country with its own currency is that it can handle it as it wishes, not as eurozone leaders wish. It need not increase government debt but just print money to distribute for as long as it thinks necessary. This could be through higher benefits, higher wages, higher tax thresholds or lower VAT. For that matter, the Treasury could add £10,000 to every adult’s bank balance – a giant version of the pensioners’ Christmas fuel allowance – and still have spent less than it has handed to the banks in the past four years.

Think on that for a minute. If the government had given all the money it gave to the banks over the last four years to private individuals instead, it would be the equivalent to putting £10,000 into the bank account of every adult in the UK. Even if you argue that the financial sector required a cash injection in order to prevent a calamitous collapse of the system, if the government had lavished just half as much on the banks, we could all be receiving a £5,000 cheque in the mail.

Yes, there are arguments to be had about how we put the newly printed money into the hands and bank accounts of the citizenry. Should it be equally per person (no), equally per taxpayer (no), based somehow on one’s past tax contributions (yes, probably), or some other means of allocation? We can have those arguments once we accept the reality that the current course of action is not working, and as we move to follow Japan’s lead and implement their real stimulus policy. We need to face facts and acknowledge that printing money and giving it to the banks has not worked; perhaps giving the money directly to the consumer will.

The economic news emanating from the US and the UK continues to be bleak, and our leaders keep offering the same solutions and hammering out the same compromises between themselves.

In the final, desperate hope of avoiding another lost decade, let us at long last now try something new.

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