How austerity may reduce innovation

An interesting post from Simon Wren-Lewis on how sustained austerity can lower innovation and productivity growth. With the latter growing painfully slowly in the UK and other rich countries for a number of years, this is potentially important. As he notes, it may only explain part of the productivity slowdown, but it still highlights one of the negative impacts of austerity.

Put briefly, austerity weakens aggregate demand when it cannot be offset by monetary policy (as has been the case since the recession). This may create an ‘innovations gap’. Firms facing reduced demand for their products will slow down the rate at which they create or utilize new products, processes and technology via new investment, leading to weaker growth in productivity. This sort of investment would have ’embodied’ the new technology, but in its absence, the improvements will not take place.

Budget deficits forever?

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Below is a helpful quote from post-Keynesians Wynne Godley and Marc Lavoie on fiscal deficits and full employment. I am sceptical, based on economic history, that full employment can be sustained for lengthy periods under capitalism, which Keynesians claim is possible given the right policies. However it usefully makes a nonsense of the oft-found obsession many governments have with austerity and ‘balancing the books’, as if the public finances are akin to those of a prudent household. Continue reading

Yanis Varoufakis: why austerity doesn’t work

Yanis Varoufakis explains in the short video below why austerity doesn’t work. He uses the example of the UK economy, and leaves out the foreign sector (trade and investment), which does simplify things. I would argue that including the latter in the model is in fact vitally important to our understanding in the case of economies open to foreign trade and investment.

One reason for this is because a deflation which results from government austerity reduces the demand for imports from abroad, which negatively affects trading partners. Devaluing the currency can also have this effect, and is potentially an example of a ‘beggar-thy-neighbour‘ policy. The devaluing country may only gain at the expense of others, which can invite retaliation. This can take the form of competitive devaluation: if one country devalues, its growth might increase for some time, but if all countries do the same, the global benefits may be zero, while their distribution will tend to be uneven.

A small country open to international trade can adopt a deflationary fiscal policy and devalue its currency, in order to rebalance its economy away from domestic demand and improve its export competitiveness. This has often been the policy imposed by the IMF on developing countries in crisis as a condition of lending.  But if all countries deflate and devalue, the result will be a global recession.

This illustrates the importance in macroeconomics of analysing the world economy as a whole system, whose interacting parts can produce effects not obvious when looking at a single economy. This is an insight found repeatedly in the work of Michael Pettis, whose book The Great Rebalancing offers an original explanation for the Great Recession of 2008 and the likely global economic outcomes in the years ahead.

UK debt reduction: how can ‘Spreadsheet Phil’ do it?

Money-poundsLast week the UK government’s new Chancellor of the Exchequer, Phillip Hammond, known to some as ‘spreadsheet Phil’, gave his first Autumn Statement to parliament. This outlines the state of the UK economy and the government’s finances, and announces new policies on government tax and spending.

The forecasts of the Office for Budget Responsibility for the UK economy’s likely trajectory over the next few years were somewhat gloomy, and laid much of the blame for this at the door of the decision to leave the EU, or Brexit. Growth will be slower, investment weaker, and public borrowing and debt higher than otherwise.

I will avoid reiterating details regarding the Autumn Statement that were covered in last week’s press, and instead focus on the potential for debt reduction and overall economic performance over the next few years, which the government is trying to manage and improve upon: the Prime Minister wants an economy that ‘works for all’. Fine aspirations indeed. Continue reading

Fakeconomics and austerity: how did it happen?

keep-calm-and-join-a-trade-union“The enforcement of fiscal austerity qualifies as the single most important public policy consequence of the abandonment of economics in favour of fakeconomics. Acceptance of austerity by the public in almost every major advanced country is even more perversely impressive than the austerity itself. Anyone born after 1960 must find it hard to believe that once, long ago it seems, the belief in balanced budgets did not drive public finances, nor did governments agonize over and quake in breathless anticipation of the “verdict of financial markets” on their policy decisions.

The overthrow of rigor and common sense in what we once called the economics profession did not cause this seismic shift in the ideology of public policy. We can trace the chronology of causality quite clearly, especially in Britain and the US. The cause lies in the secular decline in trade union influence and the parallel rise in the power of capital. Aneurin (“Nye”) Bevan, tireless Welsh campaigner for the rights of working people, stated the danger succinctly. Unless the working majority organizes to prevent it, “it is an axiom, enforced by the experience of the ages, that they who rule industrially will rule politically.” In the twenty-first century we can replace “industrially” with “financially.”

John F. Weeks (2014), Economics of the 1%

Continue reading

Ha-Joon Chang on austerity and corporate vs social welfare

ha-joon-changHere is a useful five minute interview on the Guardian website with Cambridge economist Ha-Joon Chang, bestselling author of 23 Things They Don’t Tell You About Capitalism, which is very readable and full of interesting and iconoclastic ideas. I have discussed some of Chang’s ideas on this blog in the past. Here he punctures a few myths about the recent direction of economic policy in the UK.

The continued failure of the government’s ‘long term economic plan’

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The ex-chancellor George Osborne in his hard hat

Some evidence here that the outcomes of the oft-mentioned ‘long term economic plan’ of the UK government have fallen far short of predictions and claims. First of all: austerity. Geoff Tily, Senior Economist at the TUC, shows that public sector net borrowing for the first quarter of this financial year was £26.6bn, more than the November 2011 official forecast for the whole of the 2015/16, which was £24bn.

The cuts to public spending and tax increases have reduced the deficit much more slowly than hoped, since growth has been much weaker than forecast since 2010.

The government has claimed many times that it has turned the economy around and saved it from ruin. What it doesn’t mention is that recovery was underway when it came into office in 2010. The combination of austerity and the Eurozone crisis slowed growth significantly until 2013, when it picked up and the chancellor George Osborne in fact relaxed austerity to some extent.

The UK’s recovery since the recession has been the weakest since records began. Continue reading