~ Chris Martenson [extracted/edited ~R]
“Like the issue of… ’Is it better to have austerity or stimulus?’ Well, the basic problem there is that we’re not having a quality conversation on the subject.” ~Ray Dalio
When we witness the clash between the Austerity and Stimulus camps, on the surface there is the appearance that a true debate is taking place between diametrically opposed economists. For example, Austerity folks correctly note that our economy has been badly weighted towards consumption for some decades. They want to clear out the excesses, let the malinvestments fail, and elect an overall path of acute economic pain in order to reset the system. Stimulus advocates find such plans completely unnecessary, if not downright masochistic.
Armed with a more humanistic approach, Keynesians want the government to run large deficits to help the private sector deleverage, which of course could take years … While interest rates are low … why not ease social and economic pain through further [govt] borrowing? After all, the private sector will simply use this spending to repair its own balance sheet. Once a tipping point is reached, then the private sector can start taking on new credit, increasing tax revenues to government, and thus knocking down the debt incurred during the recession (or depression). What’s not to like?.
Meanwhile, an example of the austerity argument comes from … Those in favor of fiscal shock and awe, persuaded by the view that government spending “crowds out” the private sector, and that government misallocation of capital nearly always exceeds the private sector’s similar mistakes.
Frankly, I am sympathetic to the sincere urges on both sides of this debate.
Why not conduct reflationary policy indefinitely, at least as a humanitarian exercise? And also, why not … kill off a number of regulatory agencies, and promote the growth of small business?
Internal to this debate, however, are a number of shared assumptions about … their prescription not only delivering the economy back to growth, but also to trend growth – an eventual rejoining, if you will, to the pre-2008 trend.
A rather serious problem in the ability of Developed Economies to coherently allocate resources started showing up well before the 2008 crisis. This status quo, made in part by policy mistakes, credit creation, and the energy limit, still remains today. Crucially, neither stimulus nor austerity will dislodge this status quo. Unless, of course, by austerity we mean to intentionally collapse the system, or if by stimulus we mean to engender a runaway inflation that will eventually yield the same result.
… What the system needs instead is a more targeted transition process, not a radical simplification (Joseph Tainter’s term for collapse).
However, underneath this, all of the poor allocation of existing resources continues apace, and this is the central explanation for why the economy cannot create jobs: The connection between needs and actual production is badly broken.
Interesting article, and raises some points worth considering.
Although I am still of the Austerity camp (a deep purging still needs to be done), it is worth considering if the Austerity vs Stimulus debate is a false dichotomy. And what exactly is the problem your prescription is trying to fix… ?