Are the austerians on the retreat?

Are the austerians on the retreat?

May 8th, 2012

Give economist Paul Krugman some credit. You may or may not agree with his views that governments across the world need to go out and spend, but he does seem to have invented a new word – one that seems to be creeping into popular usage. You may know that there are three pretty big ideas that economists like arguing about. There’s Keynesianism, Monetarism, and then there are the Austrians. During Mrs Thatcher’s era, the row seemed to be between the Keynesians and the Monetarists. And frankly, the Keynesian idea that governments can spend their way out of recession seemed pretty discredited. In fact, the backlash against Keynes had started before Downing Street saw its first ever woman Prime Minister. “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending, “ said the then Labour Prime Minister James Callaghan in 1976. “I tell you in all candour,” he said, ”that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.” Before he became disgraced, President Nixon once said: “We are all Keynesians now.” A few years later, that belief was in disarray, the monetarists were in the ascendance as was their conviction that both the UK and US had allowed the money supply to rise too fast during the 1960s and early 1970s, causing all kinds of nasties. Then there are the Austrians. If the markets were left alone, and governments left businesses and employers to their own devices, there wouldn’t be unemployment, they say – at least not for very long. Their rationale goes like this: if there was a rise in unemployment, wages would fall, until employers look at the cost of labour, see that it is very cheap, and start employing again. In other words, if wages were allowed to fall, markets would clear. Demand and supply of labour would always match, and in a world where there is no unemployment benefit, supply of labour would pretty much be infinitely flexible. The Keynesians respond by saying that if wages fell, total demand across the economy would fall, and actually that would make things worse. These days the Austrians slate labour laws: how impossible it is to sack staff, of the huge overheads associated with employing people. And funnily enough, these days, the Monetarists and Keynesians have pretty much moved into alignment. The Keynesians look back on the Great Depression of the 1930s and say the mistake made then was that governments didn’t spend enough. It took World War 2 and the resulting massive levels of government spending, which was a kind of Keynesian stimulus by mistake, to end the depression. The Monetarists say the Great Depression occurred because banks were allowed to collapse, and the money supply was allowed to contract. They both argued for more stimulus; they just disagreed on how that stimulus is constructed. The Austrians say “no”. They continue: governments need to slash spending, debt needs to be cut, and then cut some more. They say that if governments can get rid of their debts, business will suddenly feel a lot more confident, start spending all their massive reserves of money, take on more staff, and the world will go back to being a happy and prosperous place. In all the furore of the last few years, the Austrians have become associated with austerity. And that is why Krugman’s new word is so apt. The Austrians have become the Austerians and the focus of debate has shifted. The above article is from Investment & Business News, a newsletter edited by financial journalist, Michael Baxter.  If you like this article you can sign up to more news items by clicking here  

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