Austerity doesn't work
Bryce Wilkinson advocates austerity as the way to rebuild New Zealand's economy shattered as a result of the government's covid-19 actions.
His research obviously hasn't taken him as far as Greece to see how well austerity might be working. Even the IMF, the cheerleader for austerity economics (outside of the New Zealand Initiative) has acknowledged that it failed to realise the damage austerity would do.
In an assessment in 2013 of the rescue, conducted jointly with the European Central Bank and the European Commission, the IMF said "Market confidence was not restored, the banking system lost 30% of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment."
In 2016 three IMF research department economists – Jonathan Ostry, Prakash Loungani and Davide Furceri delivered a strong warning that austerity policies can do more harm than good. “The benefits in terms of increased growth seem fairly difficult to establish when looking at a broad group of countries,” they said. “The costs in terms of increased inequality are prominent. “Increased inequality in turn hurts the level and sustainability of growth”.
The economists rejected the notion that austerity could be good for growth by boosting the confidence of the private sector to invest. Their report said that in practice, “episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1% of GDP increases the long-term unemployment rate by 0.6 percentage points.”
And in 2019 Professor Christian Kastrop, who was a key figure in the Eurozone’s response to the banking crisis of 2008, admitted that Ireland was hit with unnecessarily harsh austerity measures. He feared the rules he helped devise – to block runaway borrowing by politicians – have been distorted. In particular, he accuses Germany’s ruling Christian Democratic Union of fetishising balanced budgets.
This has demonised debt-financed spending and, he says, contributed to years of chronic under-spending even on education and physical and digital infrastructure. “You make a great mistake if you cling to rules when the circumstances change substantially,” he said.
Frances Coppola writing in Forbes magazine two years ago had this to say “In May 2010, the UK elected a government on a mandate to pursue a front-loaded program of fiscal consolidation. It did just that, raising taxes on households and businesses, and making deep cuts to government spending. Within a year, the UK’s recovery had tailed off and there was talk of renewed recession. Years later, both the deficit and the debt remain elevated”.
The UK was not the only country to replace fiscal expansion with fiscal austerity, to the detriment of its recovery. Many other countries did so to, to a greater or lesser extent.
In a paper presented at Jackson Hole in 2017, the economists Alan Auerbach and Yuriy Gorodnichenko showed that, contrary to popular belief, fiscal expansion after a major financial shock such as that in 2008 did not cause debt/GDP ratios to rise. In fact, the researchers found that debt could become more sustainable, not less, after fiscal stimulus:
“For a sample of developed countries, we find that government spending shocks do not lead to persistent increases in debt-to-GDP ratios or costs of borrowing, especially during periods of economic weakness. Indeed, fiscal stimulus in a weak economy can improve fiscal sustainability along the metrics we study.”
Of course, there is another option to government doing its borrowing from commercial banks.
It’s been advocated by Social Credit for nearly 100 years. It's a process supported by BERL chief economist Ganesh Nana, Sense Partners economist Shamubeel Eqaub, former senior lecturer in economics at Victoria University Dr Geoff Bertram and numerous others - painless borrowing from the Reserve Bank.
Mr Wilkinson called it “snake oil”. I doubt those learned economists will much like their remedy being by denigrated in that manner.
Ganesh Nana said on RNZ’s Morning Report “The government can borrow from the Reserve Bank. To be technical it's literally borrowing from itself.”
Shamubeel Eaqub writing on Interest.co.nz had this to say “I don't see why we don't jump straight to the Reserve Bank buying bonds from the Treasury direct. Central banks will have to step in and buy these bonds.”
Dr Geoff Bertram capped it off. “Issuing money in the current circumstances has impeccable support from mainstream economic thinking. In the current context it is the correct, most efficacious way to proceed. [Govt] should not be prisoners of outmoded, arch-conservative political doctrines.”
To quote Mr Wilkinson “This is simply Government borrowing by another name, but of a particularly dangerous type for financial stability. Like fire in the hands of a child, a poorly-constrained power to print money is dangerous.”
What he has not highlighted is that the government can borrow as much as it likes and spend what it likes – pretty much. That ‘poorly-constrained power to print money” is what happens already when it borrows from commercial banks who print the money they lend in the same way as the Reserve Bank does.
The difference is that they charge interest on it, and the Reserve Bank has no need to. If it does, to keep up appearances, the interest gets returned to the government in profit due to its ownership of the Bank.
Taxpayers’ money is therefore not siphoned off into the pockets of overseas owned bank shareholders and wealthy investors, and is available for spending on health care, education, infrastructure and the environment - the things that benefit Kiwis.
If Auerbach and Gorodnichenko are right, then the policy path of austerity will leave lasting scars, particularly on the young.
What a complete, utter, disastrous failure of public policy, not just for Greece but for New Zealand.