Is Austerity Class Politics?

See video below for a discussion of this theme (hat tip Barry Ritholtz). This is a very good video for learning about how debt deflationary spirals are created by the "fallacy of composition" and how it applies to countries in a balance sheet recession like the US, the US, Spain or Ireland.

Source: ‘Austerity’ Video Launches New Media Initiative – Brown University

  1. Intelledgement LLC says

    Spending on roads and police and teachers and firemen is one thing. Spending my tax dollars to keep spendthrifts in homes they should never have bought and can’t pay for while I have to keep paying my mortgage, and to keep insolvent banks going so they can pay their execs big bonuses while I am scrambling to find enough clients to keep afloat is quite another. Seems to me that the problem is that the politicians and bureaucrats making the spending allocation decisions—who are supposed to be working for me and Prof. Blyth—are instead beholden to those who can afford high-powered lobbyists and big political contributions. If I have to choose between having my tax dollars misspent or not spent, I choose the latter.

    1. Edward Harrison says

      I think that’s what a lot of the new found austerity is about. The way stimulus was applied and the way the banks were bailed out, the way the auto unions made out makes it seem as if “stimulus” is a euphemism for political favours. There’s a lot of truth in that. And this true as much in the UK with its bank bailouts as in the US. I can’t support another round of stimulus for that reason. Add to this the large deficits, and this makes people uneasy.

      I would argue for an increase in automatic stabilizers as the main source of stimulus. In my view this has been helpful to the Germans, the Swedes, and the Dutch in weathering the storm. But make no bones about it, they are in a better position than the US because they lack the high private sector debt. And we all know Spain and Ireland have European-style automatic stabilizers.

      Bottom line for me is that the US is in for a tough ride. Austerity risks a debt deflationary spiral and stimulus risks wasteful and politically-motivated spending. The focus should be on closing the output gap and getting closer to full employment, thus reducing the deficit, rather than focusing on the deficit itself per se. The best alternatives I have seen to date are (temporary) payroll tax cuts, increased automatic stabilizers (directed toward states in particular), infrastructure rebuilding and jobs programs in place of unemployment insurance alone. I think we could get the general public onboard with fixing the crumbling infrastructure and re-upping the Bush tax cuts for two years but re-directing the tax cuts for the wealthy to payroll tax cuts.

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