Efecto boomerang del austerismo

De Bill Mitchell blog

The German experiment has failed

Posted on Tuesday, October 7, 2014 by bill

In the last week, several new data releases have shown that the Eurozone crisis is now consolidating in the core of Europe – France, Italy and … yes, Germany. The latter has forced nonsensical austerity on its trading partners in the monetary union. And, finally, the inevitable has happened. Germany’s factories are now in decline because the austerity-ravaged economies of Europe can no longer support the levels of imports from Germany that the latter relied on to maintain its growth and place it in a position to lecture and hector the other nations on wage and government spending cuts. The whole policy approach is a disaster and is exacerbating the flawed design of the euro monetary system. The leaders should find a way to dismantle the whole charade and allow nations to seek their own paths to prosperity with their own currencies. The German experiment has failed.

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Where are all those Ricardian households and firms that were just poised to launch a spending boom as soon as the fiscal balances started to fall back towards zero signalling to these robust, perfectly foresighted economic agents that they wouldn’t have to pay any further debt rises back?

Note that the nonsense about a fiscal contraction expansion, which has been used to vilify government spending and deficits was introduced by the Monetarists initially in the 1980s.

As an alternative, they introduced the rather bizarre turnaround in logic that said that when there is unemployment the correct strategy for government is to cut its spending, that is, introduce what is now popularly known as ‘fiscal austerity’.

This policy view was based on an arcane theoretical notion that economic textbooks promote called ‘Ricardian Equivalence’.

It sounds scientific, but in simple terms it refers to the assertion that private spending is weak during a recession because households and firms form the view that the government will have to increase taxes in the future to pay back the debts it incurs due to the higher deficits.

As a consequence, the households and firms deliberately stop spending and save up to ensure they can pay the higher taxes. Once the government starts to cut the deficit, the theory claims that a signal is sent to the private sector that future taxes will be lower and so they start spending again. Problem solved.

Remember, Jean-Claude Trichet who is presumably in retirement with a very comfortable pension and plenty of financial security.