
Amartya Sen: The economic consequences of austerity - MaysonL
http://www.newstatesman.com/politics/2015/06/amartya-sen-economic-consequences-austerity
======
mohawk
Fascinating how the meaning of the word 'austerity' has drifted away from the
meaning of 'austere'. A balanced budget doesn't seem very 'austere' to me.

Many people arguing against balancing budgets (or 'austerity' if you will) do
so because the first budgets to be slashed are usually things where the
benefits are long-term, such as education. But it's a false dichotomy that
these are the only choices.

Then there's the economists, who will pull out some toy model and claim xyz is
good/bad. Too me it seems more like religions (being a Keynesian, Austrian,
etc), where people search for facts that confirm their positions.

The problem with most macroeconomic theories is that they ignore too many
important details.

So for example, you can borrow money to invest in the future which is usually
good in the long run, or you can spend it on things you don't need such as
hosting international sports competitions, ineffective military equipment, ...
This means you can come to completely different conclusions as to the
effectiveness of government spending. In the words of Warren Buffet, we don't
talk about 'quality' of GDP enough.

There's a nice paper by Mankiw on the topic of science vs engineering in
economics:

[https://www.nber.org/papers/w12349](https://www.nber.org/papers/w12349)

~~~
atmosx
Austerity is a religion in Europe and it's strongly supported by Germany,
which is the leading economic powerhouse and major EU creditor.

If you look at the surplus it works well for their exports but the salaries
are at the same level they were in the 90s. So although unemployment is low
and exports were going strong (hence corporations like BMW and Mercedes are
making huge profits) the salaries were largely at the same levels. The German
government decide to keep the surplus instead of spending money in local and
foreign investment which keeps virtually the EUR low. It's a policy heavily
criticized by both USA and European economists.

One might argue that these choices worked very well for Germany. Not very well
for the rest of the Eurozone, especially the Mediterranean countries, which
found themselves having huge deficits. The EU has structural problems which
the German model speed up.

~~~
mohawk
First, i'd like to state that i'm talking about austerity in general, not
about Greece in particular. Greece needs a debt restructuring, there's no way
around it.

The whole reason for all that austerity was that some countries were unable to
refinance their debt and other countries are afraid they might not be able to
refinance in the future. Refinancing debt in hard times becomes harder yet if
it is externally financed.

You need to convince someone to lend you money if you want to run a deficit.

Love it or hate it, the Germans don't like a soft currency. The reason is
probably the prelude to the rise of Hitler, which was marked by hyperinflation
from printing too much money. It has been in their "DNA" since WW2, and no
amount of economic handwaving is going to change that, at least in the
forseeable future. In practice Germany has had a budget deficit nearly every
year of course (such is politics), they just aren't that big.

The reason Germany joined the Eurozone was the absence of debt mutualisation.
The Bundesbank warned that this was hard/impossible without political union,
but they were ignored. And so, here we are.

~~~
ZeroGravitas
Some claim the Germans intentionally inflated their currency to stiff the
French who held crippling levels of debt over the Germans.

~~~
mohawk
Inflating away the currency had no benefit for reparations.

The details are here

[https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_R...](https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic)

[https://en.wikipedia.org/wiki/World_War_I_reparations](https://en.wikipedia.org/wiki/World_War_I_reparations)

------
jackgavigan
Sen is being disingenuous when he compares the ratio of debt to GDP in 1948
(200%) and 1957 (120%), with 2010 (70%). The reason that, as he puts it, "the
scare was not there from the late 1940s through the 1960s" is because the UK's
debt level at that time was a legacy of WWII. The UK's national debt ballooned
during WWII, peaking at 237% in 1946-47, then declined rapidly to less than
50% in 1973.[1]

He also fails to distinguish between the degree of austerity imposed in the UK
and Europe. In the UK, the Conservative government has taken steps to balance
the budget by reigning in public spending (benefits in particular) in order to
cut the deficit. It is a world apart from the extreme measures that were
imposed on countries like Ireland[2] and Greece[3].

For context: The New Statesman is a left-wing publication. The left-wing in
Britain are deeply opposed to the (right wing) Conservative government's
austerity policies.

1:
[http://www.ukpublicspending.co.uk/uk_national_debt_chart.htm...](http://www.ukpublicspending.co.uk/uk_national_debt_chart.html)

2: [http://www.independent.ie/business/personal-
finance/the-10-w...](http://www.independent.ie/business/personal-
finance/the-10-worst-budget-blows-since-austerity-hit-30656061.html)

3: [http://www.newyorker.com/business/currency/what-austerity-
lo...](http://www.newyorker.com/business/currency/what-austerity-looks-like-
inside-greece)

~~~
MaysonL
There is _no_ correlation between austerity and debt reduction:
[http://equitablegrowth.org/2015/06/28/must-read-christian-
od...](http://equitablegrowth.org/2015/06/28/must-read-christian-odendahl-no-
correlation/)

[https://news.ycombinator.com/item?id=9796611](https://news.ycombinator.com/item?id=9796611)

In other words, austerity doesn't work.

~~~
jackgavigan
Ironically, that graph is taken from an IMF paper[1], which outlines a model
for the effect of fiscal tightening on the Debt:GDP ratio, under which said
ratio generally (depending on the country's fiscal multiplier) increases in
the first year after a fiscal tightening, then declines after year 2 (see
figures 2, 3 and 4).

In other words, that graph _supports_ the idea that austerity helps reduce
debt.

1:
[http://www.imf.org/external/pubs/ft/wp/2013/wp1367.pdf](http://www.imf.org/external/pubs/ft/wp/2013/wp1367.pdf)

~~~
MaysonL
The paper is about a model, not any actual data: the data don't support the
thesis. Anyway, austerity at the zero lower bound is arguably insane, and
imposing it on countries in recession is also arguably insane.

------
gadders
"Similarly, at the international level, the global free fall following the
2008 crisis was largely halted by the move, under the visionary leadership of
Gordon Brown, for a meeting of the governments of the newly formed G20 in
April 2009 in London, each promising to do its best not to feed the downward
spiral by domestic complicity."

I think that is the first time I've heard Gordon Brown described as visionary.
He's normally considered one of the worst post-war Prime Ministers.

~~~
eterm
You probably read too many UK newspapers, each of which decided to make a
sustained attack throughout his leadership.

~~~
gadders
Well, living in the UK, yes I do.

And Brown decided to wage his own childish sustained attack on Tony Blair for
the whole time he was Chancellor of the Exchequor as well.

But on top of all this, Brown was a bully to his subordinates as well.

~~~
TheOtherHobbes
He wasn't as bad as James Callaghan, John Major, or - IMO - Margaret Thatcher.
And Blair was - and is - a war criminal.

The politicking between the two was juvenile, but I'd rather blame Brown for
his insistence on semi-privatised (and ruinously expensive) funding for public
projects through the misuse of PFI.

That aside, Sen may actually be right in that Brown kept it together after
2008.

The Tory press love to blame him for 2008 in its entirety, including the parts
he had no control over. But that's because the Tory press is full of vile
liars, criminals, and frauds. (Some of whom have spent time in jail now.)

A more sober assessment is less unkind to Brown as an economist - if perhaps
not as a politician.

~~~
gadders
He could have made a very good academic. He's obviously a bright bloke. He
appeared to be temperamentally unsuitable to leadership though.

To your other points:

\- Calling Blair a war criminal is just childish name calling.

\- Thatcher is one of the best post-war Prime Ministers, together with Clement
Atlee, depending on your politics.

\- The left-wing press has its own share of liars and frauds. The Daily Mirror
was at least as complicit as the Murdoch press in phone hacking. And Johan
Hari, Guardian Journalist, is probably the biggest liar in journalism of
moderd times.

~~~
TheOtherHobbes
It's not very realistic to write off Blair's record as "childish name
calling."

We're still waiting for the Chilcot report, but the US side has more or less
admitted that the pretexts for the Iraq war were made up nonsense.

At least half a million people died in that war, and the results for the
region were catastrophic - although very profitable for certain contractors.

I'm not quite sure what else you need to describe someone as a war criminal.
But it's not just my opinion: it's a sentiment that's been voiced in the House
of Lords.

As for Thatcher - charisma hardly maps to competence, and many of Thatcher's
protectees and associates were - let's say - questionable company for a moral
leader, with some extremely unsavoury hobbies that are being investigated by
the police. This hardly speaks well of her judgement or character.

The Daily Mirror has very limited political influence, and last time I looked
there was no one from the Mirror in the Cabinet running Communications for No
10 - until they were tried and jailed.

It would be interesting to find out exactly how and where phone hacking
started. I suspect it wasn't invented by the Mirror. Naturally I can't prove
that. But I do know that as far back as 1994 journalists from another
newspaper were handing out illegal addictive drugs in return for tip-offs. So
phone hacking is just the tip of the iceberg.

And Johann Hari actually wrote for the Indie, not the Guardian.

Considering the Mail regularly "repurposes" content from the entire web
without attribution, accusing him of being the worst journalist _ever_ is
slightly hyperbolic - although to be fair the Mail does usually try to rewrite
the content at least a little, which makes it okay, I guess.

~~~
gadders
>>It's not very realistic to write off Blair's record as "childish name
calling." We're still waiting for the Chilcot report, but the US side has more
or less admitted that the pretexts for the Iraq war were made up nonsense.

I don't think that's the case. Even countries that were against military
action, such as France, believed Saddam had WMDs.

>>I'm not quite sure what else you need to describe someone as a war criminal.
But it's not just my opinion: it's a sentiment that's been voiced in the House
of Lords.

The same as for any other criminal - a conviction by an actual court.

>>As for Thatcher - charisma hardly maps to competence, and many of Thatcher's
protectees and associates were - let's say - questionable company for a moral
leader, with some extremely unsavoury hobbies that are being investigated by
the police. This hardly speaks well of her judgement or character.

I suspect we won't agree on her political competence but if you implying some
of her ministers were paedophiles, I suggest you also look at Grevill Janner
(Labour) and Cyril Smith (Liberal).

>>Considering the Mail regularly "repurposes" content from the entire web
without attribution, accusing him of being the worst journalist ever is
slightly hyperbolic - although to be fair the Mail does usually try to rewrite
the content at least a little, which makes it okay, I guess.

I think repurposing or copying content from other websites is not as serious a
journalistic sin as inventing large parts of stories. Hari didn't just
plagiarised, he knowingly lied. He also cyber-stalked people on wikipedia as
well. [http://www.huffingtonpost.com/2011/07/20/johann-hari-
fabrica...](http://www.huffingtonpost.com/2011/07/20/johann-hari-
fabrication_n_904456.html)

------
paulsutter
Austerity yes/no is the economic equivalent of a bikeshed argument.

All the arguments about printing more or printing less money completely
sidestep the real issue: how do you improve the productivity of the Greek
economy. Economists have opposing theories that it's either really good, or
really bad, to drop money from helicopters or just outright give it to banks.

None of these people are looking at the Greek economy saying "this is how they
can double tourism", etc. Over the long term these are the decisions will
create actual sustainable growth.

As for getting back the €360B, well, I wish all parties better luck with their
decisionmaking next time. Seems like they need aid more than they need loans.

~~~
tim333
>Austerity yes/no is the economic equivalent of a bikeshed argument.

Well not really - it effects millions of people lives and billions / trillions
in economic output and in the 1920's case led to Hitler and WW2. It's not like
what colour to paint the bike shed.

------
Symmetry
It's worth noting that austerity is strongly correlated with GDP decrease only
for those countries without an independent monetary policy (i.e. the
eurozone). People have been worried about the zero lower bound but it doesn't
seem to have had much of an effect in practice.

[http://www.themoneyillusion.com/?p=29692](http://www.themoneyillusion.com/?p=29692)

------
ekianjo
> GDP per capita has risen far more slowly in the UK than in the US and Japan
> (not to mention some of the faster-growing Asian economies).

Oh, I don't think you should cite Japan as any example anywhere. The financial
situation over here is catastrophic, and there's not telling when the country
actually hits the wall, but when it will it will hit it BAD. Demographic
decline, Productivity stagnating, retirement paid by workers (less and less of
them), humongous debt (spelling out default of hyper inflation in the mid
term) - and a Nobel laureate should know that GDP growth is far from a good
economic indicator...

> and austerity, as Keynes noted, is essentially anti-growth

Huh, does the author seriously believe that Keynes was constant in his
beliefs? The guy changed his mind about many things thoughout his life:
[http://www.economist.com/blogs/freeexchange/2013/11/economic...](http://www.economist.com/blogs/freeexchange/2013/11/economic-
history-2)

~~~
conistonwater
> Oh, I don't think you should cite Japan as any example anywhere. The
> financial situation over here is catastrophic, and there's not telling when
> the country actually hits the wall, but when it will it will hit it BAD.
> Demographic decline, Productivity stagnating, retirement paid by workers
> (less and less of them), humongous debt (spelling out default of hyper
> inflation in the mid term)...

Wait, if the UK, which doesn't suffer from these problems quite as badly,
still has lower GDP growth than a country that does, that says something bad
about UK's growth. So it seems clear then that the UK has done something badly
wrong.

> GDP growth is far from a good economic indicator

It should be good enough. For one thing, large systematic movements in _any_
indicator can be used to measure things, and the indicator doesn't have to be
totally precise for it to be useful.

~~~
mohawk
Ah, Japan & GDP growth numbers, the perfect example :)

Are GDP numbers a good indicator of the success of economic policies? They
aren't that useful if you ignore all the details.

Here is an example when comparing US and Japan GDP growth numbers:

[http://research.stlouisfed.org/publications/es/article/10011](http://research.stlouisfed.org/publications/es/article/10011)

"In summary, three structural factors seem to account for the difference in
GDP growth between Japan and the United States in the post-1990 period: (i)
the slow population growth in Japan, (ii) the employment rate, and (iii) the
decline of average hours worked in Japan from a very high level to the level
in the United States. It seems useful to consider these findings when Japan’s
experience is used to draw policy conclusions for the United States."

And yet we have been lectured by numerous economists (sometimes with Nobel
medals on them) about the implications these raw GDP growth numbers supposedly
have for economic policy.

------
tim333
Having just finished the article a day or so later it occurs to me a lot of
the problems occur because the situation is too darn hard to understand. 99%
of people if asked to explain why increasing government borrowing in a
financial crisis is a good thing in general if you have your own currency but
increasing your personal borrowing is often bad would fail to give an answer
that would pass an economics exam. Most elected leaders also. Hence the mess
we have.

------
welshguy
To quote Margaret Thatcher: "You soon run out of other peoples money"

------
petercooper
Does Britain really have "austerity" when the total central government
spending in 2015 is 39.4% higher than in 2007 at the height of our supposed
prosperity?

------
vegancap
Keynes's record on matters of public spending and monetary policy is a shaky
one (see broken window fallacy). Not only is any level of public debt a threat
to long-term stability, it's immoral. Generally speaking it's not us, in the
present economy, or the politicians who allow the debt to rise who have to pay
it back. It's our children and grandchildren. Inter-generational debt just
isn't right. New Statesman should have read some Hayek.

~~~
stkni
Nah, don't think so. Keynes might not have been right about everything but I
think some of his ideas are the closest we've come to what could be described
as a 'just' economy.

Indeed if we're going down this road then the broken window fallacy contains a
contradiction (and so must be false) because it assumes full employment to
reach its conclusion. Something that, should it be true, would probably cause
the problem we're trying to solve to disappear.

------
Htsthbjig
Good piece of economic propaganda from first word to the last:

"Nobel Prize-winning economist Amartya Sen considers the alternatives."

There is no such a thing like Nobel price Winners. There are Winners of
Central bank's created Nobel Memorial price that of course say what the
Central Banks want.

To say that the crisis that we have today is the consequence of austerity is
like saying that because you feel bad when sober the morning after getting
drunk, the problem is being sober in the first place.

There is no Western country today that is austere at all. All of them are
spending more money that they have, most of it on bad investments.

This always has ended on one place: destruction of capital. It should had been
done in an ordered manner but they decided to kick the can ignoring the
problem but making it worse in the future.

Instead of removing the bad investments from the system, they had used the
working part of the system to save the bad, actually rewarding the bad
actors(that made a killing at the start of the bubbles.e.g 20% profits per
year in Greece real state).

When Greece was bankrupt years ago, the problem was not solved giving them
more money, and indebting them even more.

The proper solution was to bankrupt Greece as soon as they could not pay. Of
course this would have bankrupted the irresponsible French and German banks
that lend money to Greece in the first place. "Saving Greece" was in fact
saving French and German banks and allocating the losses on public hands.

