That’s what we’re doing – it’s official according to Treasury. It was revealed on Friday at a lunchtime seminar in Wellington with Dr Girol Karacaoglu, recently appointed Chief Economist at the Treasury.
The best response came from Dr Geoff Bertram, who asked “What’s intelligent about it?”, citing anti-tradables bias and income inequality as two unintelligent outcomes of current policy.
Karacaoglu admitted that Treasury were very aware of anti-tradables bias in current policy settings. Treasury were asking themselves what could they do in the face of high current account deficit, low savings, high real interest rates and low growth.
Good questions all – Treasury’s “intelligent austerity” answer was to focus on increasing savings of the Government sector – budget cuts in my language.
So it was with interest I read today “How to end this Depression” by Paul Krugman in a recent copy of the New York Review of Books. This is what he had to say about austerity policies:
Assessing the effects of austerity therefore requires painstaking examination of the actual legislation used to implement that austerity.
Fortunately, researchers at the International Monetary Fund have done the legwork, identifying no fewer than 173 cases of fiscal austerity in advanced countries over the period between 1978 and 2009. And what they found was that austerity policies were followed by economic contraction and higher unemployment.
There’s much, much more evidence, but I hope this brief overview gives a sense of what we know and how we know it. I hope in particular that when you read me or Joseph Stiglitz or Christina Romer saying that cutting spending in the face of this depression will make it worse, and that temporary increases in spending could help us recover, you won’t think, “Well, that’s just his/her opinion.” As Romer asserted in a recent speech about research into fiscal policy:
The evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process.
That’s what we need to change.
I couldn’t agree more. Seems much more intelligent to me. You can read the IMF research here.