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Austerity vs. stimulus

Written By: - Date published: 1:15 pm, September 27th, 2012 - 53 comments
Categories: capitalism, economy, uk politics, us politics - Tags: , , ,

The UK and USA make for interesting case studies in their differing responses to the global recession. Cameron’s Conservative government opted for austerity – huge cuts to the public sector. Based on the (loony) theory of “expansionary austerity” this was supposed to lift the economy (via a visit from the mythical confidence fairy). Obama’s administration opted for a stimulus package. Based on sound Keynesian economics this “counter cyclical” spending by the government provides input to the economy when it is needed.

The outcomes in the USA have certainly not been everything that Obama might have hoped for, but even so, guess which approach works best:

(Credit: NYT Syndicate.  Sourced from here).

Kind of a pity, don’t you think, that Key and the Nat’s decided, in their “wisdom”, to follow the UK on the “expansionary austerity” path? The NZ economy will eventually pick up again of course. But when it does it will be in spite of what this government has done, not because of it…

53 comments on “Austerity vs. stimulus”

  1. tc 1

    Rudd also stimulated the Oz economy admitted he didn’t need to on the whole but they knew resources would boom on whereas the rest wouldn’t.

    Catching up to Oz with the brighter future…..when will the sheeple wake up to these crooks who choose tax cuts for the wealthy instead.

  2. prism 2

    Thanks for this the graph – it seems clear as a guide to what we should be doing. Despite the tendency to bob along after the USA (the dingy dinghy) NACTs natural tendency tends towards screwing the masses, so reinforcing their overblown belief in their own worth based on “If you’re so smart why aren’t you rich”. The UK always has the class distinctions governing who gets the largesse and who gets the gruel which will pop up any time there is a shortage of goodies.

    The NZ way has become to carelessly conduct our business policies so as to squeeze NZ business till it fails, and make us poorer. And being poor demonstrates that we are a bunch of losers. There is no incentive to stimulate the economy because the result of the recession reinforces their prejudices, and their apathetic approach to creating conditions for a thriving economy.

  3. insider 3

    An alternative and more detailed view at comparative US/UK data. He’s sceptical a single policy difference across very different economies can solely account for the gap.

    http://etedeschi.com/2011/10/27/charts-digging-deeper-into-the-us-and-uk-gdp-comparison/

    “The quick conclusion here is that the differences in US and UK GDP have been mainly driven by a divergence in the path of real personal consumption. Fiscal policy may explain part of this difference, but there are other plausible candidates as well (such as, for example, the housing markets). “

    • Richard 3.1

      Sorry Comrade, you can’t link to actual economic analysis in a “Bash National With A Simplistic Poorly Understood Graph” post. Check the rules.

    • mike e 3.2

      Insider your graphs don’t match OECD figures!
      They show a rapid decline in exports since 2008 for a start!
      Which means your argument is shot full of holes!
      So One Tac and Dick cranium wipe the smile off the face

      • Bored 3.2.1

        The graphs don’t match the numbers? How surprising.

        From where I am seeing it just what do the numbers mean? The US dollars are just that $s US….and Bernanke is printing a shipload of them (quantitative easing)…so just what is the US GDP in real terms? Just what are real terms? Who bloody knows except to say that it is becoming apparent that Mr Washington on the Greenback has been severely undressed by Mr Bernanke.

        So to the Pound: it would appear that Betty Windsor is now well covered on the note with the clothes off of the backs of poor kids. But again, just what is the Pound worth? Really?

        • Draco T Bastard 3.2.1.1

          All good questions especially considering that the US is about to go for QE3:

          Why QE3 Won’t Expand the Circulating Money Supply

          In its third round of QE, the Fed says it will buy $40 billion in MBS every month for an indefinite period. To do this, it will essentially create money from nothing, paying for its purchases by crediting the reserve accounts of the banks from which it buys them. The banks will get the dollars and the Fed will get the MBS. But the banks’ balance sheets will remain the same, and the circulating money supply will remain the same.

          When the Fed engages in QE, it takes away something on the asset side of the bank’s balance sheet (government securities or mortgage-backed securities) and replaces it with electronically-generated dollars. These dollars are held in the banks’ reserve accounts at the Fed. They are “excess reserves,” which cannot be spent or lent into the economy by the banks. They can only be lent to other banks that need reserves, or used to obtain other assets (new loans, bonds, etc.). As Australian economist Steve Keen explains:

    • That’s sort of like saying that the abundance of coats is causing cold weather. Personal consumption and the state of the housing market should be viewed as indicators of the state of the economy, not drivers.

      • Poission 3.3.1

        The signal communicated at present is that the driver of the increased current AC deficit,is mixture of high govt expenditure and external influences such as economic downturn in the EU etc.

        Since the onset of the GFC the increased overseas financial investment liabilities has gone from 199 billion 2007- 251 billion 2012 yesterdays figures.

        The increase growth in liabilities (read debt )of around 51 billion if we divide it into the 3 sectors where the growth is largest is

        Agriculture 47%
        Business 9%
        Household 20%

        The two primary debt drivers are household mortgages,and agriculture land capture in ttl
        ( 44 billion) this is a result of the decreases cost of servicing debt the same driver that forced the Spanish asset bubble.

        A system operating outside of constraint is clearly evident,repeating the same errors is a recipe for disaster.

        That we have a self organized criticality emerging is evident.

        • Jokerman 3.3.1.1

          always enjoy reading your recurring summaries 🙂

          • Poission 3.3.1.1.1

            Thanks,and it seems Bollard is of the same mind (his exit interview being just published)

            Q The exchange rate issue hasn’t really gone away – the
            exchange rate has remained uncomfortably high in
            recent times and is challenging for parts of the tradables
            sector. What are your parting thoughts on what can be
            done to manage this?

            A We also understand more about inflation
            control and monetary processes and influences. But
            our understanding of exchange rates is still lacking. The
            exchange rate is essentially the price of one country
            compared to another country. Ideally it should reflect a
            country’s long term, sustainable competitiveness. When
            it doesn’t, it is problematic, particularly for a country
            like New Zealand which is very open and a price taker
            internationally.

            There are two classes of things we can do. The first
            is to address any internal distortions. Tax distortions
            in the housing property sector probably exacerbated
            our housing cycle and the carry trade.Some of those
            have been removed now which helps, but there are still
            arguably some distortions.

            The second is to address international distortions, but this is much harder to
            achieve. These distortions arise from capital controls and
            fixed or managed exchange rate systems through a large
            part of the world.

            Clearly we need to focus on the internal distortions,the indirect feedback will entrain (slowly) and doing nothing is not an option.here it is the signal that is important,an amber light so to speak.

            Click to access 2012sep75_3hodgetts.pdf

            • BloodyOrphan 3.3.1.1.1.1

              Good man that Bollard

              • To'stampingyourfeetlikeaspoiltbrat'.

                [lprent: deleted – right off topic. ]

                • [lprent: response was inappropriate as well. ]

                  • blue leopard

                    Is there any merit to having these above 2 comments on this site??

                    • [deleted]
                      Very sorry people.

                      PS: I have no objection too any of my comments being removed, I’m trying to contrbute and help not hinder this country.

                    • blue leopard

                      Thanks Bloody Orphan

                      Now that you’ve explained your comment, I can see that the comment from To’stampingyourfeetlikeaspoiltbrat’ was an unsolicited attack. Seems a shame that the moderators haven’t picked it up.

                      I sincerely hope this is not your mother. 🙁

                      If she is, may I suggest that ‘Happy Orphan’ might be a more appropriate name for you? 😀

                      [lprent: we don’t see everything all of the time – fixing. It is rather off topic. ]

                    • She was trying to speak for my mother, my “real” mother is worse bud.
                      And I choose BloodyOrphan beacuse it speaks my current state of health better,
                      but thanks I try to be a happy/life positive man.
                      I’ll hopefully change my alias again at some point in the future but 4 now it’s pertinent.
                      It was BernyD, but that was crowded with w’craft/remote phsycology.

  4. JonL 4

    “when will the sheeple wake up to these crooks who choose tax cuts for the wealthy instead.”

    Those that can do something about it?
    Probably never.

    • blue leopard 4.1

      “Those that can do something about it?
      Probably never.”

      What grounds do you say that?

      The sheeple who are benefitting from the circumstance have no need to wake up; in fact they would have a lot of resistance to waking due to the perks that they are getting. The increasing numbers that are experiencing degeneration of their circumstances will wake up.

      That’s why the crooks these days are particularly daft. I mean if you create too much damage people will wake up. NZ appears full of sheeple at present because most are still pretty comfortable…or perhaps are like frogs having the water they are sitting in slowly heated up.

      • tc 4.1.1

        Yeah I think frogs is a better analogy, sheeple can’t always follow the flock as it jets away on an overseas holiday, pays off the mortgage, sends the kids to those elite and more publicly funded private schools.

        Whereas the frogs plod along thinking it will get better as it has before if they just remain in this water, stay the course, everyone else is in the same boat, no need to vote they’re all the same etc etc

        • prism 4.1.1.1

          I object to that frog in boiling water analogy on a care for the environment basis. But I do think that the daily declining standard of living must register eventually with NZs. Surely we won’t have to go until we face Greece’s dilemma. (That word is from Greek derivation actually.) Perhaps we could talk about rising tides that will drown us instead of frogs. When we are treading water we’ll be alerted to our looming problems.

          We should be querying why NACTs are throwing money at education testing when we know already we have a ‘tail of poor achievement’ there that isn’t helped by having this extra test of National Standards. At the same time we have a tail of unemployment and low earners, the working poor, so where is the determination to turn this round. But of course the govmnt doesn’t want to decide a minimum level of income that can be stated as the poverty level to enable statistics to be quantified.. Too much information as the saying goes when someone doesn’t want to hear the full facts.

          • Jokerman 4.1.1.1.1

            plenty of cognitive overload with all this Facechook Twatting nonsense going around
            (people are not only airing their washing publicly, but allowing the chooks to poop all over it) Made ya look, ya dirty chook, hung ya on the butchers hook…

            • prism 4.1.1.1.1.1

              Jokerman
              Your approach is highly individual – I think it’s called stream of consciousness. Would you agree?

      • Dr Terry 4.1.2

        blue leopard – yes, I think you are on to it here. New Zealand has lots of poor people but it is not a poor country, having considerable numbers who remain very comfortably well off. Key’s strategy is to avoid, as much as possible, treading on the toes of middle – to- upper middle class voters. He is perfectly content with a lesser (though significant) number stuck in the “poor” category.

        Will there be economic recovery for the “underclasses”? Possibly never, after Key has finished with them.

    • King Kong 4.2

      When will people wake up to the fact that calling the voters of this country “sheeple” makes you sound like a ginormous fuckwit

  5. …Sound Keynesian economics!?

    What a complete fantasy.

    • mike e 5.1

      the water boy the figures insider has provided are from a fundamentalist right wing faith based website moron and are incorrect.
      Keynesian economics works in recessions you naive idiot stick to gossip around the watercooler!

      • Colonial Viper 5.1.1

        Considering that its the neolibs and the kleptocratic elite who got us here in the first place…

  6. marsman 6

    Expansionary austerity is that like wet dryness?

  7. Colonial Viper 7

    I don’t think either austerity or stimulus approaches will tackle what needs to occur: massive debt deleveraging.

    • higherstandard 7.1

      No, I doubt it as well.

      Unfortunately the usual approaches to rapidly correct such serious imbalances such as wars and plagues are fairly hideous alternatives to the rapidly cycling mini boom/busts that we have to look forward to over the coming years.

      Alternatively we could cede all control to the Hypnotoad ?

      • Bored 7.1.1

        That is normally called a “market”….a sort of a mythical entity which cant see its own hands.

      • Draco T Bastard 7.1.2

        Unfortunately the usual approaches to rapidly correct such serious imbalances…

        Actually, the usual approach which has been perfected over the last 5000 years is debt write-off. The problem is that the people who hold all the debt don’t want to do that and they’re the ones controlling the politicians.

  8. mike e 8

    CV writing off debt is another tool.

    • Colonial Viper 8.1

      Yep. Odious and fraudulent debts need to be written off.

      • blue leopard 8.1.1

        …and do something about the privileges that corporations have while you’re at it; they appear to create monopolistic effects in many different ways and need to be removed (the privileges). This would allow for small businesses to be more effective; more work and less nasty part-time/temporary BS work that large monopolies have devised.

        …and how about stop treating money as a commodity and put it back in its rightful place.

  9. Poission 9

    Austerity vs stimulus is a binary in its simplest form and quite nicely answered as response mechanism by Minsky presciently.

    If the government is to be the lender of last resort to salvage the financial markets ( to big to fail) and as it induces instability in employment.Then the inverse holds that the government in addition becomes the employer of last resort ( to reduce the depreciation of human capital)

    One of the arguments at present is if the large institutions are to big to fail,then they are also to big to manage due to the increased complexity ( and inherent instability ).

    The absence of any workable solution globally is clearly evident,so copying and pasting some template to NZ is not an option.

    Here the changes need to be more diverse,and a mix of both fiscal policy such as an asset tax,CGT or removal of interest deduction for investment property ( here savers are subsiding borrowers).

    Another mechanism maybe an enhanced withholding tax on short term non resident investment in todays figures (nzstats) we see the oncall overseas financial liability has changed from 2007-2012

    call 19billion to 27billion and the 2-90 day 58 billion-49 billion.a greater risk for overnight flight.

    Time to increase the pressure.

  10. xtasy 10

    Neither works:

    The world is caught in a frenzy of idiot political measures, which will never address the problems.

    Austerity, if it is based solely on cutting debt, costs and deficits, to achieve a hypothetical “balance” that is just up in the air, is a waste of time and will only worsen things (see especially the Greek scenario).

    Fiscal easing by printing money may be a solution to a degree, but it also becomes a useless and rather harmful measure, once all other competing economies do the same, when this neutralises any potential advantegeos effects, and when it only leads to lowering currencies in comparisons to others. Inflation will down the line be the menace to follow.

    Keynesian economic measures have their limits, especially when other competitors implement measures of a different kind (printing money, devaluing currency), that make the measures less or totally ineffective.

    So the world is heading into a situation, where no magic solution is possible. Most countries and economies are already taking a more protectionist approach. NZ is sadly only a hangers on economy, a marginal player, and the only thing that makes NZ a focus point internationally is, that it is a great, safe playground for currency speculators.

    That is NOT how you run an economy, and Key as currency trader of years gone by is the worst leader this country could ever have at this moment.

    A well thought through set of moderate, yet smart and diverse measures are needed to protect NZ from the economic disaster to hit the world. For once NZ will never be a loser, as it is a country so many desire to “invest” in, be this just for currency harbouring or else. There are also endless migrants, many well “loaded” and connected seeking “safe havens”. So besides of that, all NZ needs to do is, to smartly operate, to more diversify economic activity, to smarten up and offer more high end products (value added), to make sure skilled people stay, to get skilled ones back, or attract new high skill persons, to invest in a future proof technology and economy, which goes beyond selling milk powder, cheese, butter, meat, wool, fruit, logs, raw fish and the likes, which mostly get processed overseas.

    The government that gets a recipe to steer that way will win the votes and get re-elected at least 2 to 3 terms. So that is the challenge, but who can deliver?

  11. xtasy 11

    Chile livertat, elpueblo nido:

  12. xtasy 12


    Khechua y Aimara indio musica

    Have just a little “taste” of latin American native musi8c of best, authentic and loved quality, from Peru and so forth, but let us not forget Che and friends, and what they fought for!

    More to come, viva!

  13. Lloyd 13

    The sad thing about screwing the sheeple at the bottom of the pile is that if instead the poorest in society were given a hand-up economically and educationally; in the long-term, the people at the top of the pile would generally be better off. Trickle -up does work. Less crime, better health and a better educated society are all things that will generally help out the rich and allow for a flexible economy, in which the rich can make money faster. Only the really stupid rich would be arguing for economic contraction at the moment, but just because you are rich doesn’t mean you are smart.

    • Colonial Viper 13.1

      if instead the poorest in society were given a hand-up economically and educationally; in the long-term, the people at the top of the pile would generally be better off.

      The “long term”? What is that? I just want to make an easy 10% gain now by risk free ticket clipping please. Screw the “long term”.

    • blue leopard 13.2

      +1

    • Jokerman 13.3

      sadly, true. 🙁

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  • 300,000 students to benefit from free mental health services
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