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The budget’s flawed premise

Written By: - Date published: 1:02 pm, May 15th, 2013 - 25 comments
Categories: class war, debt / deficit, economy, national - Tags: , ,

The Nats have made surplus by 2014-15 their one and only economic goal, because it is one that they can meet. They just keep the slashing social spending, and introducing stealth taxes until they make it. Claim success with no accounting of the damage caused on the way.

The whole approach rests on the fallacy of “expansionary austerity”. This approach is failing the world over. As has been widely covered in the media lately, the flimsy academic foundations that it rests on have recently been found to be utterly wrong. There are many good articles on the topic, this one by Bryan Gould is excellent:

Govt policies based on ‘sloppy research’

Key, English prefer to sacrifice the vulnerable than acknowledge damning case against austerity.

… Most people will know that the current government, from the moment it took office in 2008, has insisted that its top priority must be to cut spending and reduce the government deficit, thereby becoming a founder member of what is by now a dwindling group of countries that maintain that austerity is the correct response to recession.

This stance seems to run counter to the Keynesian lessons we thought had been learned from the Great Depression and to the experience today of those countries finding themselves mired in recession while pursuing austerity policies.

But, in the face of mounting evidence that they are on the wrong track, the proponents of austerity have been encouraged to stick to their guns by the work of two highly regarded Harvard economists.

Carmen Reinhart and Kenneth Rogoff published a paper called Growth in a Time of Debt in 2010 which purported to show that a country with international debts equal to 90 per cent or more of its national output would suddenly see a sharp fall in its growth rate.

For those countries with high levels of debt (and we are one of them), the lesson was clear. If they are to grow and escape recession, they must reduce debt. …

But the story has now taken an unexpected turn. A young graduate student at Massachusetts University Amherst, Thomas Herndon, was required to replicate Reinhart and Rogoff’s research. He was downcast to find that, try as he might, he could not. The young man finally discovered the truth; the research was vitiated by fundamental errors. With the help of two senior colleagues he published the results of his work and created a sensation which is still reverberating around the world.

The catalogue of mistakes is shocking. Reinhart and Rogoff had omitted through an oversight some of the key data; they had capriciously given excessive weighting to minor factors that had skewed the results; they had assembled statistics in bands so as to suggest there were tipping points (such as a 90 per cent debt to GDP ratio) that were in fact artificially constructed; and even if their conclusions had survived these errors, they had hardly considered the possibility that any correlation between high debt and growth rates might have shown that slow growth produced high debt rather than the other way around.

What this means is that policies that have kept millions out of work, condemned many to continuing poverty, destroyed a number of European economies and weighed down the whole global economy have been based on sloppy research and political prejudice.

But it seems unlikely the architects of austerity will be deterred. They will go on crucifying the poor and vulnerable, even in the face of practical and theoretical evidence that they are mistaken. …

Bryan Gould is a former Waikato University vice-chancellor and UK Labour Party MP.

Keep this in mind amidst the budget brouhaha tomorrow. The whole austerity driven focus of the budget and National’s economic policy is based on a premise which is in turn based on a spreadsheet error. Austerity and “surplus at all costs” has done this country much more harm than good, and merely delayed the recovery.


25 comments on “The budget’s flawed premise”

  1. One Anonymous Knucklehead 1

    So, the neo-liberal “conspiracy” turns out to have been snafu from the get-go. Not evil, just incompetence.


    • tc 1.1

      It’s not incompetence but deliberate choice of wealthy over the not so wealthy with all the consequences well laid out. They just don’t give a F.

    • Tom Gould 1.2

      Lead ‘news’ story on One News tonight has ‘journalist’ Corin Dann saying in a dramatic live cross outside Parliament “When Bill English came into office he was pretty much immediately faced with a wall of red ink. He had the global financial crisis to deal with, then the Christchurch Canterbury quakes, big deficits. He has fought and scraped to get the books back into shape. He has pretty much achieved that. But while things are looking up, he is a conservative man, fairly cautious man, so don’t expect a big spend up.” What planet is this snivelling Tory apologist on? Bill English, Corin’s hero. What a guy. I was waiting for Corin to well-up and wipe a tear from his eye.

      • QoT 1.2.1

        That would be Corin Dann who framed all election-debate questions to push the neocon line. I was especially fond of “So if we went into recession and had to pass an austerity budget, would you support it?”

      • Green machine UpandComer 1.2.2

        He is exactly right about Bill. Tune in to the Australian budget with 43 billion dollars worth of cuts to see the alternate reality that Labour would have subjected New Zealand to, except it would have been worse. Bill has been fantastic, and people in the real world are grateful.

  2. karol 2

    Good article by Gould. And this by Peter Lyons in this morning’s NZ Herald:

    In 1973 the Kirk Labour Government was in power. Many Kiwis were starting to protest against French testing of nuclear weapons in the Pacific. Fred Dagg was about to become a national icon. …

    Fast forward 40 years to 2013. Over the four decades, the New Zealand economy has undergone remarkable transformations. There has been a lurch towards free markets and reduced government intervention in the economy.

    The economy is now one of the most open in the world through the removal of barriers to international trade and financial flows. Over the decades, the economy has also experienced significant inflation. The general price level for goods and services is now almost 12 times higher than in 1973. …

    Many of these changes were necessary. But the ultimate rationale behind economic reform was to improve the material prosperity of New Zealanders. Yet in real terms, the median citizen and those below him or her on the income ladder are little better off than their parents were 40 years ago. Their ability to own the roof over their heads has actually declined significantly.

    A similar story has played out in other Western economies, including the US. The bulk of the gains in economic prosperity have accrued to those above the median.

    In the post war decades, until the early 1970s, benefits of economic growth, which averaged 3 per cent a year, were generally shared across the board. In the past 40 years, increased prosperity has largely accrued to the better off in our society.

    • Colonial Viper 2.1

      In the past 40 years, increased prosperity has largely accrued to the better off in our society.

      Not an accident.

  3. tracey 3

    As long as enough people believe (and there is enough manipulation and lying by various people to help them) that the only way they will have more personal wealth is to support the policies which currently assur eonly the top 1% more wealth, we will never get off this money-go-round.

  4. UpandComer 4

    You guys need to get a sense of proportion around the idea of ‘austerity’. I’m not sure how you can accuse the govt of borrowing/spending too much money, and also accusing it of ‘austerity’ in the same breath like Russel Norman, and the posters here.

    Not using up all your monetary power by not printing money as a run of the mill policy as opposed to a monetary policy emergency procedure isn’t austerity btw guys.

    • One Anonymous Knucklehead 4.1

      Ah, I see the point has sailed right over your head: the National Party sabotaged its own revenue stream with tax cuts in a recession. Not sure why you left the revenue side of the equation out of your analysis, but my best guess would be ideological mendacity.

    • Enough is Enough 4.2

      If National had not given tax cuts to the rich we would have never gone into deficit.

      It is that simple.

      They created this crisis.

      • UpandComer 4.2.1

        That statement is silly in how untrue it is. On the spending paths that greeted National, they could have raised taxes on everybody substantially, and we would have been in deficit for the foreseeable future. I’ll rephrase and say your statement is laughable.

        I’ll also just point out that over about half of the ‘tax cut’ you refer to, without any reference to any of the other tax policy measures that ‘increased’ revenue, was brought in by Labour, remember?

        • felix

          What tax cuts are you talking about? National’s were all “revenue neutral”, remember? All they did was cut income taxes for the rich and increase all the other taxes on everybody.

          Most are worse off as a result.

          Sure, it’s not austerity if you’re one of the top few percent. But who is?

        • tracey

          Do you concede the impact of national’s first tax cuts were not to stimulate the economy?

  5. Macro 5

    Nothing new… Neoliberal economics is essentially based on false premise and junk logic/math. The media have been brought up on this tripe, so will be very reluctant to criticize it.
    There is a growing number of economists around the world who are starting to realize the enormity of the error of the currently perceived conventional wisdom of neoliberal economic “theory”. They need more voice but get little attention.

  6. Shaz 6

    Rogoff’s and Reinhardt’s isn’t the only research that has been overturned. The CTU’s April economic report (http://union.org.nz/economicbulletin145) also covers the change of heart in the IMF where recent research has demonstrated that the effect of cuts in government spending is far more severe than was previously thought. The multiplier effect as it is called is the contraction in the wider economy especially in recession conditions caused by cuts in government spending.. The IMF’s historical value was set at about 0.5 i.e a $1.00 cut in spending would cause a 0.50 c contraction in the economy.
    Then new research shows that the likely actual impact is more generally between 1.2 and 1.9

    In the UK this information has caused one of the biggest wrenches in the coalition government as George Osborne has had to face serious questions about the speed and savagery of cuts from the Liberal Democrats. The so far untold story here is I would have thought that the government’s story about a well performing economy is somewhat of a chimera.. Whatever the GDP effects of an earthquake driven ‘recovery’ the year on year cuts in public sector funding and capacity,cuts in services and staffing and the cap on public sector personnel will be having a similar effect in our economy.

    • Colonial Viper 6.1

      So is it time to admit that orthodox economists are nothing more than mis-guessing fortune tellers, and dangerous ones at that?

      • peterlepaysan 6.1.1

        So what is new?

        It was GB Shaw ( I think) many decades ago who observed that “if you laid all the economists in the world end to end they still would not reach a conclusion.

        The study of economics can only ever be conjectural and descriptive of hypotheses.
        It can never be prescriptive.

        The mantras and dogmas of economists (and their adherents) have more in common with religious fundamentalists than with reality.

        Somebody we think important said something, and it was recorded in a book.

        These things align with my prejudices and beliefs so it must be true.

        Anyone who questions this is an unbeliever, an outcast, a gentile, an infidel, a satanist, a North Korean, a Stalinist, a socialist, a communist……etc etc.. (and worst of all “politically correct”)..

        • geoff

          “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today. ”

          –Evan Esar

  7. Huginn 7

    The response to Herndon’s critique of Rogoff & Reinhart has been fascinating.

    The defenders seem to be going through a Kübler-Ross Five Stages of Grief thing. There’s been a bit of anger and denial – a lot of ‘What’s wrong with you! Can’t you see it’s just common sense!!!!!!!’.

    Now they’re going through the Bargaining Phase with ‘It’s only a little mistake’ and ‘let’s not throw the baby out with the bath water’.

    It’s a very emotional time for these guys – it’s not easy arguing from a position of intellectual bankruptcy.

  8. geoff 8

    Let’s not pretend that Neoliberalism is just a mistake that some well-intentioned individuals made. It is merely the latest in a game that has occurred throughout history where the powerful attempt to assert as much dominance over the population as possible. That is simply the nature of power. All the concepts like neoliberalism, capitalism, socialism are just language games that power uses to grow.

  9. kiwicommie 9

    “All we are saying, is give slavery a chance!”

    • peterlepaysan 9.1

      Nah slavery is too expensive. Been tried ,and failed. A wage dependent proletariat is cheaper.
      Take away any welfare system, provide only charter schools and you wind up with a neo con lib paradise like Bangladesh. Shonkey (and his wall street/hollywood cronies) will love that.

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