Wednesday, April 17, 2013

Austerity R.I.P.: April 16th 2013

We've made a great deal of fun about austerity here at the Bonddad Blog.  Simply type in the word austerity in the search tab in the upper left and a bevy of posts will turn up. 

My reasoning is pretty simple.

1.) NDD and I did a series of articles on the Great Depression about 5-6 years ago.  The data from that episode is incontrovertible: well structured government spending during a period of weak demand increases GDP.  The same philosophy underlies Chinese investment policy as well, and they've been growing by leaps and bounds.

2.) The basic GDP formula uses addition.  One of the variables in this equation is government spending.  Hence, simple (and I mean really simple) math tells us that austerity lowers growth by definition.

The primary arguments against government spending are

1.) political (the government is a bad thing)
2.) Moral (our children will drown in debt)
3.) the theories of Reingard and Rogoff

Points 1 and 2 usually only come out to play during Democratic administrations.  Hence, they should be ignored.

Points number three are derived from a paper that argued when a country's debt goes over 90% of GDP, growth slows.  Now it turns out that that paper had some serious errors in it.  Mike Konczal over at the Next New Deal has the lowdown on exactly what was involved.  But the end result is the research didn't add up.  At all. 

So, here's the deal:

If you have argued for austerity in any way over the last five years, realize this:

1.) The paper which backed up your theories was deeply flawed.
2.) The actual experience of countries that have tried these theories shows little to no growth.

This means that austerity doesn't work in theory and and doesn't work in practice.

Or, more bluntly: austerity doesn't fucking work.  Period.