Chapter 1 Questions

Earth to Talking Heads: Cutting through the punditry on economics

(formerly: Pundit's Guide to Economics)



Chapter 1 Questions

Q: Does belt-tightening by everybody ever work?

A: “Belt-tightening” by households and businesses is the natural response to slumps. According to the cave man metaphor, it should be applied by all, including government. John Kenneth Galbraith described this as “the oldest error in economics.” But belt-tightening, i.e., austerity has been tried dozens of times. The economic authorities in Europe are prescribing it now, under the rubric, “Expansionary fiscal consolidation.”

Has it ever actually worked to bring an economy out of recession? 

After the 1997 Asian currency meltdown and the serious recession in several East Asian economies, South Korea was able to tighten its belt, cut its exchange rate, and export its way to recovery.  After 1990, the reunified Germany was able to grow out of the economic difficulties.  Otherwise, between 1900 and today, there have been no exemplars for austerity. After the Great Financial Crisis and stagnating worldwide demand, the export model is no longer open.

The idea that there is an equilibrium to which the economy will return after a shock, if only everybody would behave, is seductive. Unfortunately, although it is the basis for much of orthodox economics today, it is wrong. The economy is a dynamic system. A return to an acceptable stability is not guaranteed. There is no internal gyroscope when it is knocked off balance. The government must act, through planning and investing and spending, to act as a stabilizer.

Q: Do nations with low or high government spending do best? 

A: Nations with larger government sectors do better than those with lower.  Examples of the former:  Sweden, Northern European states.  (Similarly, the U.S. states with larger state and local governments and higher taxes tend to be the more prosperous.)

Q: “How can we afford to invest in public goods when tax revenues are going down?”

A: Not possible from the Cave Man metaphor. Difficult for the Machine, depending on how it is programmed. The Natural Force would just ignore such efforts. On a family farm, the key resource is not money, but labor and capital. Finances are adjusted to keep these fully employed. Moving value from the future to the present – the use of credit – is a no-brainer when resources are lying idle. It is a matter of getting fuel in the machinery and making plans. The tasks at hand are obvious. Barns fences, roads, wells.

What is available practically is often not available politically, often because it requires the willingness to create the credit. We look into that in a later chapter. What a difference the metaphor makes.