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Austerity


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'Austerity as a Knowledge Transmission Mechanism failure'

Related to the post after this one, from Simon Wren-Lewis:
Austerity as a Knowledge Transmission Mechanism failure: In this post I talked about the Knowledge Transmission Mechanism: the process by which academic ideas do or do not get translated into economic policy.

I pointed to the importance of what I called 'policy intermediaries' in this process: civil servants, think tanks, policy entrepreneurs, the media, and occasionally financial sector economists and central banks.

Here I want to ask whether thinking about these intermediaries could help explain the continuing popularity amongst policy makers of austerity during a liquidity trap, even though there is an academic consensus behind the idea that austerity now would harm output. ...

Posted by Mark Thoma on Sunday, June 7, 2015 at 11:24 AM in Economics, Fiscal Policy, Politics | Permalink Comments (16)

The Economic Consequences of Austerity'

From today's links, Amartya Sen on the turn to austerity during the Great Recession (there's a lot more in the full text):
The economic consequences of austerity, by Amartya Sen:

...As it is quite common these days to blame economists for failing to see the real world, I take this opportunity to note that very few professionally trained economists were persuaded by the direction in which those in charge of European finances decided to take Europe. The European debacle demonstrated, in effect, that you do not need economists to generate a holy mess: the financial sector can generate its own gory calamity with the greatest of elegance and ease. Further, if the policy of austerity deepened Europe's economic problems, it did not help in the aimed objective of reducing the ratio of debt to GDP to any significant extent – in fact, sometimes quite the contrary. ...

If failing to understand some basic Keynesian relations is a part of the explanation of what happened, there was also another, and more subtle, story behind the confounded economics of austerity. There was an odd confusion in policy thinking between the real need for institutional reform in Europe and the imagined need for austerity – two quite different things. There can be little doubt that Europe has needed, for quite some time, many serious institutional reforms – from the avoidance of tax evasion and the fixing of more reasonable retiring ages to sensible working hours and the elimination of institutional rigidities, including those in the labour markets. But the real (and strong) case for institutional reform has to be distinguished from an imagined case for indiscriminate austerity, which does not do anything to change a system while hugely inflicting pain. ...
An analogy can help to make the point clearer: it is as if a person had asked for an antibiotic for his fever, and been given a mixed tablet with antibiotic and rat poison. You cannot have the antibiotic without also having the rat poison. We were in effect being told that if you want economic reform then you must also have, along with it, economic austerity, although there is absolutely no reason whatsoever why the two must be put together as a chemical compound. For example, having sensible retiring ages, which many European countries do not (a much-needed institutional reform), is not similar to cutting severely the pensions on which the lives of the working poor may depend (a favourite of austeritarians). The compounding of the two – not least in the demands made on Greece – has made it much harder to pursue institutional reforms. ...



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