My daughters separately refer me to this article from last Sunday's New York Times Magazine: God Save The British Economy, by Adam Davidson.
This is the story of an American economist, one Adam Posen, who finds himself appointed as a member of the Monetary Policy Committee of the Bank of England in an era of Tory government. It seems that the Cameron government has come to office committed to a program of "austerity." Great word, "austerity." As in, "The economy's only chance to return to long-term growth, Cameron argued, would be a painful, but brief period of austerity." As soon as they use that word (it appears upwards of 30 times in the story) you know where this is coming out. "Austerity" -- how cruel! how heartless!
Posen figures out that there is an alternative to "austerity," known here as "stimulus." Seems to be working in Japan. (I can't believe that Japan is the best example they could find of the benefits of "stimulus." Isn't that a clear indication that there is no actual success?) The MPC starts taking votes on monetary policy, and before you know it it's going 8 to 1 against Posen every time. But he's a principled chap, and sticks to his guns. There isn't a real end to the story. But, according to the author, the tide of proper world thinking is now turning against "austerity" and toward "stimulus."
In the 2010 mid-term elections, U.S. voters flooded Congress with Tea Party-friendly candidates. Many carried the mandate to halt further government stimulus. Since then, though, an increasing number of global economic policy leaders have turned on austerity. Earlier this year, in a remarkable joint statement, the I.M.F., along with the World bank, World Trade Organization and eight other major economic institutions, warned that austerity was hurting global growth and raising unemployment. They asked the world's major economies to embrace stimulus.
Whatever you think of the loaded terms "austerity" and "stimulus" (I would prefer "responsible behavior" and "irresponsible behavior"), you can't get away from the fact that these policies are the opposite of each other. They cannot both be right. If one of them is right, then the other is a fallacy.
Which one is the fallacy? It's not too hard to figure out. "Stimulus" as an ongoing economic policy implies an ever-increasing occupation of the economy by the state. If that worked, North Korea and Cuba would be great economic successes. Look around and figure out which are the most dynamic and successful economies: the United States for 200 years after its founding (with the exception of the depression), Britain (before the socialists took over after World War II, and again for a period after the Thatcher reforms), Hong Kong, Singapore, post-war Germany, Australia, Canada (under current Conservative government). What is the key thing they have in common? Low occupation of the economy by the government. What happens when there is high occupation of the economy by the state? Even putting aside the disaster of communism, consider the likes of Greece, Spain, Argentina, Venezuela.
Yes, when the state cuts back its spending, the first thing that occurs is that some people get laid off. If you measure gdp by counting a dollar of government spending as equal to a dollar of private spending (which is how all gdp accounting is done) then when the state cuts spending you will measure an immediate drop in the economy. The accounting is fallacious. A dollar of government spending is not equal to a dollar of private spending, but nobody knows any other way to measure it. To restore a dynamic economy, resources must be redeployed from the inefficient uses to which government spending has put them, and into the private economy. Call it "austerity" if you want. I call it responsible behavior.
So then, who has been duped by the conventions of gdp accounting (or by general predilection for big government) into falling for the fallacy that endlessly increasing government spending is a positive for an economy. Well, according to Davidson, the I.M.F., the World Bank, the World Trade Organization, and "eight other major economic institutions," -- not to mention, of course, Davidson himself, the New York Times and essentially all other major media. Oh, and don't forget President Obama and his administration. Yikes! It's no wonder there's not much constituency for a big shrinkage of the government. We'll just have to wait until the Ponzi scheme starts to crash. Meanwhile, if you are getting the idea that almost all of our highly credentialed intellectuals are just plain wrong about just about everything important, you are right!