Myths of Austerity?

Leo Kolivakis's picture

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Catullus's picture

So how do the government know which projects to allocate money to? Do they have some magic CBA tool with a "social welfare" plug in the model?  Did they buy a crystal ball from Best Buy to tell them which project will be most benefitial?  And who will this be benefitial to? "Society as a whole"? 

There's no objective way to assess it.  And the long history of abuse through government spending just constantly invites the crony capitalists back to the honeypot.  The only idealism that goes on with this discussion is people assuming that the government could direct resources in some sort of pragmatic manner.

WaterWings's picture

You need to a much more radical approach which will target new emerging industries. I was happy to see president Obama announce that the government is handing out nearly $2 billion for new solar plants, but this is a drop in the bucket, basically peanuts.


You can't drink the hangover away if it ain't water. 10am is coming, whether you like it or not. The sun also rises.

knukles's picture

The fundamental precept upon which the discussion rests is whether governmental spending and taxation effect a multiplier effect greater than, equal to or less than 1. 

Very little of the vast majority of rigorous intellectual and statistical/mathematical work has suggested other than a multiplier less than 1.


ozziindaus's picture

Three Examples of Total Rubbish

  • People who think crack addicts can smoke crack to cure their addiction
  • Alcoholics who think they can drink their way out of alcoholism
  • Debt junkies (and Keynesian clowns) who think one can spend one's way out of a spending problem

I've followed Mish's logic and subscribe to his views well. But I believe in this case he is missing an important point.
  • Consumers who think they can consume their way back to prosperity.

Absolutely. Why not?? As long as manufacturing repatriates back to the US AND new technologies are pioneered in the US as seen may times before. A $14T consumer based economy is sustainable but requires reinvention continuously. 

TBT or not TBT's picture

"A $14T consumer based economy is sustainable but requires reinvention continuously. "

Somebody has to produce what the consumers want, however.   If incentives for doing so are removed, the repatriation and/or reinvention of the reproductive economy does not occur.   Welcome to Obama-/Reido-/Pelosi-nomics.

I'm trying to remember the name of the economic theory that worked before.   Had the words "supply" and "side" in it.   The cheerleader in chief at the time kept carrying on about "freedom" and what not.   Help me out here.

Temporalist's picture

How about the fact that that consumerism is based in debt and not real savings or income but just "potential" income.

Now that the entire U.S. and most of the world has learned the lessons of governments, i.e. spend and pretend, they want to continue the same insanity endlessly.

Insanity: doing the same thing over and over again and expecting different results. - Albert Einstein

Shameful's picture

How do you propose to bring the jobs back?  What madman would open a manufacturing plant in the US?!?!  Explain to me why an industrialist would not seek low wages overseas or Mexico.  Remember because of NAFTA and GATT it's not like we could raise tariffs.  So America has to offer, high wages, high regulation, and gov uncertainty to the potential industrialist.  So who is going to build these factories here?

The industrial economy has already left the barn, and we need to accept that and look at the position we are in.  If we want it back changes have to be made not even more government intervention.

ozziindaus's picture

You're right. Repatriation is a stretch since it was corporate driven with political coercion. But now that that's done and buried, it's time to focus on the second point. Invest in new technologies that command a premium and ones that can be sustainably manufactured in the US. Without this, we are nowhere near competitive. 

PS. IBM issues more patents than all of China combined. That's what i'm talking about. Hope we can maintain the drive to propel us out of this shit. 

Shameful's picture


Guess where those innovations go?  They go overseas to boost productivity in their facilities. So the gains in productivity from those innovations leave.  I'm failing to see how this helps us.  Sure we can employee a few million of the smartest Americans as scientists and engineers in high skill positions.  However we can't swing a nation of 150+ million scientists.

New innovations will head out the door because through a combination of factors it is better to run industries in places other then America.  Unless we change that then the innovations won't make a lick of difference and will only boost up the productivity of overseas facilities.  After all where is Apple making all it's innovative gadgets?

geminiRX's picture

"First, as I have stated before, implementing austerity measures at a time when private sector recovery is still fragile is very dangerous and will ultimately threaten the global recovery."

- Leo, get your lips off the government tit. Austerity should have happened on day 1 after Lehman collapsed. We would be in much better shape for recovery now (i.e. purged all marked to market diarrhea and derivatives from the economy). What kind of person celebrates an economic recovery (er...falicy) built entirely upon taxpayer "stimulus"? I appreciate an opposing view from time to time, but your thoughts are becoming a little ridiculous. Do you run your household like the US Fed runs theirs (I seriously doubt it)? Do you have children (austerity not passed now - means you hand the shit to the next generation)?


ozziindaus's picture

Austerity should have happened on day 1 after Lehman collapsed.

Correct but it didn't and now that the same banks who contributed to the collapse have recapitalized using public money, why strengthen their position by cutting spending on the productive economy?? This is exactly what the bailed-out-beneficiaries want. Would you rather suck the governments tit or the banks dick?

Leo Kolivakis's picture

Last I checked, governments were never run like households. If you still have not figured why, then you don't understand public economics 101. Also, I am not advocating spending just for the sake of spending. I want targeted spending on industries of the future. Finally, if we had let AIG collapse, the entire world would have been purged straight into a living hellhole. I do not need to speculate on that, and don't tell me otherwise.

faustian bargain's picture

targeted spending on industries of the future

It's called free markets. Which we don't have, and won't, as long as the Fed is in charge.

TBT or not TBT's picture

"If you still have not figured why, then you don't understand public economics 101. "

Um, no.  We DO understand "public economics 101", as currently practiced, and we're pissed off.   T.E.A. party is not about some sexual depravity (however entertaining), it is about Taxed Enough Already.   A group of bureaucrats backed by heavily armed police and extensive jails is motivation to keep your head down, and at some point to restrain or withdraw your productive zeal.   This is where the country is today, beyond that point in the curve where enough for the government is way too much for We The People.   The result won't be a double dip, but rather, as Mish explains, a failure to ever exit the initial dip before the next long painful leg down.

Nihilarian's picture

 I want targeted spending on industries of the future.

Last time I heard a comment on this level of asininity I was being indoctrinated with the virtues of FDR's New Deal in High School. 

OldTrooper's picture

I want targeted spending on industries of the future.

Leo, I don't think government can predict what the industries of the future will be. 

And I certainly don't want the government to pick what the industries of the future will be.

It's a very bad idea to get the next wave of malinvestment started before we clear out the last one.

docj's picture

Leo, I don't think government can predict what the industries of the future will be.

Leo is not interested in the Fed.Gov investing in "the industries of the future" - what he wants is for the Fed.Gov to pour tons of other peoples' money into what he is invested in so he (Leo) can make a killing.

Nothing more.  Nothing less.

Kayman's picture

Rewarding the arsonists for burning the economy to the ground sounds like fine social/economic policy to me. (sarcasm off)

Until the rotten toilet paper contained in the Wall Street Casino and the Fed are written down, until criminal charges of fraud and conspiracy against Treasury and Fed officials (past and current) are implemented, this economy is going nowhere.

Trust is lost. Look at the oil mess in the GOM - no one is in charge of this rudderless ship.

Of course Leo governments are never run like households- household spend their own money, not the money of others, and if households borrow more than they can repay, they go broke.  

If not for passing an insurmountable debt load onto our children and grandchildren I would say go ahead Leo and Kruggy- burn Rome to the ground.


exportbank's picture

Leo.. PLEASE speculate on that - every time some shit box company that should have failed was kept on very expensive life support the reason given was "end of the world". How about we revert back to capitalism and allow scummy, thieving worthless companies fail. They would have died because they sold insurances (CDS) to others that had no insurable interest in what they bet on. I'm sick and tired of watching what was a good economic system be turned into world of businesses that can't stand on their own two feet with management that pays itself billions. I guarantee that the day after the end of AIG the sun will rise and we'll deal with the issues.

AR15AU's picture

Your ability to reason is a disgrace.  Since when does Nancy Pelosi have a handle on which industries are best to invest in.  Central planners are not smarter than the free market.  You can't just dump a trillion dollars into solars and expect rainbows and unicorns.

ColonelCooper's picture

"I want targeted spending on industries of the future."


I want more governent subsidies thrown at alternative energy so I don't lose my ass in solars.

Temporalist's picture

Of course industries of the future!  We should all be as prescient as you to know what those are!  The government is so good at picking out winners that is why the future is so bright.  I guess that is one reason that the space program needs to be cut...Tang was their greatest achievement.

"It's all ball bearings nowadays."


Rogerwilco's picture

"Finally, if we had let AIG collapse, the entire world would have been purged straight into a living hellhole. I do not need to speculate on that, and don't tell me otherwise."

And your proof of this is? Without the 2008 bailouts, we would have seen some unpleasant situations and the collapse of large corporations. But the markets would have cleared all the bad debts in a far more efficient manner than what we're seeing now. Instead of TARP and the AIG rescue, the federal government could have stepped in to fully insure deposit accounts for Americans (individuals and businesses). Everything else would be left to sink or swim. Pain? of course, but it would have been over in 6-12 months, and by now we would have real economic growth instead of 50 zombie banks and phony GDP "growth" propped up only by 12% deficits.

Droops's picture

There isn't enough money to insure all of those deposits, it's a ridiculous assertion that you could somehow have let all the banks burn but got out with your deposits. If the banks go, the deposits would have gone too - FDIC is already insolvent. Or do you want the Government to print money just to repay your bank accounts? I think we can see where that one would lead.

Shameful's picture

Indeed if Goldman had not gotten paid out 100 cents on the dollar it would have been the end of mankind.  The seas would have turned to blood, fire would have rained from the sky, dogs and cats living together, mass hysteria!  Let us bow our heads and thank the Almighty that he has given us such men that no banker shall ever be left behind!

I for one don't want to live in a world where there is no TBTF!!!


Gordon Freeman's picture

Watch your choice of words.  The entire world would most assuredly NOT have been "purged straight into a living hellhole".  It is just such hysterical statements that forever retard, and ultimately poison, any sensible discussion of these issues.


mtomato2's picture

He was doing "not as bad as usual" until that idiotic line.

Leo Kolivakis's picture

So if you're so smart, tell me, what would have happened had they let AIG collapse?

maddy10's picture

They could have given the real life, business, auto insurance owners 100 cents on the dollar and said the paper insurance crowd to FO

Real Business would have gone on as normal

If investments banks went belly up so be it

Holding banks could have insured 100% for normal account holders and their accounts could have been transferred to a healthy bank of their choice


But this would take a bank holiday for a week or so for which you have the entire national network at your service to keep everyone informed 24/7 unlike 1907

If you say on TV that your bank accounts,trading accounts upto 1 million and all 401k will be insured fully there would be no bank runs

BUT this would mean bankruptcy for the Top 100 institutions in US who sponsored the politicians left and right

You see ,there is never a bad time to do the right thing

Glaucus's picture

"Public economics"?  What the fuck is that?  Oh, that's right; it's macroeconomics.  Here's it's "flaw" chart:

And what's the flaw?  Well, it's right there in the center of it, as in (Central) Government. As in the inherently flawed components of macroeconomics: fiscal and monetary policy, which is to say, intervention in the market via government spending on the one hand and quasi-government (corporatist) control of the money supply on the other.

"Public economics," in other words, is just another word for "socialized economics," which in turn is just another word for socialism.  As is Keynesianism (though "fascialism" is probably a more accurate description of it), which is to economics what astrology is to astronomy.  And you're just another dyed-in-the-wool Keynesian, Leo, no matter how oblivious you are of this fact.  

If and when you ever open your eyes to the truth of the following, let us know.  Until then, you might want to keep your hands off the keyboard:

"Everything the state says is a lie. And everything it has it has stolen." -- Frederick Nietzsche

malek's picture

If they had let AIG collapse and done nothing at all:
We would be using silver coins again, and lots of people would be digging for roots.

If they had let AIG fail (and lots of banks as well) and used the TARP plus $185 billion AIG rescue money for propping up the FDIC to rescue the savers (but not the stock- or bondholders) and help found new smaller banks:
It would have been a hell of a ride. But we would be on an stable upward path for a year now, and a financially sustainable path to begin with! Small businesses and entrepreneurship would be thriving again. Lots of scamsters would have been burned so badly, lots of people would not try such a thing anymore in their lifetime.

mtomato2's picture

Leo, it's much simpler than you are willing to admit.  I respect you for your guts and tenacity, but simply put, even the dumbest among us is learning that "spending money to make money" only works with a positive ROI.

"We lose money on every unit, but we make up for it in volume" seems to be government's argument for hope. 

With all due respect, sir, we are slowly wising up to the idiocy, strike that, evil overwhelming us.  I seriously wonder whose side you're on. 

ColonelCooper's picture

Way to set the standards high.  Love the avatar.  Quite appropriate for Leo. Never gets to kick the ball.

traderjoe's picture

1. Krugman never discusses the quality of spending v. quantity. He seems to believe this is a cyclical recession and not a structural depression. 

2. The federal government spends 80% more than it receives in revenue. Illinois 100%. If spending more money was the answer, wouldn't this already have worked by now? Santelli said it best, if the multiplier was above 1, then we could spend infinitely. Why would another 10% on the top solve the problems? Aren't we currently in a cycle of perpetual stimulus spending?

3. I hate the concept of the vigilantes. Bond investors want to get paid back. In a classic Prisoners Dilemma, once confidence is lost that lenders will get paid back, everyone rushes to the exit. The time to fix our problems is when confidence is still there, not after it is lost. 

4. It's already too late. Neither solution will work. "Austerity" would spark a new leg down, especially if it doesn't invest and addresses structural issues but simply cuts spending and raises taxes. Spending more just to create aggregate demand is chasing your tail - it will never end because "just one more rush" will hopefully fix the problem. 

5. I read an interesting article on ZH about the siren song of growth. Why growth? Why inflation? What's wrong with stability? What's wrong with sustainability? At some point growth hits an finite limit of resources. When, who knows. But why not create sustainability on our own terms as opposed to letting a crisis dictate it?

6. Krugman rails against opinions based upon prejudices, not facts. Of course, his are as well. Macroeconomics, IMHO, is not a science. It's a bunch of theories that are twisted to match the purposes of the speaker/theorist. I didn't hear him mention one fact or hard analysis in both of his interviews today.  

stpioc's picture

["Krugman rails against opinions based upon prejudices, not facts. Of course, his are as well. Macroeconomics, IMHO, is not a science."]

Yea, right. Give five examples.

The amount of people I've seen railing against Krugman who:
- cannot deal with his arguments
- then go on to dismiss him as a crank, a policy hack, a socialist, etc. (not you, but many others have done this)
- or even dismiss macroeconomics altogether (yes, you..)

What do you suggest should replace macro-economics? Common sense? Whose? Yours? Considering your point 2, where you've just invented your own "macro-economics" doesn't bode well. To ascertain whether the stimulus worked or not is quite a bit more complex than you seem to think:

traderjoe's picture

I'll bite...Macro-economics - in the sense that it is used by Krugman, et. all, - is not a science because IMHO, science requires an evidence-based proof to a hypothesis. Krugman's points are theories. The trouble, IMHO, is that he presents them as facts. From your own link:

"First off, whether a particular economic policy isn’t working is extremely difficult to ascertain, all kinds of statistical heroics need to take place and multiple studies need to confirm as few of these ever become clear-cut. The problem with economics is that there are just too many variables, and many are interdependent."

What I am asking for from Krugman, and the economics profession, is the intellectual acknowledgment that we are running experiments, without control groups, and the end result is unknown. We may not even be able to draw conclusions at the end about why something worked or did not. I believe economists like Krugman use their theories to gain celebrity, power, and for personal gain maintain the illusion that their knowledge of economics creates certainty. Just as Fed researchers can suggest economics is hard, and without a PhD you just can't contribute (even that researcher suggested Krugman was a blowhard). 

And of course, politicians use economists to maintain that illusion of certainty and gain support for a particular set of policies (typically ones that favor more spending for constituents). How many times has Obama said "the majority of mainstream economists say this...". 

You asked me for 5 examples (I am not sure of what), I will ask for just one in return. What is the Keynesian Multiplier of government spending expressed as an integer (and not a theory)? What is the number?? My point is that it is not a single number - precisely as you suggest - that it will be different in each of the infinite circumstances which it might apply. Which means you can't predict the result of said spending in advance, which makes the spending proposition nothing more than a theory. 

TBT or not TBT's picture

Let's see, government spending directly stimulates what?


Temporalist's picture

I agree TJ.  I was thinking that there is no proof that the govt. can spend efficiently and if that were the case Japan would be the strongest economy in the world right now.  Building things that nobody needs makes you seem productive but ultimately it is just wasted investment.  I guess until the destitute masses need to live somewhere and can squat in abandoned buildings.

And Paul E., the growth for growth's sake pisses me off too.  As someone pointed out the blivet is a huge problem not an answer.  There is a natural growth rate in nature.  One can't make a sequoia grow faster.  It's as if the lessons of the dot com era have disappeared from the collective memory.  I remember when clothing stores were closing down everywhere because they grew too fast.  So what happens as a result?  The stores get closed!  That is what needs to happen now ...close the store.

Here is a George Carlin clip about stuff (miss that man they broke the mold when they made him):


dnarby's picture

I dunno about that re: sequoias.

Ever think of dumping a couple hundred gallons of fertilizer on the roots of one every week for a couple decades?  I think you might be surprised!

A Nanny Moose's picture

Classic hubris. Trees grow where they grow for a reason. Like everything else, they serve a purpose, and have adapted to their surroundings.


Human doings however choose to defy nature and adapt their surroundings to their desires. Hence the need for fertilizer in the first place.

Temporalist's picture

Give it a try and get back to me.

Paul E. Math's picture

Why growth?  Why inflation?  Because it favors the powers that be, that's why.

I have recently concluded that Deflation is actually the solution to our problems.  Deflation is the reset button that many hope for.  Painful, to be sure, but afterwards we would have a real economy again.

Today, power is located in large corporate interests.  These large corporate interests relied on cheap money and an inflationary Fed to provide even cheaper money when times got tough to ensure that corporate leverage always paid off.  They just became richer and more powerful through leverage and inflation.

And deflation would destroy them as they would be unable to repay the debts they have built up.

So they want us to fear deflation like they do.  This is why they always point to the mass layoffs that would occur if corporations went out of business due to deflation.

But what they don't mention is that when we are unable to borrow money to buy new crap we will put more effort into maintenance of what we have.  And that requires labor and produced jobs too. 

When you decide to extend the life of your car the auto-makers and their wage slaves are hurt because you haven't purchased a new car.  But the skilled auto mechanic benefits.  And so, incidentally, does the environment.  And so does democracy as power shifts from large corporate interests to small business and skilled labor.

Deflation is the bogeyman only of the powers that be - to the rest of us it is the answer we have so long awaited.

Popo's picture

Good post.  I agree mostly -- but I've got to take issue with a couple things you said. 

> "Deflation is the bogeyman only of the powers that be - to the rest of us it is the answer we have so long awaited."

It depends.  If you're in debt (as are many, if not most Americans) deflation will rip your face off.

> "And deflation would destroy (large corporate interests)."

Unless those corporate interests have a strong cash position, as many do.  In which case, deflation represents an amazing opportunity.

While you're right that the powers that be favor inflation, it should be noted that Deflation represents a very, very compelling opportunity for many major players as well. Deflation is characterized by an overhang of capacity.  And capacity (ie: The means of production) is ultimately 'the prize' -- and the opportunity to acquire productive capacity on the cheap is one compelling reason why many cash-rich players actually seek deflation.

Yes,the financial sector is completely freaked out by deflation -- because the sword of leverage cuts both ways.  But that's not to say that there aren't loads of cash rich big players licking their chops at the prospect of a collapse in valuations.




mtomato2's picture

Freakin' awsome response, dude...  +1000

Idiot Savant's picture

Thanks for the succinct response Paul.


Idiot Savant's picture

4. It's already too late. Neither solution will work. "Austerity" would spark a new leg down, especially if it doesn't invest and addresses structural issues but simply cuts spending and raises taxes. Spending more just to create aggregate demand is chasing your tail - it will never end because "just one more rush" will hopefully fix the problem. 


That pretty much sums up my thoughts. Why all the arguing re: stimulus v austerity? Why not extend and pretend until we default? At least we'll have a few more years of air conditioning and internet porn.

I fail to see the point of austerity measures at this stage of the game as we're fucked either way. If you got em, smoke em! 

DoctoRx's picture

Ozzie is right.  It's about invention and innovation; positive ROI Fed spending.  Unfortunately we don't see that.

And I disagree w Leo when he says:

Importantly, the big, bad bond vigilantes are simply no match for the Federal Reserve and they know it. Bernanke can squash them like a bug if they get too smug and start speculating on US sovereign debt.

Remember Soros squashing the Bank of England like a bug?  IMO it's imprudent to gamble with tons of short-term debt.  What happens when "the market" simply finds ZIRP uncompetitive when the BRICs and other, better-run and more soundly-financed countries return to offering more attractive short-term investments with similar or even lesser risk profiles?  Then the game is up and at best it's Britain 1970's w the IMF coming in.  It then is not possible for Bernanke or the next Fed-head to squash "the speculators"; it will simply be the time for the US to stop living off its victories of years earlier and justify its uncompetitiveness.  So it will fail. 

Meanwhile, it's up to society to decide to allocate more resources to non-workers and the needy.  Fine in theory, just raise taxes to cover it.  Or cut subsidies to homeowners; get out of Afghanistan; etc.  Or cut spending elsewhere.  These debt imbalances are IMO lunatic.  Japan has been getting by because you may be aware it is a capital surplus country.  It produces more than it consumes.  Thus in its inscrutable way, it truly owes its debt to itself.  How it resolves that imbalance is not the US problem, as the US is a debt-seller, not a pos balances of payments country.  So the US continues to rely on the kindness of strangers.  Bad policy, Leo.

Finally, a generally unspoken truth is that it is the banksters who benefit from all the debt issuance.  Its business they wouldn't have if the govt began to run surpluses.