Austerity Plans Are Based on the Wrong Diagnosis of the Wrong Problem -- And May Plunge Europe into

[xchrom]

http://www.alternet.org/economy/153656/austerity_plans_are_based_on_the_wrong_diagnosis_of_the_wrong_problem_--_and_may_plunge_europe_into_depression/

Austerity Plans Are Based on the Wrong Diagnosis of the Wrong Problem -- And May Plunge Europe into Depression

Even if European politicians ‘get their acts together,’ the eurozone crisis will not be solved by a new ‘Fiscal Compact’ obsessed with austerity, i.e. tight rules for all member states on their spending. The agreement, which is intended to save the single currency, is not a “fiscal” anything, since that word usually refers to government spending. The plan is really an Austerity Compact – an attempt address economic malaise based on upside-down thinking.

And it won’t work. Because as John Maynard Keynes revealed, the worst thing that a government can do during a recession is to lower spending. And yes, all of Europe is in a recession, and probably a depression soon. Private investment spending is cyclical in nature -- too much during up-boom periods and too little during down periods. That’s why government spending must act as a counter-balance. Instead, what we have seen is government actions fueling private sector spending (with lower interest rates and lower taxes) in boom periods (like the 1990s), and now withdrawing spending during the recessionary period when there is not enough private investment.

This is exactly the opposite of what should happen.

But the main problem with the ‘Austerity/Fiscal Compact’ solution is not just that it won’t work for Keynesian reasons, but that it is based on exactly the wrong diagnosis of the problem. The austerity solution assumes that the problem with countries like Portugal, Ireland, Italy, Greece, and Spain (PIIGS) that are peripheral to the eurozone (and the list is growing) is that they ‘spent too much.’ As I have now argued endlessly in various media outlets, this idea is completely false. In fact, the pre-crisis deficits of all EU countries (except Greece) were in line with the target rates of 3-4%. Deficits started to rise in 2007 after government spending rose to fund stimulus packages and bailouts. If you look at Spain, currently one of the most problematic countries, you will find that it had one of the lowest deficits before the crisis, and even one of the lowest ratios of debt to economic output (debt-to-GDP).

[marmar]

1. And it seems so obvious.......

....... but then again, the architects of this probably don't give a damn.

[DCKit]

2. Of course not. This is Disaster capitalism.

They're looking to strip the carcass (Europe) and sell off the pieces (privatization). The people will pick up the tab.

It's S.O.P. once the IMF and/or World Bank become involved.

[xchrom]

3. yeah -- 'unexpected or 'nobody could have known' isn't what you'd think

a crew like that would say.

but they probably will.