Portugal’s Economic Revival
nytimes.com
nytimes.com
In 2011, Portugal applied to an IMF bailout. What do you do when you beg someone for their money? You comply! You don't come out for the streets saying you won't pay! You say creditors exactly what they want to hear. You (seem to) reduce costs, you cancel holidays, you go even beyond what creditors ask you to do. You get smart, you understand you're in a weak position and take the best advantage of it. You don't do like the Greeks who let their egos be greater than their brains, and be on the spotlight for being over-spenders by saying they won't pay their creditors. That's what the government did in 2011-2015 and it worked! We got out of the spotlight and stop being perceived as over-spenders..
In 2015 a new government was elected. With the influx of tourists, and being seen as people who saved some money (and learned their lesson), the new government was in a really better position to try "the revival". They started reinvesting and giving the appearance that we are growing (and some things are, but also government spending). And it seems to be working so far...
So, what really seems to work? Both things. When you're in a weak position you comply, and then when you get to a stronger position, you negotiate. So both type of governments were needed at exactly their time.. A good timing - I think that was the key to the current success!
This statement is very far from the truth.
The current acting government actually cut investment spending to record levels as part of their renewed austerity effort, both with higher taxes and slending cuts, that resulted in record low deficit spending.
While the previous goveremt of Portugal focused on higher income taxes focused on the middle/upper class and public sector workers, the current acting government forced increases in gas prices mixed with off-the-bool spending cuts in the form of captivation of expenditures.
The key factor in Portugal's economic turnaround is the fact that the austerity program was actually surprisingly effective at fixing Portugal's problem, as is demonstrated by the fact that the portuguese recession that started way back in 2008 ended in 2014, right before the end of the austerity program.
Saying austerity led to the end of a recession is like saying that cutting costs at your restaurant led to an increase in customers, or allowed you to charge higher prices for your food.
Greece and Italy are fighting austerity because they take the traditional economic stance - government needs to spend tax dollars on increasing investment, education, employment, etc. instead of cutting investment costs and ensuring tax money is channeled to interest payments.
Perhaps foreign investors saw that Portugal was taking its austerity seriously and began to increase investment, reassured their money would be relatively safe. But how could austerity lead to the boom in tourism and exports cited in the NY Times article?
One of the key factors was that the national trade balance became net positive during the period, as the private sector was pushed to invest in exports, but I'm sure the issue is much more complex and can't be pinned down to a single cause.
Nevertheless the undisutable fact is that the recession that started in 2008 and caused the then acting government to nearly bankrupt the state in 2011 with their record public spending push, piling yearly deficits of over 10%, ended in 2014 during the third year of the bailout program. That fact is somehow ignored by anti-austerity critics who insist that no recovery is possible when reality shows otherwise.
Do you think this is one of the reasons (or the major one) that so many Portuguese people live abroad? [1]
1. A culture built on world exploration. Our golden age myth is sailors leaving the country to find new lands. Our great epic book is "Os Lusíadas", a celebration of the discovery of a sea route to India by the Portuguese explorer Vasco da Gama inspired by Virgil and Homer's epics.
2. Many people left the country between WW2 and 1974 (due to a ruling dictatorship, a colonial war, and economic difficulties). These were mostly uneducated people that went to France, Germany, Switzerland to become low wage workers.
3. A newer wave of emigration (of much more educated people) due to low salaries in Portugal. I know a lot of people (mostly engineers) that more than tripled their wage simply by moving to more developed countries: Germany, UK, Sweden... Similar to moving to SF/NY when you're in rural US.
Can you elaborate on what or how the tax system is very lax for foreigners?
https://news.ycombinator.com/item?id=18165995
As an anecdote, Madonna is nowadays living in Portugal. Media says the reasons are the Lisbon sunlight and her son wants to learn soccer.
It's not like the creditors were helping from the goodness of their hearts. They made stacks of money off it, off those imposed austerity measures, off (if you excuse the description) of bleeding the working class dry. Let's not forget who profited the most off the situation generated by the European debt crisis: big German banks...
It's in the citizen's rights at least to protest for an alternative solution.
It’s how socialism works. Spend other people’s money on handouts then blame capitalism for the public debt.
I'm not expressing any value judgment on these decisions in this post, but it seems to me the basic terminology is hard to dispute.
By that logic, I assume that in the case of the subprime crisis of 2008, you also think that the culprits are the indebted families, right? Not the banks that pushed loans on people who clearly couldn't afford them, who set up a system that richly rewarded them for that, that hoodwinked their clients and the public, that stacked regulators with friends to look the other way, that stacked universities with "economists" in conflict-of-interest to tout that their practices were a-ok, that paid themselves billions in bonuses with taxpayer money after the working class bailed out their losses... Not those people, right?
>It’s how socialism works. Spend other people’s money
It's always funny to me that the people who get trillion-dollar bailouts to recoup their losses and keep living an elite life of luxury have the gall to call others out on "handouts".
Anyway, you forgot to set that quote over a photo of Margaret Thatcher /s.
That's how an economically careless welfare state works in a capitalist economy. What you are describing is social democracy, which is not the same as socialism and never has been in the history of the movements or any terminology recognised by social scientists.
Socialism is direct worker control over the state and social means of production (to the point where Karl Marx considered the term synonymous to "Communism"), while social democracy is a liberal capitalist economy in which the government (which owns very little social means of production itself) funds welfare programs through taxes.
Lets imagine some democracy votes an incompetent fool into their highest office, who starts making "bad deals". Would you expect other countries to not agree to those deals for reasons other than their own interests?
Actually, it's not. Borrowing money is the sole responsibility of the borrower, who decides how much money he wants to borrow based on the impact it will have on their finances.
For a loan to materialize, the borrower needs to be aware of how much it will cost him and for how long he will have to repay or service the loan.
That's all the borrower's responsibility.
Only after the borrower is aware of the immediate and long-term impact of his actions will the borrower petition a lender to execute the loan. The lender's only role in the deal is to double-check the borrower's assumptions to ensure the borrower is actually capable of keeping his word and pay back the money he is borrowing.
It's also extremely disingenuous to criticise higher interest rates as they are a safety mechanism that reflects the borrower's ability to repay future loans, and are supposed to act as pressure to dissuade the borrower from digging himself into a finantial hole.
> You shouldn’t just blame on party of the two party interaction.
That's simply wrong on so maby levels. The only part who holds any form of responsibility is the borrower. He's the one making the decision to ask for more loans being fully aware of his financial situation and the impact the new loans have on his cash flow. He is the only part of the arrangement who actively petitions for the deal and has full and complete access to his economic state. The borrower is the only part who has the legal power to sign on the loands. The borrower is the only part who actively seeks the loans and actively engages with each and every single lender in the world to fulfill his desires for more debt.
There are lots of cases where borrowers do not understand all the terms of the loan. Have you read and understood every single loan document you’ve signed? I doubt it. Your belief that only the borrower actively seeks loans is can easily be dispelled by watching TV and seeing ads for loans.
It’s hard to understand how you can write
Borrowing money is the sole responsibility of the borrower...
And the write
The lender’s only role in the deal is to double-check the borrower’s assumptions to ensure the borrower is actually capable of keeping his word and pay back the money he is borrowing.
Lenders can deny loans and they can also reflect the risk in the interest rate. However, lenders only provide their input after the borrower evaluates the impact of a loan on their finances and decides based on his evaluation that he clearly and unambiguiusly is willing and capable of servicing and repaying such a loan in full. Only after that decision is expressly made by the borrower can lenders be involved, and their involvement is restricted to rubberstamp the deal decided by the borrower.
Love these capitalism excuses.
Give money away, no questions asked, blame the borrower.
I mean we can blame the Germans, but it's not going to change anything. Borrowers will find someone to lend to them. It's only the borrower who can avoid getting under crushing debt.
The economy is growing, yes, mainly thanks to tourism. However, austerity is still much in place and taxes have only gone up since 2008 for middle and higher class (for low class people the conditions are much better of course). In order for a country to have a "revival", it needs to be growing in multiple industries but Portugal is evermore dependent on tourism which doesn't scale that well. Entrepreneurship is very limited to due to insane levels of bureucracy, high taxes, difficulty in firing people and most talent leaving to the UK/Germany/Switzerland in search of better salaries and better "value for money" taxation.
This is objectively false. Portugal ranks about middle in total taxation, against the rest of the EU. Taxes are about 34% of GDP, which is pretty average in Europe.
You have all the data here, with the most interesting summary in the "Tax Main Aggregates" document:
https://ec.europa.eu/taxation_customs/business/economic-anal...
We pay middle but earn way less than middle, meaning cost of goods and services are pretty much the same within some margin, but income is a order of magnitude off.
The country provides free health services, with quality levels that are worldwide references.
Everyone has access to free high school education and next to free university access. You can earn a medical degree for less than 10k€ in school fees.
Police, although understaffed, are effective, resulting in top world ranks in citizen security.
The only real black spot, in State services is justice. It works, but is slow as molasses.
All of these services must be paid. You draw a correlation between GDP, disposable income, and taxation level that is erroneous. The link is between State service level and taxation level. In Portugal these look OK.
Still silly, but not insane.
In all countries I know of, tax withholding is not a perfect match to final tax bill, and that could amount to a no-interest loan to government like you say. Not sure if in practice that loan is unusually large in Portugal, could be.
With the exception of a few notable oil economy countries that have sovereign wealth funds, federal governments most certaily do not invest tax revenue in the market. Taxes are used to finance the running of the country. If governments are lucky something is left over paying its' bills and the government runs a surplus.
Please provide a citation that Portugal invest its' citizen's tax revenues in the financial markets and makes a profit from those.
>"If they did it the other way they'd have to raise the tax rates to compensate, which wouldn't go down for the politicians doing it, even if the net result is the same."
Umm no if they did it the other way around the government could additionally tax people's gains from investments, and people could save for things like their retirement at the same time.
What "they" said was:
>"that is money the government is investing and earning a return on."
"Investing money and earning a return on it" is universally understood to mean putting your money to work in the financial markets. Your comment is disingenuous at best.
Further governments don't earn a "return" when they spend money on a stoplight or a bridge. Infrastructure requires upkeep, maintenance and eventual replacement.
It's a coast center not a profit center. If it was the latter governments would be building infrastructure like crazy and running a budget surplus. And that clearly isn't the case is it?
You have the right to your opinion, but changing words meaning is taking it a bit far.
In the context of a government or any other large institution this is most certainly understood to mean the financial markets. That is not "opinion" but rather common understanding in English language business parlance.
You have resorted to cherry picking words and trying to play semantic games. You have added exactly nothing to the conversation. In fact it's worse as resorting to "that's just your opinion" type remarks just degrades the level discourse. It's just slightly above name calling.
However, in order to minimize the amount due in August, the government captures an estimate of your income tax every month (before you get paid).
It is this estimate that is designed to be simple, and applies deductibles to the whole salary. There's no harm: If it happens to capture too much, you'll see your money back next August.
Under the progressive system, there are no surprises or delays, what I paid that month is exactly what I owe.
Like another poster said, effectively an interest free loan to the government from taxpayers.
What am I missing?
Simplicity and personal data protection. In order to capture tax in advance with perfect estimates, employers would need to know your total income and deductible expenses. With the simplistic system, they just need to know how much they're paying you.
If so, that seems literally insane to me. Why wouldn't Portugal fix this?
Health system is completely broken the public Hospitals don't have enough resources or money to threat the patients with dignity, people still live with very low salaries and high prices of goods, The industry is still very weak unlike its mentioned in the article etc.. etc...
Honestly seeing these articles makes me really sad.
No need to be so dramatic. Compared with countries with a similar economy, our system is objectively very good. Independent reports will back me up.
Austerity can involve tax increases, spending cuts, or combinations of the two. It’s not limited simply to spending cuts.
That said, it very much matters what “kind” of austerity one engages in, as research indicates that tax increases and spending cuts have different respective effects on an economy.
In reality Austerity is defined by tax breaks for the very rich, combined with spending cuts and privatisation - i.e. economic enclosure, debt peonage, and asset sweating - for everyone else. Sometimes that includes tax increases, but if som it usually means indirect taxation.
Austerity is purely ideological. Even the IMF acknowledges that recent Austerity regimes have underperformed expectations while examples of stimulus spending have had the opposite effect.
This is objectively false, and a poor atempt at forcing a particular spin on a very objective definition.
Looking at Portugal, the bailout program enforced tax increases exclusively on the middle and upper class, along with publix sector workers who are by far more priviledged than private sector workers. For example, the bailout program saw the introduction of a new tax bracket for the richest taxpayers which forced a 53% income tax rate.
And also privatizations are implemented to avoid additional austerity pushes by providing the government with one-off sources of free cash thus avoiding further spending cuts or tax increases. Therefore, they are in fact an alternative to austerity, not a consequence.
> Austerity is purely ideological.
This statement is so mind-numbingly wrong that it boggles the mind how anyone in this point in time could be so disingenuous or clueless to keep parroting this silliness.
Let's look at Portugal, who doubled its sovereign debt fron 60% of the nation's GDP to over 120% in about 5 years prior to any mention of austerity, and did so by piling a string of yearly deficits of over 10% including a structural deficit of around 3%.
If your state is so dependent on overspending that it needs loans after loans to keep working and pay up salaries, who in their right mind will argue that they don't desperately need to cut spending and/or raise taxes to avoid going bankrupt or even to keep functioning?
If austerity was actually "purely ideological", how exactly would it be possible for Portugal to keep their 10% spending deficits?
https://en.wikipedia.org/wiki/Austerity
Those who favor austerity will say that the austerity laid groundwork for Portugal's success, those who have opposing view say that it only helped.
As far as I'm concerned if a government spent and loaned recklessly for decades and the only solution is to make temporary cuts so the government can go right back to spending (ie, no long term changes to government culture, risk management, and fiscal responsibility were made) then while it's still "austerity", it's not necessarily a very useful one.
Additionally, despite all of the FUD about "austerity" measures the average nation state across the entire western world (and in Asia too, minus Singapore) have exploded in size over the last few decades.
Most of these "austerity" programs are a tiny, temporary, sliver relative to the massive growth in scale of the administrative state.
Nor can you point to some half-hearted "austerity" where there was no change in the gov culture which brought about the unsustainable spending, nor factoring in the complete scale on which the previous government spent recklessly for which austerity is required in some countries vs others (and size of GDP, dependency on public investment/social programs, etc).
Even HN isn't immune to political flamewars.
When has that ever happend?
People do not run successful campaigns on the basis of displacing hundreds of San Francisco families, for example, regardless of whether or not those families are rightfully entitled to their housing or not. Once people have come to rely on something, it will upend their livelihood to remove it, and that is not something most people are comfortable voting for.
If you've ever worked in a government job, you can compare the state of the bureaucracy now to previous versions of the texts, and see that they only ever grow and compound on themselves.
In Portugal the income tax rate for a €100k gross salary is around 50%.
Then of course there are other forms of taxation, such as a gas tax of over 100%, a rent tax of around 30% and of course a 23% VAT.
VAT in Norway is 25%, petrol yesterday was €1.6/L (and we're a major oil producing nation). A car here is probably 1.8x of same model sold in Portugal, purely due to the taxes. About 35% of my (unremarkable) paycheck effectively goes towards income tax, after all tax breaks are factored in. If you are in top tax bracket, you'd be easily paying 45% effective income tax, with nominal over 50%.
Do we get fair return for the money? Most people here seem to think so. Can smaller tax on over smaller base income be felt disproportionately? You have a point there. However Portugal is a first world nation, and this level of civics, infrastructure, education and healthcare does require substantial money for upkeep. There is no good way around this, but hopefully you get a better deal on that due to economies of scale than if you had to provide all that for yourself on your own.
Norway is an outlier even among rich countries. Having lower taxes than Norway does not mean taxes are low.
Net spending cuts, rather than stimulus: “Mr. Costa made up for the givebacks with cuts in infrastructure and other spending, whittling the annual budget deficit to less than 1 percent of its gross domestic product, compared with 4.4 percent when he took office. The government is on track to achieve a surplus by 2020, a year ahead of schedule, ending a quarter-century of deficits.”
Growth is slowing, minimum wage is lowest in the eurozone: “Growth is cooling from 2.7 percent last year, as Mr. Costa keeps public investment at a 40-year low to cut the deficit. While he restored public sector salaries to previous levels, they have barely budged since before the crisis. And the minimum wage of 580 euros a month, although up, remains one of the lowest in the eurozone.”
Gov cutting taxes as well: “To cement the growth cycle, the government is putting what little investment it makes into targeted initiatives like tax breaks for foreign companies and training for the unemployed.”
The actual government is mainly taking advantage of tourism growth and the stimulus from the Central European Bank (https://www.ft.com/content/7514a734-6fbe-11e8-92d3-6c13e5c92...) and is selling the recent growth as being a consequence from their measures of lowering taxes (which is not exactly true, also - https://www.pordata.pt/Portugal/Receitas+fiscais+do+Estado+t..., and yeah I know that if more people have a job more the total amount of taxes collected is higher) and others.
Being a Portuguese living in Portugal, it is obvious that the economy is improving but that improvement is not sustainable IMHO.
Meh, you should see the sad state of affairs in the US.
It's true that the "Contraption" in the government is working better than Greece or Italy, but still...
While Lisbon has a big chunk of the jobs, other cities also have plenty of opportunities. YMMV of course.
I work remotely, so I’m outside the local job market, but I still get plenty of offers for local companies in my mid sized city.
The thing is, less than 3 years is absolutely not enough time to draw any conclusions. Much of the improved results are explainable by an uptick in tourism, and low interest rates, therefore attributing it to this government's policies seems premature. In truth, no true changes are being made. Taxes remain high (which is not necessarily a bad thing in itself), public spending remains inefficient in some areas. No actual, really meaningful reforms have been made, no truly new ideas. The old "systemic" problems, if you will, remain. Corruption remains an issue. Beaurocracy has been somewhat improved, but still needs lots of changes. The judiciary remains slow. Etc, etc.
A portuguese colleague told me a few years ago that this was one of the measures taken by the government to lower tax evasion (and I thought "cool, why not") but I don't really know if that's true nor if it's still used nowadays.
It is fully automatic. You just tell the cashier your tax id number, and you are set. No need to keep the receipt.
Yes, I now remember my colleague mentioning a car :)
But well, I wouldn't have enough faith in XXX cashiers. I'd want a hard receipt (confirmation of submission on paper with some kind of checksum which I could confirm online if I wanted to).
You can also check all your receipts online, on the Finance Ministry website.
Anonymous paper receipts will remain valid, indefinitely (i.e. they are not being phased out).
I've spent time in Portugal and was never asked if I would like to participate. Is it only certain types of store or receipts?
"Is it only certain types of store or receipts?"
Every business.
Plus now the government knows every purchase you make and likely where you were then. Despite privacy controls being now better in the IRS (every access is audited after some VIPs had their information constantly accessed and leaked), IMO it's only a matter of time till this information starts being used for other purposes.
I'm saddened to hear that it actually sounds like centralized, authenticated registration of all purchases.
How does it curb tax evasion? Is the idea that if a customer requests the lottery entrance that the sale will be reported? Do most people opt for the lottery ticket in practice then?
In addition to the lottery, there are also tax rebates for people who ask for invoices. For restaurants, I think it's like 20% of the VAT of the purchase, towards a limit of 250 EUR/year. Other industries where tax evasion is endemic (hairdressers, auto repair, etc.) have separate rebates and limits. I think this is the reason, more than the lottery, that makes people ask for invoices.
This being said, I don't live in Europe but I speak Portuguese. I plan to buy an apartment in Europe. Lisbon was always a serious consideration. But prices are through the roof. Golden Visa did not help either. I am also skeptical on having too much money invested in real estate in a, comparably, poor country. Real Estate taxes are a bargain compared with some US states. This could change (outch!). But basically they priced me out already. Overtourism does not help either.
Since then, we've learned this short-lived economic boom was really just attributable to outsized Chinese demand for commodities which went away as quickly as it came about. The Workers' Party spent its ~16 years in power fostering the centuries old crony capitalism that has fundamentally defined that South American nation since it was a Portuguese colony, throughout its 19th century monarchy, its 20th century republic, the congress-appointed military regime in power between 1964 and 1988 and all of the democratically elected presidencies since.
Eike Baptista was indicted and convicted for fraud and embezzlement, his companies sold for pennies on the dollar.
Lula's anointed political successor, Dilma Rousseff, was ridiculed, impeached and couldn't even win a senate seat in the last elections.
Lula himself was indicted, tried and convicted, along with hundreds of other politicians – not to mention the countless more the country hasn't yet gotten around to convict.
The populace radicalized to the point of destroying families and friendships before fatally electing a bizarro president – when the alternative was keeping the Workers' Party in power for another 4 or 8 years, Brazilians opted instead for a diabolical Faustian-Orwellian blend.
I'd love to hear Obama's take on how wrong he was. And I caution others to resist the temptation of extrapolating from a handful of moderately successful economic years, thinking their countries have fundamentally changed overnight.
You know what causes extreme changes overnight? A revolution. Brazil hasn't experienced one, and I doubt Portugal has.
Pretty much everyone in Portugal ( other than the usual ones ) rolls their eyes when the read stuff like this.
Although not at the same level of Brazil, politicians in Portugal do the same thing depending of how arrogant they are in not getting caught. It's full of bottom feeders trying to get some cushy position for themselves, I think it's our main problem right now, the sheer amount of money sucking parasites from top to bottom.
I think two things trip people up. One is blind extrapolation of good personal and business financial advice onto macroeconomics. It's clear to me that macroeconomic systems seem to have their own rules. Secondly I think some of the disdain for Keynesian ideas comes from dislike of the power concentration inherent in central banks.
The latter is still IMHO a valid criticism. There might be different more transparent or decentralized ways of achieving what central banks achieve. But the overall history of macroeconomics seems to fall on the side of Keynes and his successors.
It makes sense to spend more during tough times, but it's a career suicide for a politician to suggest tightening the purse strings when the times are good.
In essence, modern Keynesian politics oscillate between "The times are bad, we have to spend more", and "The times are good, what do you mean we can't afford to spend more".
Not necessarily. In 2014, California Proposition 2 (originally 44) passed with over a 2-to-1 margin [0], reforming and expanding the "rainy day fund" created by 2004's Proposition 58. California now has almost $30B in surplus [1].
[0] https://ballotpedia.org/California_Proposition_2,_Rainy_Day_...
[1] https://www.politifact.com/california/statements/2018/dec/18...
Unless you really go whole-hog on the metaphor: if the son sells apples to the dad to make a living, and the dad decides to cut back on apple buying, then the son loses his income. Then the son can't buy the cucumbers the dad was selling him, and the dad is even worse off. There is no-one outside the house.
Mental reservation, on the other hand, is sometimes justified.
It's too bad religion is so obsessed with not being gay as the most important of all moral issues. Our culture of lying is a real moral crisis with real consequences. I have never once heard any religious figure take a strong public stand against it. If anything most seem willing to lie in service of their own causes.
This is the main misconception that people have.
Microeconomics deals with open systems, macroeconomics deals with closed (or mostly closed system).
In personal economics, penny saved can be penny earned. In macroeconomics penny saved is penny that someone else does not earn. Fiscal multipliers affect how government spending or saving actually affects the government debt. Sometimes spending may actually increase tax returns. https://en.wikipedia.org/wiki/Fiscal_multiplier
Another issue is that while creative destruction is good thing in business, people are not very elastic. They, their families will be permanently damaged if they are long without jobs.
And because the supply of gold and silver is only weakly correlated with what the economy needs to keep nominal incomes on a predictable path (which mitigates market frictions and delivers a smoother-functioning economy, for standard "Keynesian" reasons), there is no well-established solution to this issue; in practice, we've settled on having centralized issuance of money, and having it managed by an independent authority, with strong, constitutional-level guarantees to that effect. For essentially historical reasons, we like to call that authority a "central bank".
I lean toward the view, espoused by modern liberal economists like Paul Krugman, that goverments should tighten spending and run surpluses during booms, so they have some cushion to increase spending during downturns. This tends to run counter to human psychology, as during a boom, people have trouble imagining it coming to an end. And politics tends to interfere with good economics; thus we have the spectacle of the Republican Congress passing a major tax cut when the economy was already heating up. (I'm actually sympathetic to the argument that the corporate income tax rate was too high and needed to be cut, but other taxes should have been enacted to make the whole package revenue-neutral.)
No, this is actually their greatest weakness. Mises biggest joke is: “Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.”
It is a tautology. A joke. Idiotology.
1. Yes, every boom ends in a bust. I must, because you can't predict the end of a cycle and always have to pre-finance production. There is an analysis, the tallest skyscraper always get's build before the bust. Obviously.
2. Yes, every credit expansion creates a boom and every boom creates a credit expansion. They go hand in hand. Which boom did NOT GO with a credit expansion? It has to be.
I think this is a pretty fair criticism of Austrian solutions. But like telling a drug addict that he must get clean, there is no way out of it other than to get clean. Some drug addicts can quit cold turkey (which is what Austrians recommend), others need to switch to a different less addictive drug (like Methadone etc) until they get completely clean.
I believe (and has been my belief for past few years) that Cryptocurrencies will play a major role this recession, acting as 'methadone'.
How? I will explain it from two different point of views:
- Krugman-Keynesians: Recessions are caused by liquidity crunch and liquidity must be pumped into the market by the fed and the govt in order to clear the market. Govt should also absorb excess unemployment by hiring people and shut down those programs when the market recovers and private sector can absorb the labor. These Keynesians are also great fan of artificially created liquidity (to get out of the liquidity trap) by Capitol Hill Babysitting Co-op [1], Alternative currencies issued by various cities during the Great Depression [2].
My claim is that in the next recession in the 'liquidity crunch', people will find it easier to switch to Cryptocurrencies and tokens, perhaps even issuing it themselves on local level. Bitcoin has a problem with having a fixed money supply, but at least the first switch from Fiat to crypto would happen without issues, but for the next to next recession, bitcoin would represent the same liquidity trap as fiat does, in fact worse. Due to this, many people will dump the dollar, but it also would ease up the liquidity crunch of the dollar economy. Therefore bitcoin and fiat economies being headlocked in a duel, until people decide to come back to the dollar again.
- Austrians: The single most important thing which needs to happen (and generally does not happen in recessions) is that the real wages must move downwards (fast enough). Govts try to solve a recession by pumping more credit and money into the markets, esp to keep people employed and wages up, but it doesn't really happen. Eventually some real wages move down enough and some inflation of the assets which starts a new bubble causes the market to 'recover'.
My claim is that in the next recession people will switch to more inflation-proof cryptocurrencies for salary but for a 'lower real wage' (potentially because they will either perceive crypto to be better medium or it would be the only expanding economy or/because dollar is losing value compared to crypto). This allows markets to get cleared faster and recovery to happen. But more of this effect results in an avalanche effect with people fleeing from dollar jobs to bitcoin based jobs and faster clearing of the markets.
1. https://en.wikipedia.org/wiki/Capitol_Hill_Babysitting_Co-op
2. https://www.armstrongeconomics.com/history/europes-economic-...
Welcome in the club. Mises is great. Everything sounds very logical, written from a guy who never worked one day in a free market enterprise. Mises never understood a capitalist market economy and the money and debt that drives it. He basically describes a middle-ages, barter free market economy.
That never existed in reality.
Can you elaborate? What exactly are "Austrian" type economics? I'm not familiar with this distinction.
There's a name for a rule that escapes me right now, on when the news writes about a subject you know about, that's when you realize all news reporting is utter crap. This was that moment for me.
isn't that the definition of 'do what they want'
if you are not going to put people in jail for drugs
people will do drugs.
What Portugal showed was that punishing them is actually counterproductive.