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Comment by tsotha | Hacker News Reader

>There are two groups of economists: scientists who predicted that austerity wouldn't work and would make things worse, and quarks (aka the Chicago school) who recommended it.

Oh please. The idea that you can spend your way out of debt has been shown to be disastrous over and over, and yet like the Marxist "scientists" before them these Neo-Keynesians are going to claim everything is peachy until even the slowest among us can see they're wrong (and not scientists, either). But like any good faith healer they'll say "You didn't do it hard enough". Does that sound familiar?

In the short run austerity is painful. In the long run it's the only option, and putting off the pain only makes it worse when you're out of options. Either you do it honestly by cutting expenditures, or you do it the normal way by printing money.

The idea you can derive globally applicable lessons from a country the size of Cleveland is a bit daft.

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"The idea that you can spend your way out of debt has been shown to be disastrous over and over,"

The idea is not that you can spend your way out of debt, that would be silly. The idea is that you can and should spend money to compensate for lack of demand in a recession, because the markets overshoot. Once you are out of recession, you must pay back the debt.

So austerity when the economy is good, spending when it is bad. Anti-cyclical government behavior.

Austerity in a recession is pro-cyclical. As was predicted and Greece (for example) has shown, a government cannot save itself out of debt in a recession, because tanking the economy at a crucial time like that makes the debt worse (as percent of GDP, and that's the crucial number in terms of ability to repay).

Update:

I am German, "living within your means" is sort of part of my DNA, and not living within your means is going to cause problems. But timing does matter!

Totally agree. But then the question becomes, what do you do when countries actually increase spending and debt when the economy is good, and therefore have nothing to spend when the bad times arrive. The main distinction between Iceland and Ireland is that Iceland can print its own money.

In the UK it seems that 'nasty' parties that advocate spending cuts in the good times get voted out of office, and replaced by parties that increase spending.

So it becomes less a question of economics and more one of politics. For the moment Germany might see "living within your means" part of the DNA, but few other countries do. And I imagine that, as Germany gets further integrated with the rest of Europe, that kind of thinking will be weakened.

"But then the question becomes, what do you do when countries actually increase spending and debt when the economy is good, and therefore have nothing to spend when the bad times arrive." "So it becomes less a question of economics and more one of politics."

Precisely. And all the western countries have been guilty of this, the only difference is that of degree. Which is why debt has generally only crept up and politics has slowly but surely ceded sovereignty to the banks, especially in Europe where new currency is apparently only created via commercial banks (unlike the US, which just prints it).

"And I imagine that, as Germany gets further integrated with the rest of Europe, that kind of thinking will be weakened."

As far as I can tell that's the current political struggle, especially between the North and South.

If Cleveland had its own currency, you could derive globally applicable lessons. But it doesn't.

The "normal way" is much much better than deflationary expenditure cutting. Deflation increases the debt burden in real terms.

The underlying reason governments are following austerity is because protecting old people's benefits & pensions (the people on the credit side of the debt, i.e. claims on future production) is more important than growing the economy for young people, because that's how the votes are structured in the economies that matter (Germany in Europe). Politics and demographics are pro-austerity, not economists.

Going into endless debt does not grow economies any more than running up your credit cards makes you wealthier. It just gives you the illusion of growth. If you want to see where this leads look at what happens in Japan over the next 12 to 18 months.

And anybody who lived through the Carter years understands high inflation is something to be avoided at all costs. It's not a stimulant to the economy, it's a drag. Companies don't know what the real return on their money will be so they don't make investments.

>Politics and demographics are pro-austerity, not economists.

Nonsense. Politics is very, very, very anti-austerity. Governments do not get smaller without a major upheaval. Look at the UK, where you hear much wailing and gnashing of teeth over "austerity" that's simply a tiny cut in the rate of growth of the budget.

Projected cuts of 10% next year on top of the already in the pipeline cuts of 25% would be difficult to sell as "a tiny cut in the _rate of growth_ of the budget". The cuts to government capital expenditure has been largely the cause for the contraction in the construction [1], which has in turn contributed to the UK going back into recession.

Borrowing in order to increase sales (taxes in the case of governments) or to decrease costs (increase economic efficiency, spending on infrastructure and the like) is a good idea; both companies and governments do this all the time. Borrowing to spend frivolously is a bad idea no matter who you are.

[1] http://www.guardian.co.uk/business/2012/apr/25/eurozone-cris...

>Borrowing in order to increase sales (taxes in the case of governments) or to decrease costs (increase economic efficiency, spending on infrastructure and the like) is a good idea

It can be a good idea if the economic activity that results covers the cost of borrowing. But that's not an easy thing to determine, and any rational start to the process tends to get warped by political reality. The fetish for infrastructure spending results in, for example, rail projects that lose ¥32 for every ¥1 they take in:

http://spikejapan.wordpress.com/2012/05/20/minispike-the-end...

And anybody who lived through the Carter years understands high inflation is something to be avoided at all costs. It's not a stimulant to the economy, it's a drag.

And everyone who remembers the Great Depression says the same thing about deflationary spirals.

...we may have very few humans left of that era

I would rather see a depression than runaway inflation.

If Cleveland had its own currency, you could derive globally applicable lessons. But it doesn't.

Well, Ireland, Spain, Portugal, Greece, etc don't either.

Iceland does, and they used it to sort themselves out.

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