Monthly Archives: April 2012

The austerity question: ‘How’ is as important as ‘how much’ | vox – Research-based policy analysis and commentary from leading economists

Europe’s embrace of austerity has sparked a debate among economists. This column argues that the debate has gone astray. Until the critical principle – ‘how’ is as important as ‘how much’ – is embraced, the austerity debate in Europe will continue to be completely out of line with the real economic trade-offs.


The European debate on fiscal austerity has gone astray – focusing exclusively on the size of deficit reductions. What policy makers should really be focusing on is the budget tightening’s composition�(tax versus spending) and on the accompanying policies. Indeed, the title of this Vox debate – “Has austerity gone too far?” – reflects this inappropriate emphasis on size.

In our view, the essential question is not ‘how far’ governments go but of ‘how’ they go far enough.

Evidence on new taxes versus new spending cuts

Economists have engaged in some lively debates about how to measure and evaluate the effects of large fiscal adjustments episodes in OECD countries (Europe in particular). But a careful and fair reading of the evidence makes clear a few relatively uncontroversial points, despite the differences in approaches. The accumulated evidence from over 40 years of fiscal adjustments across the OECD speaks loud and clear:

via The austerity question: ‘How’ is as important as ‘how much’ | vox – Research-based policy analysis and commentary from leading economists.

via The austerity question: ‘How’ is as important as ‘how much’ | vox – Research-based policy analysis and commentary from leading economists.

Government Intervention in the Economy

Statue of Liberty Gaeilge: Dealbh na Saoirse

Statue of Liberty Gaeilge: Dealbh na Saoirse (Photo credit: Wikipedia)

Economy is akin to the freeway, though on the freeway there is a speed limit and traffic signals to regulate the traffic. And of course police to book the offenders. The economy, too, should have limits, regulators, and the law to book offenders.

If we base our analysis on methodological individualism, subjective rationality and inherent unpredictability of economic system to properly analyze the Government role in society we have to conclude that, beyond the point of maintaining the basic framework of law and order, government’s role in society is very limited. One single intervention is unlikely to produce a solution to deep-rooted economic and social problems and thus policy makers often try to build a variety of policy, policies that work on market demand and market supply.

Economists have referred innumerable times to the “free market,” the social array of voluntary exchanges of goods and services. But despite this abundance of treatment, their analysis has slighted the deeper implications of free exchange. One of the most lucid analyses of the distinction between State and market was set forth by

In his book The General Theory of Employment, Interest and Money (1936), John Maynard Keynes set forth a series of theories that have come to be known as “Keynesian economics,” whose major implication for the public and for governments was that recessions and depressions are not simply natural events that will eventually correct itself, but rather a problem that must be solved by direct government intervention in the economy, by deficit spending and other measures.. He pointed out that there are fundamentally two ways of satisfying a person’s wants: (1) by production and voluntary exchange with others on the market and (2) by violent expropriation of the wealth of others. The first method Oppenheimer termed “the economic means” for the satisfaction of wants; the second method, “the political means.” The State is trenchantly defined as the “organization of the political means.”

Economists usually make a common mistake, that extensive modeling, statistical and empirical coverage of events is enough for proper design of any system. Economics is a social science and the effects of intervention cannot be calibrated / forecast with great accuracy , people’s behaviour is subject to change as one can infer that from the ‘law of unintended consequences’. If we live in such undetermined and unpredictable world, with limited knowledge and limited ability for proper economic analysis, one cannot be sure about the policies that are being proposed.

On my To- Read Pile

• The Economist sees (and raises) (Michael Pettis)

• India’s economic monsoon (FT Alphaville)

• The mirage of free-market roads (Atlantic)

• The bathtub model of unemployment (Liberty Street)

• A conversation about economic inequality (Triple Crisis)

• The role of speculation in oil markets (Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva)