Spending creates jobs – outweighs benefits of austerity – Spain proves

Spending creates jobs – outweighs benefits of austerity – Spain proves

It’s no fun being Prime Minister of a debtor nation without its own currency. Unlike the US or the UK, Spain has no easy options. That said, the new austerity measures just announced make no sense at all. According to news reports, Rajoy has announced 65 billion euros of tax increases and spending cuts; this will clearly deepen Spain’s depression. So what purpose will this serve? Think of Spain as facing a three-level problem. The topmost level is the problem of the banks; set that aside for now. Below that is the problem of sovereign debt. What makes the debt problem so serious, however, is the underlying problem of competitiveness: Spain needs to increase exports to make up for the jobs lost when its housing bubble burst. And it faces years of a highly depressed economy until costs have fallen enough relative to the rest of Europe to achieve the needed gain in competitiveness. So, what do the new austerity measures contribute to the solution of these problems? Well, Spain’s deficit will be smaller. Not 63 billion euros smaller, since the further depression of Spain’s economy will reduce revenues; say it’s 40 or 45 billion euros less debt, which is around 4 percent of Spanish GDP. Does anyone think this will make a big difference to the long-run fiscal outlook, or restore investor confidence? What about competitiveness? Let’s be frank and brutal: the European strategy is basically for debtor nations to achieve relative deflation via high unemployment. Think of it in terms of a Phillips curve: I’ve drawn this curve very flat at high rates of unemployment – which is what all the evidence suggests. If nothing else, this crisis has given us overwhelming evidence that downward nominal wage rigidity is real and a major factor. Now think about what Spain is doing: basically, it’s moving from A to B – driving its unemployment rate even higher. This will possibly lead to a slight acceleration of the improvement in Spain’s competitiveness. Maybe. But it won’t be significant. So, Rajoy is imposing harsh further austerity that will raise unemployment while making no significant dent in either the fiscal problem or the competitiveness problem. And this makes sense why?

Infrastructure spending is a sound investment – stimulus works and cuts will only worsen problems

Henry Blodget, CEO and editor of Business Insider, BA from Yale, 4-24-12, http://www.businessinsider.com/its-official-keynes-was-right-2012-4

But I will also add this in defense of Keynesianism ... The Austerians love to point at the 1930s as "proof" that Keynes was wrong. Look at the huge "New Deal," they say. Look at all those expensive public works projects. Look at all the spending the government did to try to get us out of the Great Depression, and it never really worked. What got us out of the Depression, the Austerians smugly observe, was World War 2. But what was World War 2 if not an absolutely gigantic Keynesian stimulus? The Federal deficit in World War 2 was massive—much bigger than any time during the Great Depression. And we built up a huge Federal debt load. And ... we set the stage for two decades of amazing prosperity, in which we worked off those debts. Our current debt and deficit situation scares the bejeezus out of me.  We absolutely have to get our long-term budget problems under control, and doing so will involve both cutting spending and raising taxes. If we don't do that, we really will collapse, as Niall Ferguson et al have long been arguing.

But getting the budget under control by radically chopping spending or increasing taxes this minute, as many Austerians want to do, won't help. In fact, it will likely make the problems vastly worse, because it will put that many more people out of work and reduce tax revenue that much further (just take a look at Europe). Meanwhile, given that we've already racked up $15 trillion of debt, I certainly wouldn't be opposed to our spending another couple of trillion upgrading our piss-poor infrastructure. Incurring debt to build things that help all Americans, from unemployed folks to business leaders to children, is a trade-off I'm willing to make. Especially if the jobs created by this "stimulus" spending help alleviate our massive unemployment and inequality problems.

Case—Spending Good—AT: Confidence

Turn – cuts worsen things, killing confidence – multiple studies prove spending is better

Joseph Stiglitz, Nobel Prize winner in Economics, November 2010, “Comment: To choose austerity is to bet it all on the confidence fairy: The mystical belief is that a smaller deficit will lead to an investment boom. What Britain really needs now is another stimulus,” http://search.proquest.com/docview/759371294)

Advocates of austerity believe that mystically, as the deficits come down, confidence in the economy will be restored and investment will boom. For 75 years there has been a contest between this theory and Keynesian theory, which argued that spending more now, especially on public investments (or tax cuts designed to encourage private investment) was more likely to restore growth, even though it increased the deficit. The two prescriptions could not have been more different. Thanks to the IMF, multiple experiments have been conducted - for instance, in east Asia in 1997-98 and a little later in Argentina - and almost all come to the same conclusion: the Keynesian prescription works. Austerity converts downturns into recessions, recessions into depressions. The confidence fairy that the austerity advocates claim will appear never does, partly perhaps because the downturns mean that the deficit reductions are always smaller than was hoped. Consumers and investors, knowing this and seeing the deteriorating competitive position, the depreciation of human capital and infrastructure, the country's worsening balance sheet, increasing social tensions, and recognising the inevitability of future tax increases to make up for losses as the economy stagnates, may even cut back on their consumption and investment, worsening the downward spiral. No business with a potential for making investments yielding high returns would pass up the opportunity to make these investments if it could get access to capital at very low interest rates. But this is what austerity means for the UK.

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