Edit ModuleShow Tags

The Economist: Austerians?

A new word crept into the economics vocabulary when I wasn’t paying attention – austerianism (the red line Spell Check appearing beneath it suggests Bill Gates doesn’t approve.) It seems to describe proponents of the Austrian School of Economics, like Keynesian is used to describe devotees of John Maynard Keynes.

For decades the battle was between the Keynesians and the Monetarists, adherents of Milton Friedman’s system of thinking. Keynesians said economic problems must be dealt with using fiscal policy, the government’s ability to tax, spend and run deficits.  Monetarists said if we kept the money supply growing at a steady rate with no attempt to fine-tune it to economic growth, then inflation would stay low and the economy would get along just fine. Those are vast oversimplifications, of course, but are the heart of the debate.

Today the dispute has turned to the Keynesians versus the Austerians (shouldn’t they get a capital letter if the other two schools do?) Inflation has become a non-issue in recent years. The focus is now on sluggish growth that accompanies high rates of joblessness.

The Keynesians argue for increased government spending. Never mind deficits when times are tough. We need to put people back to work.

The Austerians say huge deficits are the problem, not the solution. Economies need to cut government spending and live within their means. Only then will sustainable economic growth return.

The fire was fueled further by the publication of a paper by two influential economists – Carmen Reinhart and Kenneth Rogoff – who offered evidence, at least according to the popular press, that terrible things happen when the ratio of debt to output reaches 90 percent. Things got even hotter when other economists found errors in the Reinhart-Rogoff calculations that they claimed invalidated the study.

Now, I don’t want to get into the argument about how many angels can dance on the head of a pin. That’s for academic economists. But I do have strong feelings about what is wrong with both positions. In fact, let’s leave the Monetarists in the mix and talk about the shortcomings in all three positions.

The Keynesians provide good recession/depression recommendations. When the economy is collapsing, government has a responsibility to step in and augment private spending. The problem is they never know when to quit. As I’ve written before, we’ve only balanced the federal government budget five times since the early 1960s. 

The Austerians are correct that there are times when we should live within our means. One of my rules for understanding the economy is, “You can’t forever spend more than you make.” But there are times and places when it is appropriate to choose debt, whether a family is buying a house or sending a child to college or a country stimulating lackluster demand. 

The Monetarists are good inflationary period economists. Too much money chasing too few goods guarantees rising prices. But there are times when it is reasonable to use the government’s taxing and spending policy as well. Perhaps there are even occasions when it is best to increase the growth of the money supply, lowering interest rates and encouraging borrowing.

The problem all three schools have is that each seems to think they have all the answers correct. They are unwilling to admit that sometimes one policy is suitable and other times when another needs to take precedence. What happened to the bright idea of deficit spending in bad times, but paying down the debt in good times? Prior to the 1960s, the federal budget was generally balanced over the business cycle except during times of war.

When people ask me what school of thought I support, I tell them I’m an eclectic. The current situation in Southern Europe shows you can’t cut your way to prosperity in a recession. In the U.S. and many other countries we see what happens to debt when you run deficits in good times as well as bad. Ask current-day Zimbabwe (in 2008 prices doubled every day!) or post-World War II Hungary (in 1946 prices doubled every 15 hours!) what happens when you print too much money. To solve the current problem of slow growth at best and continued recession if we aren’t careful, we need to mix and match the finest from all three schools of thought.

Edit Module
Tucker Hart Adams

Tucker Hart Adams, president of the Adams Group, monitored and analyzed the Colorado economy for 30 years. She can be reached via her website, coloradoeconomy.com.

Get more of our current issue | Subscribe to the magazine | Get our Free e-newsletter

Edit ModuleShow Tags

Archive »Related Articles

Why do so many millennials live in their parents' basement?

As a result of watching the value of their parents’ home drop drastically during the 2008-2009 housing bubble, Millennials have grown wary of homeownership.

The woman behind Denver's community workspace movement

Before Ellen Winkler made a name for herself in Denver, shaping work spaces, she started her career on construction sites in New York City.

Thinking of working for a founder? Read this first!

The founder — someone who birthed several companies but never got any of them to profitability — has turned from “The Creative One” (he developed the first product) to “The Critical One,” now more boat anchor than cheerleader.
Edit ModuleShow Tags

Thanks for contributing to our community-- please keep your comments in good taste and appropriate for our business professional readers.

Add your comment: