Every Economy in the Great Depression and the GFC that let markets take control suffered terribly.....US, England, Italy, Greece, Spain etc all run by Conservatives. Social Democratic run economies run by the likes of Rudd, Swan, Stevens and Henry did NOT!!!! So which way is Phoney going in this non-existent budget emergency? The May budget is expected to announce a series of deep spending cuts to balance the books. Sydney University economist Dr Matthew Smith says (via The Conversation) these austerity measures are not only grounded in false economic theory, but could be catastrophically counter-productive. IN THE LEAD-UP to the Federal Government’s budget in May, we’ve been told to expect deep cuts in government spending. Such a policy is said to contribute to a short run decline in Australia’s economic activity, but will lead in the longer term to a greater sustained expansion as the private sector grows and blooms like flowers in spring. This argument is a fallacy — grounded in a false economic theory. I’ll explain why. The fiscal austerity argument is essentially based on crowding-out, which contends that expanding the size of government will in the long run crowd out the private sector. So shrinking government through fiscal consolidation will release resources enabling the private sector to expand. The fundamental basis for this argument is that competitive market forces push the economy toward a state in which resources, capital and labour, are fully employed — referred to as full employment. In economic theory, this long run tendency to full employment is essentially based on the substitution principle — that the demand for labour and capital will each functionally increase as their respective prices decline in relation to each other. The theory can be illustrated this way. Suppose the economy is in a downturn and there is unemployment. The competition for jobs would then drive down the real wage of workers in general and, because the cost of employing people has fallen, it will be more profitable for firms to employ a more labour-intensive technique of production. So they substitute labour for capital, increasing the demand for labour. However, if there is unemployment, then it means there is not a sufficient demand for products in the economy. So, for the economy to adjust, there requires also to be a reduction in interest rates to generate private investment spending and stoke aggregate (or total) demand, to get the full-employment caravan back on the road. independentaustralia.net/politics/politics-display/the-fallacy-of-fiscal-austerity-and-the-myth-of-crowding-out,6272
Posted on: Thu, 13 Mar 2014 05:46:54 +0000
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