The Importance of Domains: Seeing the Forest AND the Trees

[j123]

I work in IT, I thought this was a networking related post.

Well played.

 

[Lee978]

Can you elaborate? I'm guessing you're just talking about austerity causing declines, and then austerity ending leading to growth.

Iceland, Spain, Ireland, and the US all endured some form of austerity and their economies ended up better after implementing austerity than before. This would seem to contradict kpt and his view that austerity never works and anyone who advocates austerity is a loon who must not know what he's talking about.

Does this prove that austerity is ALWAYS the solution to recessions? No. However it does prove that the real world isnt as black and white as kpt would like us to believe and that when it comes to economic issues such as austerity, rarely is either side 100% correct.

 

[Jack V Savage]

Iceland, Spain, Ireland, and the US all endured some form of austerity and their economies ended up better after implementing austerity than before. This would seem to contradict kpt and his view that austerity never works and anyone who advocates austerity is a loon who must not know what he's talking about.

Again, I'm asking for elaboration. No one claims that austerity at one time forever stops growth. If you're just saying that some economies have tried austerity and then grew after ending it, sure. But does austerity in a recession cause further growth? There's no logical reason to believe it, and the evidence is pretty clear that it has a negative effect.

 

[Lee978]

Again, I'm asking for elaboration. No one claims that austerity at one time forever stops growth. If you're just saying that some economies have tried austerity and then grew after ending it, sure. But does austerity in a recession cause further growth? There's no logical reason to believe it, and the evidence is pretty clear that it has a negative effect.

What in your view is illogical about the theoretical case for slashing budgets in the face of a recession? To me the the theory makes perfect logical sense although i will concede that in practice, the relationship between debt and economic growth isnt clear.

That being said the evidence is not clear that austerity is contractionary and therefore always negative as kpt (and you i guess) assumes. Evidence concerning Iceland, Spain, and Ireland in particular shows that despite tighter budgets their economies are growing. I'm not sure how else you want me to elaborate but i think I've made my point.

PS

Look up expansionary fiscal austerity. There are have been plenty of reputable studies conducted by economists showing that austerity in the form of spending cuts doesnt have to be contractionary. Again my point isn't to argue that austerity is preferable to stimulus spending in the face of a recession. My point is only to show that the debate is hardly "settled" despite what some would like us to believe.

 

[panamaican]

A solid post and speaks to the importance of seeing the individual and reducing our dependence on broad racial, gender and social stereotypes when it comes to making policy decisions.

We have more than enough information out there to accept that we can't rely on either the trees or the forests in isolation.

 

[Jack V Savage]

What in your view is illogical about the theoretical case for slashing budgets in the face of a recession? To me the the theory makes perfect logical sense although i will concede that in practice, the relationship between debt and economic growth isnt clear.

There's no mechanism for raising taxes/cutting spending to spur growth in a recession. I understand that proponents appeal to some undefined psychological explanation, but that seems like a way to wave away the lack of a logical explanation rather than provide one.

That being said the evidence is not clear that austerity is contractionary and therefore always negative as kpt (and you i guess) assumes.

Here's the recent evidence:

Looks pretty clear to me. I understand that there could be more to the story, but that requires proponents to show why the evidence seems to go against them so strongly.

Evidence concerning Iceland, Spain, and Ireland in particular shows that despite tighter budgets their economies are growing. I'm not sure how else you want me to elaborate but i think I've made my point.

You're just naming countries. I don't see how any of them are exceptions to the general rule. If you're able to elaborate, I'm open.

Look up expansionary fiscal austerity. There are have been plenty of reputable studies conducted by economists showing that austerity in the form of spending cuts doesnt have to be contractionary.

Austerity in any form has a contractionary effect, though it can be counteracted with expansionary monetary policy or something.

Again my point isn't to argue that austerity is preferable to stimulus spending in the face of a recession. My point is only to show that the debate is hardly "settled" despite what some would like us to believe.

I understand your point, but the debate is as settled as it can be. All the logic and evidence is on the same side at this point. We're looking at very complex phenomena so there could be more going on, but at this point, the argument is "look at the logic and evidence" vs. "certain knowledge is impossible."

 

[Lee978]

There's no mechanism for raising taxes/cutting spending to spur growth in a recession. I understand that proponents appeal to some undefined psychological explanation, but that seems like a way to wave away the lack of a logical explanation rather than provide one.

None?

I can easily imagine a scenario where a country runs higher levels of debt to the point where investors begin to seriously question the solvency of said nation. By lowering their debt, the government sends a message to bond markets that its serious about getting its fiscal house in order. This signal sends interest rates lower which makes servicing the debt cheaper and therefore stimulates private investment leading to higher levels of economic growth.

Here's the recent evidence:

Looks pretty clear to me. I understand that there could be more to the story, but that requires proponents to show why the evidence seems to go against them so strongly.

I'm not sure how the above graph jives with the following:

Spain and Ireland now have the euro zone's most dynamic economies: The International Monetary Fund expects Spain to expand by 3.1 percent this year and Ireland, by 4 percent -- realistic expectations, in light of their progress in the first six months.

http://www.bloombergview.com/articles/2015-07-31/two-points-for-austerity-spain-and-ireland

You're graph seems to show that Spain isn't growing despite reports from the IMF saying otherwise.

You're just naming countries. I don't see how any of them are exceptions to the general rule. If you're able to elaborate, I'm open.

I'm not sure how else to elaborate. kpt made the claim that austerity never leads to growth and I'm pointing out how several different countries tried austerity and yet their economies all grew as a result. Of course correlation = causation and I'm sure there were a lot of other variables at play but I don't see how in light of those facts kpt can be correct.

Austerity in any form has a contractionary effect, though it can be counteracted with expansionary monetary policy or something.[/qutoe]

I'm not sure that statement is 100% correct. Maybe the key variable here is monetary policy but again, the empirical record doesn't seem to conclude that "Austerity in any form has a contractionary effect."

I understand your point, but the debate is as settled as it can be. All the logic and evidence is on the same side at this point. We're looking at very complex phenomena so there could be more going on, but at this point, the argument is "look at the logic and evidence" vs. "certain knowledge is impossible."

I feel as though I am looking at the logic and the evidence and it is telling me that this debate is hardly settled. Furthermore, economists are looking at the logic and evidence and they too seem to believe that the debate is hardly settled.

 

[Jack V Savage]

None?

I can easily imagine a scenario where a country runs higher levels of debt to the point where investors begin to seriously question the solvency of said nation. By lowering their debt, the government sends a message to bond markets that its serious about getting its fiscal house in order. This signal sends interest rates lower which makes servicing the debt cheaper and therefore stimulates private investment leading to higher levels of economic growth.

A debt crisis is a separate issue. That's why, for example, many economists supported austerity for Greece *despite* the negative effect on growth. So it's not that austerity in a recession leads to growth; it's that growth isn't the only economic consideration. One lesson we've learned from that episode, though, is that austerity in a recession isn't even effective on its own terms. That is, it doesn't really reduce deficits.

I'm not sure how the above graph jives with the following:

http://www.bloombergview.com/articles/2015-07-31/two-points-for-austerity-spain-and-ireland

You're graph seems to show that Spain isn't growing despite reports from the IMF saying otherwise.

Look at the dates. When Spain was practicing austerity, it had the same effects that austerity has had everywhere else. When it stopped, it started growing again (not enough to catch up, BTW). That's actually more evidence on the side of austerity being ineffective.

I'm not sure how else to elaborate. kpt made the claim that austerity never leads to growth and I'm pointing out how several different countries tried austerity and yet their economies all grew as a result. Of course correlation = causation and I'm sure there were a lot of other variables at play but I don't see how in light of those facts kpt can be correct.

You're not showing that austerity led to growth in those countries. You're just naming countries that have had different fiscal policy and different growth rates at different times. Again, if you look at the example of Spain (that you provided), you'll see what I mean.

 

[Lee978]

A debt crisis is a separate issue. That's why, for example, many economists supported austerity for Greece *despite* the negative effect on growth. So it's not that austerity in a recession leads to growth; it's that growth isn't the only economic consideration. One lesson we've learned from that episode, though, is that austerity in a recession isn't even effective on its own terms. That is, it doesn't really reduce deficits.



Look at the dates. When Spain was practicing austerity, it had the same effects that austerity has had everywhere else. When it stopped, it started growing again (not enough to catch up, BTW). That's actually more evidence on the side of austerity being ineffective.



You're not showing that austerity led to growth in those countries. You're just naming countries that have had different fiscal policy and different growth rates at different times. Again, if you look at the example of Spain (that you provided), you'll see what I mean.

I'll take a look but i need to get back to work now. You may be right Jack but there are many economists (in particular market monetarist) who believe austerity isn't necessarily contractionary as you suggest and they are more qualified on this subject than you and I. Either way I'll respond later when i get home. Good exchange for now. Cheers.

 

[Jack V Savage]

I'll take a look but i need to get back to work now. You may be right Jack but there are many economists (in particular market monetarist) who believe austerity isn't necessarily contractionary as you suggest and they are more qualified on this subject than you and I. Either way I'll respond later when i get home. Good exchange for now. Cheers.

What I think you mean isn't that austerity isn't necessarily contractionary, but that the contractionary effects of it can be counteracted (by currency devaluation or expansionary monetary policy). I think you'd get very wide agreement that that is possible.

 

[Lee978]

A debt crisis is a separate issue. That's why, for example, many economists supported austerity for Greece *despite* the negative effect on growth. So it's not that austerity in a recession leads to growth; it's that growth isn't the only economic consideration. One lesson we've learned from that episode, though, is that austerity in a recession isn't even effective on its own terms. That is, it doesn't really reduce deficits.

Why is a debt crisis a separate issue? We're talking about austerity which is a term that reached prominence during the European debt crisis and the fiscal cliff no? This whole time I have been operating under the implicit assumption that we were talking within the context of a debt crises.

Maybe this is one source of our disagreement?

Look at the dates. When Spain was practicing austerity, it had the same effects that austerity has had everywhere else. When it stopped, it started growing again (not enough to catch up, BTW). That's actually more evidence on the side of austerity being ineffective.

I'll agree that while practicing austerity Spain's growth might have slowed but the reasons why Spain has one of the "euro zone's most dynamic economies" is due to Spain implementing an austerity program. So I disagree that Spain is more evidence on the side of austerity being ineffective.

You're not showing that austerity led to growth in those countries. You're just naming countries that have had different fiscal policy and different growth rates at different times. Again, if you look at the example of Spain (that you provided), you'll see what I mean.

Alright so maybe my use of words is leading to some confusion here. My aim is not to argue that there are economists and studies out there that argue that austerity in a vacuum will lead to economic growth. What I am trying to demonstrate is how kpt's claim that austerity "does not promote growth" is incorrect and by the way, here are a list of countries who have implemented austerity and now so happen to have some of the most "dynamic" and growing economies in the world. Whether or not austerity leads to short-term contractions (as it looks like was the case in Spain), I don't think supports kpt's claims because evidence suggest that even if austerity causes a short-term contraction, it more than likely will lead to long-term growth (which kpt's argument rules out). To that end, I believe I have done my job.

 

[Lee978]

Also just to prove that I am not making shit up when I say this debate over austerity is hardly settled, here is the Richmond Fed:

In summary, economists have not definitively answered the question of whether and when austerity is likely to be beneficial. Much of the debate ignores the question of whether implementing austerity is feasible in nations with nonexistent records of long-run fiscal consolidation or that rely on foreign sources of deficit financing. The economic volatility of recent years provides a ripe area of future study regarding the true effects of fiscal contractions.

From the same brief:

Is Austerity Expansionary?

Some empirical evidence suggests that past fiscal contractions were expansionary. In a 1990 study, Francesco Giavazzi and Marco Pagano were the first to make this point, but they looked at only two isolated cases, Denmark and Ireland in the 1980s.5 Three subsequent studies by Alesina and his colleagues—Roberto Perotti in 1995, Ardagna in 1998, and Ardagna in 2009; “AAP” hereafter—identify all episodes of significant deficit reduction in developed countries in the past several decades.6 They find that some episodes of fiscal consolidation led an expansion based on tax cuts in the following year. Therefore, the annual data used by AAP and the IMF may not capture fi scal consolidations accurately.

Using case studies of four specific consolidation episodes in Denmark, Ireland, Finland, and Sweden, Perotti argues that other factors—such as exchange rate adjustments that promoted stabilization—led to economic growth in the presence of fiscal contractions. He contends that, since depreciation is not available to governments in individual member countries of the European Monetary Union—and indeed, the current account channel is not available to the world as a whole—fiscal consolidation is not likely to be expansionary today.

So we can see that while "fiscal consolidation is not likely to be expansionary today" it has been in the past.



https://www.richmondfed.org/~/media...research/economic_brief/2013/pdf/eb_13-09.pdf

 

[Jack V Savage]

Why is a debt crisis a separate issue?

The discussion is about whether the belief that austerity in a recession can drive stronger growth is supportable, not whether austerity ever has a purpose. Austerity slows growth, but theoretically for a country that doesn't control its own currency, a debt crisis might be urgent enough that enduring slower growth might be an acceptable price to pay.

We're talking about austerity which is a term that reached prominence during the European debt crisis and the fiscal cliff no? This whole time I have been operating under the implicit assumption that we were talking within the context of a debt crises.

Maybe this is one source of our disagreement?

See above. And also note that austerity as a response to a debt crisis is also controversial (because the effect of austerity on growth could be strong enough to counteract any attempted deficit reduction--meaning that you could lower revenue by more than you cut spending), though it can simply be imposed.

I'll agree that while practicing austerity Spain's growth might have slowed but the reasons why Spain has one of the "euro zone's most dynamic economies" is due to Spain implementing an austerity program. So I disagree that Spain is more evidence on the side of austerity being ineffective.

Well, Spain's economy did not do well since the recovery. So what you have is austerity that slowed growth, followed by stopping austerity, which restored growth, but it didn't even get back to where it would have been if it had not imposed the austerity to begin with. How is that an argument for austerity?

Alright so maybe my use of words is leading to some confusion here. My aim is not to argue that there are economists and studies out there that argue that austerity in a vacuum will lead to economic growth. What I am trying to demonstrate is how kpt's claim that austerity "does not promote growth" is incorrect and by the way, here are a list of countries who have implemented austerity and now so happen to have some of the most "dynamic" and growing economies in the world.

But "austerity does not promote growth" is a true statement, though I agree that it should be qualified with the addition of "in a recession" and especially when interest rates are as low as they can go. Debt can put a drag on growth by channeling funds into areas that are suboptimal ("crowding out" for example), and reducing it can have beneficial effects. But you're trading the slowdown caused by austerity for a speed up caused by less debt. At times, that might be a fair trade (if the economy is doing well, "crowding out" is a bigger concern and the harm of austerity is lower--plus interest rates can be lowered to counteract any slowdown effects from fiscal policy). In a recession, it's clearly not a fair trade. Either way, it's not a legitimately controversail matter. You won't see anyone argue that it's never advisable to reduce deficits, and you won't see anyone credibly argue that austerity causes growth.

Whether or not austerity leads to short-term contractions (as it looks like was the case in Spain), I don't think supports kpt's claims because evidence suggest that even if austerity causes a short-term contraction, it more than likely will lead to long-term growth (which kpt's argument rules out). To that end, I believe I have done my job.

Austerity didn't lead to long-term growth in the case of Spain. Stopping austerity led to a resumption of the normal growth trend that was slowed by implementing austerity.

Ed: And in your other post, you're pointing to a highly ideological paper arguing the same kind of thing. Austerity to cut debt slows growth, following by the opposite of austerity (tax cuts) leading to higher growth the next year. That's not an argument for expansionary austerity; that's an argument for expansionary fiscal policy having expansionary effects.

 

[ultramanhyata]

That opposing view points can be correct based on perspective or experience or values. In this case if we follow the right's view we are doomed because they believe climate change is a hoax.

If you were raised by mountain folk, and your daddy used to make oversized wooden cut outs of his feet, strap them to his boots, and run around the woods leaving "Sasquatch tracks"... Then it's entirely understandable that you would tend to see "evidence" as the product of hoaxing.

By taking the time to understand a person's background we can gain a greater respect for their "truth". I think that's the important lesson the OP is trying to teach us.