Neoclassical economics and its discontents
from David Ruccio
Economic austerity in the midst of an ongoing depression makes absolutely no sense. But that hasn’t stopped neoclassical economists, central bankers, presidents and prime ministers, and legislators in the United States and across Europe from trying to impose it.
However, there are some dissenting voices, from unexpected quarters.
One is Nobel laureate Joseph Stiglitz, who argues against “another costly experiment with ideas that have failed repeatedly.”
a resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy – or at least the economies of Europe and America, where these ideas continue to flourish. . .
There is an alternative: an economic-growth strategy supported by the European Union and the International Monetary Fund. Growth would restore confidence that Greece could repay its debts, causing interest rates to fall and leaving more fiscal room for further growth-enhancing investments. Growth itself increases tax revenues and reduces the need for social expenditures, such as unemployment benefits. And the confidence that this engenders leads to still further growth.
Regrettably, the financial markets and right-wing economists have gotten the problem exactly backwards: they believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government’s fiscal position, or at least yielding less improvement than austerity’s advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion.
The other is Bruce Bartlett, who held senior policy roles in the Reagan and George H.W. Bush administrations, and now warns against a repeat of 1937:
By 1937, President Roosevelt and the Federal Reserve thought self-sustaining growth had been restored and began worrying about unwinding the fiscal and monetary stimulus, which they thought would become a drag on growth and a source of inflation. There was also a strong desire to return to normality, in both monetary and fiscal policy. . .
This combination of fiscal and monetary tightening – which conservatives advocate today – brought on a sharp recession beginning in May 1937 and ending in June 1938, according to the National Bureau of Economic Research. Real G.D.P. fell 3.4 percent in 1938, and the unemployment rate rose to 12.5 percent from 9.2 percent in 1937. . .
While the odds of another recession are still low, they are increasing. Given the economy’s fragility, policy makers need to be very careful, because it may take only a small misstep on either the monetary or fiscal side to tip the balance. The experience of 1937-38 should be a warning.
The failure of free-market capitalism. The disaster of 1937. The surprise is not that neoclassical economics has generated a few discontents but that they are still so few.