Home > Uncategorized > Neoliberalism — an oversold ideology

Neoliberalism — an oversold ideology

from Lars Syll

So what’s wrong with the economy? …

austerity_world_tour_greeceA 2002 study of United States fiscal policy by the economists Olivier Blanchard and Roberto Perotti found that ‘both increases in taxes and increases in government spending have a strong negative effect on private investment spending.’ They noted that this finding is ‘difficult to reconcile with Keynesian theory.’

Consistent with this, a more recent study of international data by the economists Alberto Alesina and Silvia Ardagna found that ‘fiscal stimuli based on tax cuts are more likely to increase growth than those based on spending increases.’

Greg Mankiw

From Mankiw’s perspective ‘the Alesina work suggests a still plausible hypothesis.’

Hmm …  

Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand — and thus worsen employment and unemployment.The notion that fiscal consolidations can be expansionary (that is, raise output and employment), in part by raising private sector confidence and investment, has been championed by, among others, Harvard economist Alberto Alesina in the academic world and by former European Central Bank President Jean-Claude Trichet in the policy arena. austerity-meme-sequester-thisHowever, in practice, episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point and raises by 1.5 percent within five years the Gini measure of income inequality ….

The evidence of the economic damage from inequality suggests that policymakers should be more open to redistribution than they are. Of course, apart from redistribution, policies could be designed to mitigate some of the impacts in advance—for instance, through increased spending on education and training, which expands equality of opportunity (so-called predistribution policies). And fiscal con- solidation strategies—when they are needed—could be designed to minimize the adverse impact on low-income groups. But in some cases, the untoward distributional consequences will have to be remedied after they occur by using taxes and government spending to redistribute income. Fortunately, the fear that such policies will themselves necessarily hurt growth is unfounded.

Jonathan Ostry, Prakash Loungani, and David Furceri

Economists have a tendency to get enthralled by their theories and models, and forget that behind the figures and abstractions there is a real world with real people. Real people that have to pay dearly for fundamentally flawed doctrines and recommendations.

Let’s make sure the consequences will rest on the conscience of those economists.

  1. Jeff
    May 25, 2017 at 5:09 pm

    Mankiw is well paid for his flawed work. The Harvard endowment is the largest university endowment in the world.

  2. May 27, 2017 at 6:35 am

    Agree that neoliberalism is oversold. It’s like selling fish that’s near rotting. So, a rotten economics. In assessing it we have several options. First, it’s just a simple case of mis-applying the folk economics of family budgets and living within the family’s income. I honestly believe that many members of Congress buy into this folk economics and apply it remedies to the nation’s budget. This can be resolved by increasingly accurate education. Second, economists like Mankiw peddle their versions of control to policy makers. This can be resolved by reforming economics. Third, some economists and policy makers believe that there is only cure for the sins of those who spend too much, expect something for nothing, and burden the nation with lack of ambition and self-reliance. That cure is pain. Austerity and physical stress. This can be resolved with cultural reforms. The most difficult of all the reforms that must be undertaken.

  3. May 29, 2017 at 9:12 am

    I appreciate the logical approach here, and I think the term “folk economics” could be very useful. The point I’ve tried to make elsewhere is that the family doesn’t have a budget, it has a larder which it has to keep restocking. When, as now, the larder of the human family is showing signs of becoming empty, the issue is not who has spent too much but who has been raiding the larder.

    • May 30, 2017 at 11:59 am

      Dave, the politicians and business persons I talk with view all budgets as equal. The family has a budget, the city, the state, the US government, etc. When the budgeted dollars are gone nothing more can be purchased, they say, without going into debt (borrowing the money to purchase). A budget is a specific number of dollars. If a family’s budget is exhausted and the family is unable to borrow, then the family will have to “tighten its belt.” Purchase less. Do without. Budgets are disciplinary. They force people to behave in a certain way. Is it bad for the members of a family to eat only one meal a day, or eat dog food twice a week? No, say the budget hawks with whom I talk. This promotes family discipline, teaches valuable lessons in thrift, and helps improve the character of the family’s members. Most of the hawks offer little aside from anecdotes to support these claims. But as they’ve explained often to me, it’s common sense and natural necessity for humans to live within a budget. Those with the highest character can act responsibly and thus can be trusted with the largest budgets, both private and public. Those of “low” character (which includes many non-westerners, non-Christians, and immigrants) should not have access to a large budget, since they cannot use that budget properly. Now, of course this is not the only “folk economics” I’ve observed in practice. Others include Christian economics, several forms of democratic economics, and communal/socialist economics. In the situations I’ve observed, the first version has become dominant over the last 25 years in most instances.

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