Dangerous Misconceptions

Published on the Real-World Economics Review Blog, by Peter Radford, January 6, 2012.

… Thus when Greenspan writes that: “The welfare state has run up against a brick wall of economic reality and fiscal book-keeping.” He is making a political statement not an economic one. There is no brick wall. The economic reality is only in the minds of right wing economists. And the notion of fiscal book-keeping as a form of discipline that we all must bend to as a matter of inevitability is simply a tricky way of misleading readers, and distracting them from the alternative choices available.  

Yes, books must balance. But the content of those books, the totals we target, and the composition of the assets and liabilities are a very rich and diverse array. Pretending that there are hard limits beyond which we cannot, nay: should not, go is illusion. It is an attempt to guide the naive towards an agenda that they may not choose were they aware of the true choice.

It gets worse.

He goes on to suggest, as if it is a hard and fast fact, that trying to overcome the brick wall he mentions via increasing taxes “has fostered decline.” He disarms objectors by adding, somewhat professorially, “Contractions have also occurred where spending was cut as well, but to a far smaller extent”.


Far smaller extent? Austerity – which is the current favorite description for cuts in spending – can cause declines in economies, but, he says, to a far smaller extent. So when picking your poison, dear readers, he subliminally alerts us, always choose the spending cuts. It will hurt less. And since those book-keeping realities have emerged to doom the welfare state, choosing the least painful option is the sensible way forward. And we all know that being sensible is so, well, sensible.

Really? … //

… Nowhere in a finance text book would the decoupling of risk and return be thus tolerated. Extra risk, we are taught, requires extra return. That is an iron law of finance.

Except when it involves undermining entitlements flowing to workers. Then the iron law evaporates, and, hey presto, we can vault over all sorts of brick walls, and elide the constriction imposed by the need for sensible book-keeping.

How convenient.

Note the contradiction: we build confidence by replacing the certainty of defined benefits with the uncertainty of defined contributions. This builds confidence? For shareholders perhaps. Not, I would argue, for households already struggling with the consequences of corporate cost cutting, layoffs, and wage stagnation. That’s a big ask of the market magic fairy.

To correct the facts: the Spanish government was a picture of fiscal rectitude before the crisis. So-called entitlements were not its problem. Not at all. No. It ran afoul of a balance of payments crisis without having recourse to adjustment via currency devaluation. It had to plunge itself into near depression in order to sort out a mess that was not at all due to hitting a brick wall or due to the mythical impact of sensible book-keeping.

Here in the US we had a different problem. It was not a reckless promise of unfunded entitlement that ran up the debt, it was reckless fiscal policy in the form of debt financed defense spending under Reagan and debt financed tax cuts under Bush. Our debt issue, such as it exists, does not require a shift to defined contribution style government programs, nor does it require us to bend to the will of accounting. It requires us to restore the fiscal policy that served us well in the 1990′s. Nothing more. Nothing less. My recollection is that Greenspan both connived in and openly supported both the Reagan and Bush excesses. He more than anyone flouted the constraints of sensible book-keeping. He has no credibility. None.

He is peddling snake oil dressed as sage observation. He is neither sage nor an objective observer. He is an ardent advocate of right wing ideology and should be declared as such. His views are not an expression of economic realities, they are simply the opinion of a man whose major contribution to our economy was to facilitate and encourage the causes of the crisis that he now dares claim imposes limits on the very programs that have protected vast numbers of Americans from the damage he helped create.

Why the Financial Times wastes ink on him I have no idea.

His dangerous misconceptions have been proven to be especially dangerous. We need to move on without him. (full long text).

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