TJ Ryan Foundation Research Associate, John Quiggin, writes in Inside Story (17.7.20) about the economic recovery ahead following COVID-19's impact in Australia, arguing that governments should resist the 'easy' option of austerity measures.
'The central implication of classical economics – which was articulated during the Great Depression by the American banker Andrew Mellon (“liquidate the rottenness”) and following the global financial crisis by the advocates of “expansionary austerity” – is that governments must respond to a recession by cutting taxes, cutting spending even more to balance the budget, and letting the private sector expand as it naturally will.
'The disastrous failure of that approach, particularly in Europe, has put its advocates on the defensive. Nevertheless, the idea that deficits are always bad has plenty of intuitive appeal (think of Angela Merkel’s Swabian housewife carefully balancing the household books). Austerity has a particular grip on those in the policy elite whose thinking was formed in the “inter-crisis” period between the breakdown of the Bretton Woods system in the early 1970s and the GFC. That accounts for just about everyone in the political class aged over forty, with the exception of a handful of people who stick to positions they adopted in the 1960s or just afterwards, such as Jeremy Corbyn and Bernie Sanders.
'Public expenditure has expanded everywhere in response to the pandemic, and the need for more spending will continue long after it is controlled either by continued restrictions or a vaccine. The fight against austerity will begin with the expiry of time-limited emergency measures, which will happen in the second half of this year (September in Australia and much sooner in the United States).'