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No time for austerity

TJ Ryan Foundation Research Associate, John Quiggin, writes in Inside Story (17.7.20) that governments should resist the 'easy' economic option of austerity measures in attempting to steer a path out of pandemic-induced recession.

'The title of my book-in-progress, The Economic Consequences of the Pandemic, is meant as an allusion to John Maynard Keynes’s The Economic Consequences of the Peace, and one of its central messages is the need to resist austerity policies of the kind Keynes criticised in his major work, The General Theory of Employment, Interest and Money.

'As the title of that book suggests, Keynes wanted to replace a “special” theory with a theory that covered all likely eventualities. The special theory that worried him was the central tenet of classical economics: that the economy always tends to full employment unless governments or unions get in the way. Keynes compared classical economists to those practitioners of Euclidean geometry who clung to their theory in the non-Euclidean world discovered by Albert Einstein. (Keynes’s title also echoes Einstein’s distinction between special and general relativity.)

'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.'

 

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