A critique of column – The British fashion victims

I read this article on mint, asking for increased government spending and I was tempted to refute it’s message.

Before, I try to evaluate and analyze this article, I have distilled  key propositions and arguments that plays the central role in message that this article delivers.

The message delivered by this column is that fiscal austerity is the new fashion. It’s a fad that will go away. How ever, in it’s wake it will leave British people as fashion victims. This is because austerity measures won’t work to alleviate the hardships that the common people are undergoing in this tumultuous economic conditions. The lessons for it’s failure are to be derived from history. History suggests that government should intervene to prop up economy till at such time as private sector can start taking their share in the burden and economy seems to have started doing fine.

The meat of this article is summed from the following vital arguments:

  1. Fiscal austerity became fashionable.  It’s a fad that has been fading lately.
  2. Everyone must balance budgets “now, now, now” wasn’t based on any kind of careful analysis.
  3. Trying to balance budgets in the face of high unemployment and falling inflation is still a really bad idea. deficit-cutting actually reduces unemployment because it reassures consumers and businesses. This claim has no basis in reality.
  4. Britain like America are suffering from aftermath of housing and debt bubble, compounded by the reliance on financial industry revenues. The deficit rose higher because of shrinking of revenues from the financial industry.
  5. There’s no question that Britain will eventually need to balance its books with spending cuts and tax increases. When is the only question?  The author says – “eventually”.
  6. Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. It should not slash spending at a time when private demand isn’t at all ready to take up the slack.
  7. Reasons for following this fad : The Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative.

I completely agree with tags applied to this column  – Paul Krugman.

How “Krugmansque” this article has been!

Unfortunately, the art of learning selective lessons from history is not uncommon. Hey, forget about the prognosis of why these bubbles do occur and occur ever so periodically. It is far more important to discuss what to do when the bubble has occurred. Zeitgeist has been to deal with bubbles and when they are past memories, forget them.

I believe that economic activities are in constant flux. There are smaller bubbles that arise and die quickly without every one’s notice. These bubbles are investments that did not work.

Where there is investment, some would fail.

To ensure that every investment is a success is to acquire omniscient knowledge. This is not possible.

Not much is lost when I make a bid with a small proportion of my income.  If i were to sink all my savings in the proposed investment that would turn out to be a malinvestments later on, it would hurt me substantially.

Most government actions tends to dim these very signals allowing malinvestments to pile up and periodically cause an ache that is hard to bear.  Any correctional course that occurs to deal with such malinvestments cause hardship to certain section of the society. No one talks about it as it is a daily retinue that allows value generation to tune itself to demands of the society.  How ever as these pile up into a bubble and the correction is felt across the larger section of society, it now becomes special enough to mentioned in an article, beget action as inaction won’t do.

The column does mention that eventually the books will be balanced by spending cuts and tax increases.This only means spending spree whose burden will be shared by the society eventually.The government spending doesn’t reach all pockets, inevitably creating a bias that will make some richer at expense of some other folks.  In fact, government actions promote bias.

Inflation makes us poorer and in most cases it is largely due to printing of fiat money and government fiscal mismanagement. Real savings is the key to economic prosperity and also the engine for investments. Making us pay via government spending when our economic preference is to save, is not going to work. It usually ends up dimming the signals that flag malinvestments but that is a subject that requires a separate paragraph and attention.

Would it had made sense, during the dot com bubble for government to have stepped in and do the investment in these dot coms where private sector would have been unwilling to put any more money into it? This would have only dimmed the signals that some thing was not correct about these dot com investment. It would have  allowed more investments to plough in before we realized that the value we expect it to generate is not going to happen. It would have created an even bigger bubble. In fact that is exactly what happened when interest rates were artificially lowered.

It made more sense to let the correction run it’s course. It would have made even greater sense, if the interest rates have not been deflated artificially through the fiat money which dimmed the market signals and allowed a larger meltdown at later time.

How long can we spend today and put the burden of it to those who will inherit it in future?

The article seems in all defiance bent to continue a hundred year long fashion fad that has seriously undermined society, allowed government to become bigger without accountability  and creates biases that do not allow economic participation on equal footing.

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