1. RK GLOBAL ANALYSIS
The Politics of Austerity,Debt and Growth:
The Confusing Priorities and Misguided Policies
Vol.13
May 7, 2013
People do not judge in the same way as courts of law; they do not hand
down sentences, they throw thunderbolts; they do not condemn kings,
they drop them back into the void; and this justice is worth just as
much as that of the courts.
Maximilien de Robespierre ( 1758-1794)
The world of economics went through a storm few week ago when the famous and now the
infamous study by Rogoff and Reinhart (Harvard) was challenged and questioned when it was
revealed that their data was “managed” to show the critical link between national debt
threshold and its impact on the national economic growth . This started the tasty exchange1
between those who had always had some doubts about the study and those who continue to
believe the main message of the study which is that the high debt will bring economic and
financial armageddon to the nation-one day - When that one day will come in nation’s future -
no one knows. In other words, we are all somewhat clueless regarding when exactly that Bang!
moment comes in the national economic affairs where the debt is so out of control in a way that
there is practically no economic growth for a long time.
It was suggested, by many in the economic press, that the champions of the austerity approach
both in the US and in Europe used the R&R study to drum up the support for continuous
austerity measures even though the results of that approach were visible to everyone involved
in the economic analysis especially when it came to unemployment and the economic growth.
I am not here to either defend or reject the Rogoff and Reinhart (R&R) study or thesis or
whatever anyone else calls their “analyses”. Yet, what I would say that no government policy
action is based on one study- no matter who and how influential the author/s are. Moreover, by
putting the blame on a study or analyses for a certain government policy is like saying that
Nazi’s drew their insipration from Nietzsche’s Übermensch (Superman) concept. For those of
us who have been amazed at the policy response to this crisis on both sides of the Atlantic, we
do not need R&R study to inform us that the policy response has been nothing short of a dismal
at best and whatever efforts have been made by the policy makers, have not solved the real
issues facing the economies of the Europe and the US. Off course, there are those who still
1
Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst. The trio produced the study
which challenged the R&R ‘s overall thesis on the debt and its impact on the national economic growth.
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2. believe in the old line that: well, it could have been worse without these policy responses. Well,
you all know what I think of that response.
With sluggish growth and the dismal unemployment figures in across the Western world , there2
are plenty who are still advocating the austerity approach and one must ask: if the policy
response has not produced the desired results, then why insisting on the approach? The answer
lies understanding the crucial relationship between the concept of power and idea/s. In the
world of economics, it is falsely assumed that ideas are not powerful, and the economic models
usually assume that people are motivated by straightforward self-interest rather than
complicated notions. The concept of power and who has that power does not even fit into the
subject of econometrics. Yet, it matters the most in understanding the underlying elements of
the political economy.
Ideas are powerful. If they become part of a political power discourse, they can change the
course of the history. That is true for both good and bad ideas. Like good ideas, bad ideas have
profound consequences. We do not live in the tidy, ordered universe depicted by economists’
models. Instead, our world is crazy and chaotic. We try to control this world through imposing
our economic ideas on it, and sometimes can indeed create self-fulfilling prophecies that work
for a while. For a couple of decades, it looked as though markets really were efficient, in the way
that economists claimed they were. As long as everyone believed in the underlying idea of
underlying markets, and believed that everyone else believed in this idea too, they could sustain
the fiction, and ignore inconvenient anomalies. However, sooner or later (and more likely sooner
than later), these anomalies explode, generating chaos until a new set of ideas emerges, creating
another short-lived island of stability. The cycle continues and that in a nutshell is the History of
Economics.
This means that ideas are fundamentally important. Galbraith knew that and so did Keynes.
The world does not come with an instruction sheet, but ideas can make it seem as if it does.
They tell you which things to care about, and which to ignore; which policies to implement, and
which to ridicule. Everyone from the center left to the center right believed that weakly
regulated markets worked as advertised, right up to the moment when they didn’t. It is a
recurring theme in the history of economics.
John Maynard Keynes famously argued that politicians are the unwitting slaves of the ideas of
defunct economists. We must understand the application of Keynes’s dictum, asking what those
ideas are, why they are so important, and where they came from in the first place. The
economy is much too important to leave to economists alone - no matter how smart, eloquent
and convincing they might be. We need to understand how ideas shape the economic order and
how power advances those ideas and how this relationship plays itself out in any given society.
As of today, while policy makers and political masters in many industrialized nations continue
2
Both India and China are seeing the dramatic slowdown in employment growth. Latin America is seeing its own employment crisis.
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3. their “economic policy making” to contain this ongoing crisis, millions and millions of citizens
have lost their living standards; they have no prospects for gaining meaningful employment
and the chronic economic malaise of long-term unemployment continues. These are scary
themes to ponder. The citizen’s economic well being is crucial to sustain peaceful social and
political discourse in any society. When the economies collapse, societies breakdown and chaos
manifest itself in the national psyche - that is true even for those societies who were once “
The Super Powers” of their era.
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Once again, many thanks for your continuous support and feedback. Many of you have
written individually to ask my take on the upcoming crucial elections in Pakistan, situation
in Iraq and Afghanistan; on the Indian economy and of course the Syrian conflict. I have
responded to many of your excellent questions but if I have missed some of you, I apologize
and will revert to you shortly.
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