Economic Myth 2: Reducing deficits is the only way out of a recession

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Economic Myth 2: Reducing deficits is the only way out of a recession

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Belle Mellor

In April 2009 I had an invitation to be on the BBC News Channel. There was a meeting of the G20 group of rich countries in London. World leaders were very worried about the financial crisis. They seemed to have no idea about the situation. The BBC presenter asked me: ‘Is this the end of capitalism?’ It seemed then like a good question.

At the time a lot of public money was going to help the financial crisis. More public money was for a ‘fiscal stimulus’ to save the ‘real’ economy. Old cars were bought and thrown away so that more new cars could be sold, and fewer jobs were lost. General Motors was once the biggest company in the world and it now needed saving.

At the time, no-one dared to suggest any different ideas. Not even neoliberal economists. For years the neoliberals directed government policies and always thought that markets look after thremselves. Now they were lost for words.

Where did all that money come from? Where did it go? Why was it a big surprise for every one? What next? No-one knew. It was clear that private debts were being given to the public, the same as during the financial crises around the world, starting with the ‘Third World’ financial crises of the 1980s.

By the end of that same year, 2009, the neoliberals were back in control and said that the crisis was because of ‘too much government spending’.

As soon as financial markets were saved, fiscal stimulus for the real economy was stopped. Instead, “independent” central banks – in reality government banks – started giving free money to private banks and financial markets and left them to decide what to do with it. In other words, we were asking the institutions that caused the Great Recession to end it. With interest rates now lower and for longer than in economic history, quantitative easing or printing new money has risen to $5 trillion worldwide.

It was, and is only a clever financial trick. Quantitative easing features in the accounts of central banks, not governments. Now that the banks no longer needed government money, the most important thing was to cut government budget deficits, public employment and services – to cut the idea of ‘too much government spending’ to ‘too much government’.

All of this because of one clear lie – the idea that governments ‘borrowed too much’. In fact, research by the International Monetary Fund shows the opposite (see graph).

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Before the ‘credit crunch’ in 2007, public debt and budget deficits were falling quickly. Both were higher and rising faster towards the end of the 1980s, when neoliberal economic policies first had an effect. Both were very much higher during the two World Wars, the second of which cost just about as much as the Great Recession has cost so far.

The difference was that big government borrowing and budget deficits during the Second World War had to be spent on the real economy and employment, though that often meant real guns, tanks, death, and destruction. This finally brought an end to the Depression of the 1930s. A ‘Golden Age’ of capitalism followed in the 1950s and 1960s, reducing both the debts and the budget deficits of governments.

But since 2008 public funds have been given to financial markets, not to the real economy and employment. So the Great Recession has continued, just like the Depression.

The world as a whole is never in debt or deficit: for every debtor there is always a creditor, for every deficit a surplus. The chief economist of Goldman Sachs, the company at the heart of the crisis, said that public debts are always matched by private savings. There are crises, as in 2007, when private savings rise, withdrawn from the real economy. Public debt rises at the same time. If it isn’t spent on the real economy in place of private saving, the crisis continues. The real cause of the Great Recession is too many people with not enough income to make the real economy healthy enough for private savings to be invested.

For neoliberals the exercise has been a great success. An economic myth has replaced the truth. Crazy economic policies have become the sign of good economic management.

Neoliberals like to ask how a crisis caused by debt can be solved by more debt. The rest of us are asking how a crisis caused by financial markets can be solved by financial markets.

NOW READ THE ORIGINAL: http://newint.org/features/2015/12/01/deficit-reduction-slump/

(This article has been simplified so the words, text structure and quotes may have been changed).