More Disconcerting Shrinkage

Liars in prominent positions have made big claims for “contractionary expansion”. We are supposed to believe that if the government cuts back expenditure on education, healthcare and public services, and savages the welfare state, universal prosperity will ensue. Even a child could see this for the dishonest nonsense it is.

GDP is the sum of expenditures on domestically produced goods and services. If a government cuts its spending on goods and services, then, other things equal, GDP will fall. If the government raises taxes on the 99%, then, other things equal, the 99% will reduce its spending, and GDP will fall.

And so it has been. In the latest quarter, Japan, the US and Eurozone have all contracted, the last of these by 0.6 percent, its worst outcome since 2009.

The child is right, and the liars are liars.

Even so, the liars are ecstatic, and within sight of their goal, which is the annihilation of organized labor, repression of real wages, and dismantling of the welfare state. In short, the widening of the gap between the 1% and the 99%.

It’s time to turn the tide on these terrorists. For those of us in sovereign nations: Organize and oppose! In the zone of self-castration (Eurozone): Exit! Exit! Exit!

There is no need for shrinkage.

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21 thoughts on “More Disconcerting Shrinkage

  1. Well said. I was similarly disgusted today and wrote something pretty much down the same lines as yours. It’s all so frustratingly absurd.

  2. My friend, from experience I tell you this: nothing ever changes… until it does.

    People, as a collective, have an enormous capability to endure poverty, humiliation and frustration. And then, one day, an otherwise trivial incident triggers a reaction out of proportion to the incident itself.

    Things may lead nowhere or in the wrong direction. Think of the London riots or the apparently abortive Arab Spring.

    But it may also lead in the right direction.

  3. “People, as a collective, have an enormous capability to endure poverty, humiliation and frustration. And then, one day, an otherwise trivial incident triggers a reaction out of proportion to the incident itself. Things may lead nowhere or in the wrong direction. Think of the London riots or the apparently abortive Arab Spring. But it may also lead in the right direction.”

    Yes. See Strauss & Howe and Ravi Batra on the developing situation. S & H leave the question about outcome open, although their view is that US is about to go thru its fourth “spiritual awakening.” But Batra makes a case for a positive reversal as the expected outcome based on historical cycles. Interesting arguments based on historical analysis.

  4. So, capitalists provide something indispensable that justifies their returns, in the absence of any effort.

    If these people went away, like Ayn Rand said, the whole wide world would collapse: the iron ore in the mines would turn to chalk; factories would not be able to produce anything; the land would turn barren and no crops would ever be raised again.

    Well, check this out (h/t Mike Norman Economics):
    http://blog.p2pfoundation.net/occupied-greek-factory-begins-production-under-workers-control/2013/02/17

    PS:

    That’s why the rich cannot be God’s chosen ones.

    If the rich were taken in bodily form to paradise during the Rapture, earth would find itself populated entirely by the poor:

    Whose quasi-divine presence would animate the mines, factories and farms to produce for those “left behind”? 🙂

  5. Pete, mah man!

    I’m very excited! You must read this essay, if you haven’t yet:

    Finance and the realization problem in Rosa Luxemburg: a ‘circuitist’ reappraisal – Riccardo Bellfiore and Marco Passarella.

    After reading it, tell me, does it remind you of a debate over robots, realization, final demand and such?

    ———

    Trixie,

    If you’re reading this: this is the best chance to make fun of me! Even I’d would laugh! 🙂

  6. Interesting. Thanks, Magpie.

    From the penultimate section of the article on the realization problem:

    [There] is a ‘technical’ solution, where an additional flow of money allows producers of capital goods to realize the share of product incorporating surplus value and hence to pay off bank interest. In this way, against Luxemburg, the economic system is able to achieve a dynamic growth equilibrium and hence to reproduce itself on an enlarged scale.

    However, this equilibrium may be shown to be very unstable, assuming that it has been achieved (Desai and Veneziani, 2009, p. 50). It depends upon profit expectations of both banks and firms, so that every single deviation from the balanced-growth path gives rise to an explosive dynamics. In practice, the only temporary and local solution to the realization problem, an alternative to increasing government debt, is net exports, namely, the answer provided by Luxemburg in her analysis of the Marxian reproduction schemes.

    I think — consistent with the above passage, and also illustrating the compatibility of circuitism and MMT — that the MMT distinction between vertical and horizontal transactions is highly informative in showing that ongoing government deficits, by adding net financial assets, are indispensable to capitalism. Without them there is no stability whatsoever and frequent realization crises.

    For the global capitalist economy as a whole, in which the net export “out” is not available, budget deficits are, in practice, what enable a measure of stability, as well as enabling capitalists to realize surplus value with some degree of consistency.

    With that in mind, it might seem that we should change tack, and cheer on the austerity. But that is probably* not the case. Since austerity does not eliminate the deficit, it remains consistent with the realization of surplus value. Under current circumstances, austerity simply leads to what Bill Mitchell calls “bad deficits” rather than “good deficits”. They are bad, from the perspective of public purpose, because they result from falling income and an endogenous hit to tax revenues rather than from net expenditure sufficient to underpin full-employment output. However, from the perspective of the 1%, the “bad deficits” are good, because austerity involves undermining the living conditions of the 99% and widening the gap between themselves and the rest of us.

    * I say that we should “probably” not cheer on austerity because its continuation along with the widening of inequality would, at least, result in greater disenchantment with capitalism and perhaps a greater impulse to move beyond it. The 1% is playing with fire. Time will tell whether they get away with it.

  7. Let me put things this way: no matter how bad things get (and I do agree, things could get real bad) one day the people will hit rock bottom. It’s a bit the story of the golden eggs goose.

    Let’s just hope when that happens people move in the right direction

    “The 1% is playing with fire. Time will tell whether they get away with it.”

    PS, I was so excited I forgot to add a link! Sorry about that.

    PS2, Did you notice that, without explicitly mentioning them, these guys were speaking about the sectoral balances all the time?

  8. Regarding postscript 2, it’s because the article considers (non-wage) sources of demand outside the capitalist class itself (the external sector and government) to fill the saving gap. It’s also partly because Kalecki’s profit equation is another way of looking at the sectoral balances identity, except with causation specified:

    P = Cp + I + (G – T) + (X – M) – Sw

    Substracting Cp + I from both sides and adding Sw to both sides :

    P – Cp + Sw – I = (G – T) + (X – M)

    On the left-hand side, P – Cp is capitalist saving and Sw is worker saving. Combined, they form saving, S:

    (S – I) = (G – T) + (X – M)

    Or:

    (G – T) + (I – S) + (X – M) = 0

    Newer readers might wish to consult this post:

    Misinterpreting the Sectoral Balances

  9. “I think — consistent with the above passage, and also illustrating the compatibility of circuitism and MMT — that the MMT distinction between vertical and horizontal transactions is highly informative in showing that ongoing government deficits, by adding net financial assets, are indispensable to capitalism. Without them there is no stability whatsoever and frequent realization crises.
    For the global capitalist economy as a whole, in which the net export “out” is not available, budget deficits are, in practice, what enable a measure of stability, as well as enabling capitalists to realize surplus value with some degree of consistency.”

    Right. The neoliberal solution, based on free markets, free trade, and free capital flow, and “sound money,” is based on international competition for net exports in a closed system where there are necessarily winners and losers.

    It’s basically a mercantilist global economy, which is really dependent on a convertible fixed rate system. Otherwise, net exporters end up saving in a depreciating currency of the net importers. It’s a system that is doomed to fail, and failure has usually resulted in war historically. Yet, this is still the dominant paradigm.

  10. See Andrea Terzi, Do exports LOWER a nation’s living standards?

    http://www.mecpoc.org/2013/02/do-exports-lower-a-nation%E2%80%99s-standard-of-living/

    “In the U.S. and (particularly) in euro countries, policies aimed at stimulating exports are (sadly) considered an effective response to lagging growth (U.S.) and recession (Euroland). Viewing a net export balance (i.e., an international trade surplus) as an economic virtue and a growth engine is a relic of Mercantilism that has had a powerful comeback, not coincidentally, with the abandonment of fiscal policy as a counter-cyclical tool.”

  11. From Warren:

    “Available indicators signal further weakness at the beginning of 2013, with domestic demand remaining dampened. This is due to weak consumer and investor sentiment and to the necessary balance sheet adjustments in both the public and private sectors. Foreign demand also remains subdued,” Draghi said in a statement before the European Parliament’s Committee on Economic and Monetary Affairs in Brussels.
    Warren comments: Public and private sectors to continue to deleverage?

    Draghi must know what this implies and is banking on a new export strategy to pull the EZ forward. Difficult to see how that would work economically, let alone politically, as more countries spin into depression mode and social unrest rises.

  12. Thanks Pete!

    I hadn’t seen “Misinterpreting the Sectoral Balances” before. Pretty instructive, too.

    Can you recommend any blog or online article at the introductory level explaining circuitism and perhaps it’s connection to MMT?

  13. Have you come across anything that clearly explains why horizontal believers don’t see the currency issuing government sector as ‘special’.

    The only explanations I’ve seen are essentially post-hoc attempts to justify some sort of anarchic belief.

  14. Neil, the only sense I can make out of it is that due to the LLR function, money creation is entirely endogenous with the banks in control of govt’s role. Generally, this means that govt borrows from the private sector when it deficit spends instead of creating money itself. For this to be true, it seems that all reserve would have to come from cb lending rather than some from govt spending. But I am not sure I am clear on their argument.

  15. @ magpie

    He is teaching!

    I don’t know what the readership of this blog is, but I’ll bet it’s greater than the number of students that Peter would reach teaching at the university.

    In my estimation, the invisible university is far more significant than the institutional university. The post on this blog are testimony to more value added to the world for free.

  16. Me: “Peter, you should be a teacher!”

    Tom Hickey: “He is teaching!”

    ======

    Man, I love it when people ***follow*** my suggestions real quick… 🙂

  17. Agreed, Tom. Blogging reaches many more people. And unlike most university economics departments, blogging carries no compulsion to poison young minds with neoliberalism. 🙂

  18. That’s why I left university and began “teaching” informally through the invisible university. The other issue with the university is that it is essentially a credentialing institution rather than a learning one. Most students are not motivated chiefly by learning, whereas they are in the invisible university. The invisible university is much more effective and efficient. Actually, of all my mentors and teachers, those in the invisible university were far more significant in my life and they never asked me for a dime either, since the invisible university operates chiefly in the gift economy based on voluntary reciprocity.

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