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James K. Galbraith: How to Stop the Path of Economic and Social Destruction

The verdict is in: austerity economics is a global loser.

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Now, in Europe, this was especially aggravated by institutions that were inadequate to the purpose, that had been badly designed, in many ways, by my generation of economists 30 years ago in a moment when certain ideas were in fashion that held that, well, you know, the principles that everything would be all right if the central bank simply controlled inflation, and all budgets were balanced, and all markets were private. We’ve had a set of ideas which for a decade had been receding around the world — abandoned in Latin America, never adopted in Asia — but still intensely held and advanced by those who had become committed to them many years ago.

On top of that, we’ve had an attitude toward policy which was basically the mentality of a debt collection agency, a mentality of punishment of debtors and reward for creditors that fails to recognize the elementary truth that you can’t have one without the other, that every surplus has a deficit corresponding. So this alternative idea that this was the problem — a worldwide collapse of private credit met by inadequate institutions and hidebound ideas — existed. And five years have gone by, and we can ask: Which interpretation hold up better? We have cases we can look at.  

And in particular — and I’m not one to be a booster of the American experience — but we can compare the U.S. and Europe, and we can see that in the U.S., although there are many problems that remain — unemployment, foreclosures, stagnation — the situation is fundamentally stable. It stabilized some time ago, whereas in Europe it has not. The crisis just gets deeper and deeper. Why is that? It is not because the U.S. instituted and followed a policy of rigorous austerity. It is precisely because we did not.

Yes, we had an expansion package initially in 2009, and that was important. But it was not the fundamental thing. The fundamental thing was that there exists in the U.S. stabilizing institutions that continued to function, that buffered the enormous losses that people suffered in the crisis. What were those institutions? Yes, we propped up the banks, and I’m not particularly proud of that. But that wasn’t the important thing. One of the most important things was that the social insurance mechanisms worked. Social security payments went up. Unemployment insurance applied across the whole country. The health insurance programs, which only apply to part of the population, but nevertheless an important part, continued to function. Disability payments picked up part of the people who had lost their jobs. Food stamps — a very important program — was expanded to cover about 70 million Americans, a very large share of the population.

And all of these things meant that while losses were felt, they were not catastrophic to society. And there’s one other thing almost equally important, and that has to do with debts. It’s just a question of a difference of circumstance. In the U.S., the debts that were at the root of the crisis were primarily household debts. They were mortgage debts, credit card debts — but especially mortgage debts. And with a mortgage debt, over time, one of two things is going to happen. It will be paid, or it will default. Defaulting is a very hard thing, but it gets rid of the debt, and so the debt burden goes down over time. That’s not the case in Europe. The problem is public debt, sovereign debts. And they are perpetual until they are renegotiated — or repudiated, but that, again is a drastic measure. The resolution, in other words, has to be an active, and not a passive process. It’s plain as day.