Will the Harvard Austerity Error End Economic Sadomasochism?

“It seems unlikely,” anthropologist and author David Graeber writes. “After all, as I and many others have long argued, austerity was never really an economic policy: ultimately, it was always about morality.

“We are talking about a politics of crime and punishment, sin and atonement,” he continues. “True, it’s never been particularly clear exactly what the original sin was: some combination, perhaps, of tax avoidance, laziness, benefit fraud and the election of irresponsible leaders. But in a larger sense, the message was that we were guilty of having dreamed of social security, humane working conditions, pensions, social and economic democracy.”

And the grand payoff for all this moral belt-tightening “fiscal sadism” and “fiscal masochism” is what, supposedly? The salvation of our grandchildren. And it works. Voters in Europe buy it while “Politicians locate economic theories that provide flashy equations to justify the politics.” Meanwhile, “their authors, like [Kenneth] Rogoff, are celebrated as oracles; no one bothers to check if the numbers actually add up.”

Long before we knew economists Rogoff and Carmen Reinhart were wrong in concluding that too high a “debt-to-GDP ratio” will always shrink an economy, it was understood by many experts and observers that the two had made a fundamental error likening countries that have entirely different ways of creating money. Japan, for example — always held up as a horror show of modern economics — is able to print and issue its own currency. And Japan is not suffering like Spain, Italy or Ireland, nations that cannot do the same because of their membership in the eurozone.

The distinction, Graeber says, points the way to a real solution out of our global economic crisis. And the solution has a name: “Modern Monetary Theory.”

— Posted by Alexander Reed Kelly.

David Graeber at The Guardian:

Warren Mosler and Philip Pilkington are two economists who dare to think beyond the shackles of Rogoff-style austerity economics. They belong to the modern money theory school, which starts by looking at how money actually works, rather than at how it should work. On this basis, they have made a powerful case that if we just get back to that basic problem of money-creation, we may well discover that none of this is ever necessary to begin with. In conjunction with the Levy Institute at Bard College, they propose an ingenious, yet elegant solution to the eurobond crisis. Why not simply add a bit of legal language to, say, Irish bonds, declaring that, in the event of default, those bonds could themselves be used to pay Irish taxes? Investors would be reassured the bonds would remain “money good” even in the worst of crises – since even if they weren’t doing business in Ireland, and didn’t have to pay Irish taxes, it would be easy enough to sell them at a slight discount to someone who does. Once potential investors understood the new arrangement, interest rates would fall back from 4-5% to a manageable 1-2%, and the cycle of austerity would be broken.

Why has this plan not been adopted? When it was proposed in the Irish parliament in May 2012, finance minster Michael Noonan rejected the plan on completely arbitrary grounds (he claimed it would mean treating some bond-holders differently than others, and ignored those who quickly pointed out existing bonds could easily be given the same legal status, or else, swapped for tax-backed bonds). No one is quite sure what the real reason was, other than perhaps an instinctual bureaucratic fear of the unknown.

It’s not even clear that anyone would even be hurt by such a plan. Investors would be happy. Citizens would see quick relief from cuts. There’d be no need for further bailouts. It might not work as well in countries such as Greece, where tax collection is, let us say, less reliable, and it might not entirely eliminate the crisis. But it would almost certainly have major salutary effects. If the politicians refuse to consider it – as they so far have done –, it’s hard to see any reason other than sheer incredulity at the thought that the great moral drama of modern times might in fact be nothing more than the product of bad theory and faulty data series.

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