Does Austerity Increase Inflation?

Does Austerity Increase Inflation?

PAUL JAY: Welcome to The Real News Network.
I’m Paul Jay in Baltimore. One of the arguments in favor of austerity
is that it’s supposed to reduce inflation. Cuts to public sector debt is supposed to
reduce inflationary factors in the economy. Well, our next guest says perhaps it has the
exact opposite effect. She just returned from Europe, where she’s been looking at this question. Now joining us from Vermont is Stephanie Seguino.
She’s a professor of economics at the University of Vermont and a research scholar at the PERI
institute at the University of Massachusetts, Amherst. Thanks very much for joining us, Stephanie. STEPHANIE SEGUINO: My pleasure. JAY: So let’s just get what the basic pro-austerity
argument is, and then tell me what’s wrong with it. SEGUINO: The basic pro-austerity argument
is that budget deficits are inflationary, right, they are excess government spending
over revenues, and that creates excess demand for goods and services that will drive up
prices. And there’s also the argument, of course, that the financial sector observes
these budget deficits and in anticipation of inflation raises interest rates. So all
together the argument is that budget deficits drive up prices, and austerity therefore will
reduce these price pressures and reduce inflation. JAY: What’s wrong with that? That seems to
be the guiding light that’s directing most economic policy and most or if not all industrialized
countries. SEGUINO: You know, I think there’s a couple
of things wrong with this. One is the timing for undertaking austerity. You know, budget
deficits aren’t always bad, and during periods of economic crisis what they do is they put
a social safety net under families who are supporting children, which has benefits for
the long run. It maintains investments in children, who are one of the most significant
forms of capital that societies have. Failure to make those investments when children are
young or disadvantaging their parents significantly actually has negative effects on children
in utero and throughout their lifetime in terms of their cognitive ability, and thus
their long-term productivity as workers. And this is leaving aside the potential costs
in terms of social costs of austerity during times of very, very high unemployment. JAY: So you’re saying that the destruction
or weakening of a social safety net, which is more or less what austerity is about in
most of the North American and European countries, at least, and other parts of the world, that
children suffer most, childhood development suffers, schools suffer, and as a result these
kids are less productive when they grow up, and that’s inflationary. So, first of all,
why is that inflationary? SEGUINO: Well, simply in terms of the cognitive
development of children and their ability to–it affects high school graduation rates,
for example. And a lot of research shows that it has very negative effects on lifetime earnings.
And it therefore influences, for example, the degree of innovation in a society, right,
in its research, its effects on research, and so on and so forth. So in the long run
you have a less skilled labor force, and therefore the unit costs of producing a good rise. And let me just give you an example of this.
I spent a number of years living in Haiti, in which investments in children were very,
very weak and the productivity of workers was extremely, extremely low as a result of
this. So we know this. We have seen experiences of this in many countries of the world during
economic hard times. The effects are very long-run. They’re very long-lasting. JAY: So is there other places where you’ve
studied where you can actually see, you know, evidence of what you’re saying? I mean, people–I
can imagine people that run banks hear this argument and it sounds a little esoteric. SEGUINO: Well, I mean, if you look at unit
labor costs, right, if you look at unit labor costs across countries, that is, the cost,
in terms of wages, of producing a unit of a good, those unit labor costs vary dramatically
across the world. So they’re much higher in very poor countries that invest less in education,
that have less to invest in education, that have less health care, for example, and less
other forms of social and physical infrastructure. So this is not hypothetical. We observe this
in the data across the world. JAY: Well, then, why is it cheaper to produce
in those countries? I mean, why are so many jobs leaving the United States or Canada and
going to those kinds of places? SEGUINO: Well, because of the low wages that
you can pay compensate for the lower productivity. JAY: And that their wages are that much lower
that the lower productivity doesn’t matter. But if that’s the case, then why should financial
elites care? SEGUINO: Well, if that’s the case, what it
means is that–you know, let’s just take the United Kingdom, where there are very extensive
cuts being proposed and already have been implemented. What this means is that you have
a less productive labor force in the United Kingdom. What that means is corporations are
going to want to invest in other countries where labor is much more productive. JAY: Well, one of the sectors I would think
would thrive with this, and it leads to certainly a certain amount of growth and more jobs,
is that there certainly will be more prisons. SEGUINO: You know, I mean, look, we could
go there, right, with that argument about the negative effects on the social cohesion
and social fabric of austerity. And I think that that’s a very real one. But I think that even before we get to that,
issues of social trust, for example, are–you know, and social capital, an ill-defined term
in economics, is nevertheless a very important one. And I think that we already see that
social–the social fabric unraveling in a number of European countries. Greece in particular
impressed me with not only the decline of the social–of the physical infrastructure,
but also what looked like a decline of the social fabric. There’s a sharp increase in
ethnic attacks on people who are perceived to be minorities, for example, that I think
are ultimately costly. And I guess this is my point to you is that
economists are not very good at quantifying these social costs, but sociologists and psychologists
have been doing this for a very long period of time. And I think it’s very important for
economists to integrate that research so that we can adequately assess the costs and benefits
of austerity policies. Right now what we’re focused on primarily is the financial aspect
of it, but we’re not focused on the race or gender effects of this or the impact on social
infrastructure, which is a little more difficult to quantify but nevertheless very real. JAY: Okay. We’re going to continue the discussion
in part two. And this is kind of a new format. There are people that have been saying our
pieces are too long, and there are people that have been telling us our pieces need
to stay that long. So we’re going to try to please all of you. So we hit sort of the main
points in this part one. Part two, we’re going to dig a little further into it. And if you’d
like to hear more, particularly about–we’re going to talk a little bit more about the
effect of ethnicity and austerity in Europe and how that might also affect places like
the United States. Please join us for the next segment of our
interview on The Real News Network.

29 thoughts on “Does Austerity Increase Inflation?

  1. First we have to define what inflation and austerity is in the first place. Most people do not know what these terms truly mean. Inflation is simply an increase in the monetary supply. Yet, we have to evaluate how much of that money supply in question flows into the REAL economy. The Fed can print massive amounts of currency units, but as we have seen in recent years, a great deal of it may not reach main street. Austerity in-of-itself does not necessarily increase inflation.

  2. Actually, what you have done is adjust your business model to account for a reduction in business volume….however, your adjustment will work only in the short term as, your increase in prices will actually result in an additional reduction in business volume. If your cost of doing business is fixed and no adjustments can be made — your business in doomed and will not be able to survive in a long term economic downturn.

  3. In the first place, what she seems to fail to understand is that the inflation (increase in the currency) has already occurred and the elite have recovered and racked in fortunes on the backs of the taxpayers and before the full effects of the money printing can take effect — it is time to bring on the austerity (for the average man). The safety net has keep the scam going because it has hidden from view the actual state of the economy and allowed those at the top further profit.

  4. Well — if it works for your market (higher end customers). It seems that most of the impact of inflation (higher prices) has been hitting the necessities — so, the poor and middleclass are feeling the effects first….it will soon be moving to the upper middleclass as they see the value of their investments eroded away.

  5. I think this video covers an important topic but I would ask TRNN to make a distinction that this sort of inflation is labor affecting while elites are really concerned with inflationary effects on capital. I would be worried that audience members might not understand the difference

  6. the Real News needs to interview "economists" NOT associated with PERI.

    Her list of social ill effects are associated with being broke, not austerity. Austerity is simply acknowledging that one is broke.

  7. If they practiced ACTUAL austerity it would be impossible to raise inflation as a result of it. Actual austerity involves reducing spending to equal or below income levels. And the gov has to SPEND new money into existence.

    This fake austerity they are touting where they RAISE spending of course you can have increased inflation.

  8. What this lady is doing is forecasting. It's the same ridiculous crystal ball garbage they've been doing for the war on Iraq, the housing market crash, and every quarterly fed report. (Which they always revise)

    The thesis is, if the gov doesn't intervene, things will be worse. For those keeping score, nearly every time the gov HAS intervened it's been brutal. With such a delinquent gov, I can't imagine anyone responsible asking for their "help" w/o cleaning it from top to bottom first.

  9. "the Real News needs to interview "economists" NOT associated with PERI."
    Do you mean libertarians?
    They are not main stream economists and very minority group. they look big and in the main stream because they are well funded.
    Do you want to start conversations you left in the past, danL1011?

  10. "PERI is one of the only Econ departments that studies political economy."

    Unfortunately, PERI "economists" seem to have no understanding of basic economics.

  11. "Do you want to start conversations you left in the past, …?"

    Conversations require an intelligent entity on the other side. Someone who is not smart enough to recognize he is having a "conversation" with quotes of himself does not qualify. My condolences to your birth mother.

  12. There is no such thing as political economy. ALL economies are political since all economies in the modern world exist under some form of government. As Friedman said, there are only two types of economics — good or bad. PERI's is bad.

    The PERI guests I have seen are deficient in basic macroeconomics such as understanding the effects of government actions such as taxation, subsidies, price floors and ceilings.

    Politicians don't listen to economists. They USE them for political cover.

  13. Read some of sirellyn's posts. He's got the right idea. PERI guys are clueless. For example: Bob Pollin (chief honcho at PERI) once said, "If we throw money at it, we'll create jobs." during an interview.

    Friedman once asked a Communist Chinese official why they were using shovels instead of big machinery at a construction site. The official said, "More jobs". Friedman's response was, "In that case, why don't you give them spoons instead."

  14. [Arguments! Do you have any?]

    Why would I? You haven't raised an issue for discussion. If you want enlightenment, try reading a modern textbook on microeconomics and then one on macroeconomics.

  15. See, the usual black and white mentality, all or nothing… 'there only two type of economy good or bad, is a imbecile view (yes, friedman is an imbecile) because he suggest that going all the way one way is always better. We live in a nuanced world. To many communism and the innovator wont create without the profit incentive, to much capitalism and the poor are left to die in the street 'if they can't provide for themselves, they don't deserve to live!" We advocate moderation to prevent abuse

  16. You don't read very well. Two types of economics, not economies. The economic analysis is either useful in understanding what is going on or it is not. More importantly is the predictive value of the analysis to implementing certain policies.

    As for your "analysis" of Friedman, I can only conclude you have never read any of his works.

  17. Good Lord. The Shock Doctrine is a joke. No wonder why you are confused. His advice to Pinochet is EXACTLY why he was ultimately booted — which by the way Friedman told Pinochet would happen if he implemented his recommendations.
    Today Chile ranks as one of the highest in Latin America on the Human Development Index put out by the UN.
    Go read Friedman's "Freedom to Choose" and see if you think Naomi Klein portrayed the man accurately.

  18. The only shock in the "Shock Doctrine" is why Naomi Klein would soil the reputation of a dead academician just to sell a few books.

  19. I think Naomi Klein the economically illiterate was simply looking for an angle to sell books. She is clueless on cause and effect. I will give her credit for describing some of the problems associated with corporations getting too powerful. The problem is that her analysis sucks.

    Niall Ferguson on the other hand is a thoughtful historian whether you agree with his analysis or not.

    You have clearly drank the Klein Kool-Aid without any understanding of economic fundamentals.

  20. Have you ever considered going to the source instead? Aside from quoting other people's opinion, you've made no statement that indicates you are doing anything other than parroting them.

    I gave you a specific fact about Chile's HDI. It is a direct result of Pinochet implementing some of Friedman's recommendations. Chile's success today is in spite of Pinochet's record on human rights. Abuse of power and political oppression has very little to do with economic theory.

  21. You are overstating Ha-Joon Chang's position. He is simply stating what all good economists know. This goes back to one of my first comments to you that ALL economies today are political because that all exist in the context of countries and governments. Chang would not consider Friedman a joke.

  22. It seem like to me that you tried to term Austerity, what the Keynesian theory is… If im correct Austerity was based on saving and then invest to produce… not invest to produce… and hope for the best.

  23. "You are overstating Ha-Joon Chang's position."
    Are you an economics expert?
    Pending question,
    "Why austerity hurts the economy, or you don't think it hurts the economy at all?"

  24. Haha, I haven't had to look at your other posts b/c they were all tagged as SPAM by YT. I see you have been doing the same thing to others with the same SPAM censored result. LMAO.

  25. "Read some of sirellyn's posts. He's got the right idea."
    What he said that you consider "right idea"?
    Do you think it's true "Stocks depreciate in the value." as he said?

  26. "Chile's success today is in spite of Pinochet's record on human rights."
    What makes Chile's economic policy a success?
    Name a few.

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