False Choice

Politicians in Europe, notably M. Hollande, are offering “austerity” or “growth” as a choice based on the trajectory of government spending. If government spending grows less (or, not very likely, actually declines) that is “austerity.” The “growth” choice means, well more growth in government spending and debt. The nasty thing is, they’re implying that the “growth” choice means growth in the economy and the “austerity” choice means recession.

The problem is, we’ve taken the “growth” choice for a long time now. And we’re having this discussion because it failed to deliver adequate growth of the economy. So debt piled up to the point where it, too, is inhibiting economic growth. So to sell the “growth” choice as a legitimate path to the future is false. Both paths lead to recession. The “growth” path leads to a longer but ultimately deeper recession, that’s all. How much deeper depends on how much economic resource is consumed by government spending that could otherwise have been invested to produce more goods and services in the future.

It is just the old “broken window” fallacy that keeps coming back. M. Hollande, and others, are essentially promising to break more windows. Sure, the glaziers (or, in this case, the bureaucrats) are kept busy, but the wealth of the nation does not grow.

Please, let’s stop pretending that investment demand and consumption demand are the same, and that there is some magic Keynesian multiplier that accrues to government consumption.

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Comments

  • Tyro  On May 14, 2012 at 4:33 pm

    Magical Keynesian multiplier = Denial.

  • reality  On May 14, 2012 at 4:38 pm

    Insanity, actually. Doing the same thing over and over in the hope of a different result.

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