Economic Illiterate Peter Schiff's Senseless Austerity Proposals Debunked

I have chosen to post a blog from Rob Killick, a little known CEO of a mid market digital solutions company called cScape. It reaffirms my belief that there are still sane, educated people out there with rational views on how to improve the economy - and that the world is not all populated by idiots who think that a psychopathic charlatan and snake oil salesman like Peter Schiff is some sort of economic genius.

Why Austerity Won't Work

Before we all put on the hair shirt and make a virtue of cutting public services the question has to be asked, will it work? Will cutting public spending help the UK economy to revive? Is austerity necessary to keep the creditors, in this case those who lend money to the UK government, from the door? Or is there something else going on here?

To understand what is at issue here it is first of all necessary to separate out the question of government borrowing from the problems facing the rest of the economy. The current obsession with the government deficit is because the overall amount that the government has to borrow to finance its operations has grown as a proportion of the economy over the past two years. This is due to a widening of the public spending deficit, that is the gap between what the government raises in tax and what it spends.

The main reason there is a higher deficit is that the recession led to a drop in government revenue from tax. As the recession hit, less people paid income tax as they were unemployed or took pay cuts and companies were paying less tax on lower profits. So the immediate question is, now that the economy is coming out of recession why not wait until the public spending deficit narrows again? And why does public spending have to be cut instead of more borrowing to finance the gap until income balances expenditure again?

The answer to the last question is that it does not. There is no reason why the current level of the deficit is any more or less sustainable than a higher or lower figure. In the abstract there is no level of government debt which is unsustainable. In fact Japan for example has had a much higher ratio of government debt for many years than the UK economy has now without it leading to any kind of crisis. People only fear lending money if they do not think they will get it back. The doubts over the UK economy are whether it can grow fast enough to repay the debt.

The fear is that money markets will stop lending to the UK or raise interest rates on their loans to a point where they become unsustainable. But even this fear has to be tempered by the fact that the average length of loans to the UK government is 13 years. This means that only around 7% of the loans have to be rolled over each year and thus being open to hikes on interest rates. There is therefore no immediate danger of the UK government being unable to finance public spending at its current level, even if that means having to pay a higher rate of interest on a small portion of the debt.

So why the obsession with cutting the deficit? Given that the problem was created in the first place by a fall in economic output, would it not be better to focus instead on how to grow the economy back to the point where current public spending is sustainable again? This is where the real debate should be, and where the real problems lie.

http://postrecession.wordpress.com/2010/06/02/why-austerity-wont-work/

Category:

Comedy

Tags:

• Peter
• Schiff
• Ireland
• austerity
• Sarah
• Palin
• gold
• warren
• buffett
• jim
• rogers
• marc
• faber
• nouriel
• roubini
• paul
• krugman
• goldman
• sachs
• banks
• bailouts
• economy
• berkshire
• hathaway
• lloyd
• blankfein
• business
• stocks
• bonds
• investments
• austrian
• economics
• mises
• rothbard
• keynes
• friedman
• keynesian
• monetarist
• vat
• tax
• taxes
• sales
• value-added
• inflation
• default
• money
• printing
• loose
• recession
• hyper-inflation
• sovereign
• debt
• crisis
• currency
• dollar
• euro
• CNBC
• fox
• news
• Russia
• today
• RT
• Bloomberg
• reuters

[707hoser]

In a sovereign nation which issues its own currency, why are the deficits a problem, other than the payments to service the debt? In a deflationary period like we are in, it seems silly to introduce austerity measures. People do not have enough purchasing power, therefore there is a lack of demand in the economy. The federal government has to make up for the lack of spending in the private sector.

[SchittReport]

@707hoser

If you haven't read Warren Mosler's writings on this subject, I would highly recommend it.

[707hoser]

@SchittReport I've read quite a bit on MMT and I can't find any fault with it, although somehow it feels wrong. I suppose it could be that I've been brainwashed to some extent by people like Schiff.

[SchittReport]

@707hoser

well keep watching this channel and you will un-brainwashed :)

[DavidByrne85]

My God, does Schiff really believe these things he says? It's frightening that somebody can be so at odds with basic facts

[ndchriste]

@SchittReport I disagree with the MMT people a bit and that is this. Deficits aren't a problem with low interest rates and deflationary pressure now but in an economy of full employment running at full capacity, deficits can be inflationary BUT NOT IN THIS ECONOMY. Google "I Would Do Anything For Stimulus, But I Won’t Do That" For Paul Krugman's discussion on this subject.

[47f0]

See, here's one teeny tiny little problem. Schiff fanboys and Austrian nutcases can't do one crucial thing - show one single economy that has CUT its way to prosperity.

[Laughingblades]

Peter Schiff is a crank

[cobol528]

Then disease that is suffers from is an excess of republicans.

[eovid]

@zenmachinefilms

The reason that stimulus did not work is because there is no demand because of outsourcing and corporations going overseas. Nobody mentions this. until this is addreessed it is a waste of time the stimulus has nothing to grab onto. would be better off just give people shopping coupons.

[bachy100]

@kingeric77 "Schiff's answer to the problems created by neo-liberalism: more neo-liberalism! "

Nonsense. More like: The statist, neo-Keynesian answer to the problems created by government/central bank interventionism, is more government/central bank interventionism. In order to justify this ridiculous analysis they need to construct an even more ridiculous narrative, whereby some phantom "deregulation" and "laissez faire ideology" has actually existed or even influenced public policy whatsoever.

[zenmachinefilms]

I listen to Schiff quite a bit, but there is a lot of doesn't seem to address. Such as how he thinks the economy will grow with low cash-flow. He never bridges that gap, or just leaves us to assume he means the wealthy will create jobs. But they have all the money now and don't. He also doesn't address how our GDP to debt ratio is about the same as Germany, England, etc. and not nearly as unfavorable as Japan for example. Or the worth of selling T-bonds while interest rates are very low.

[nsolcis]

MORE TAXES! MORE SPENDING! MORE POLICE!!

[TheMango121]

@kingeric77

agreed.