Tuesday, May 18, 2010

World's dumbest economist, Part 532521

And today's candidate for World's Dumbest Economist: Marek Belka, director of the IMF's European department. Talking about the various austerity measures that the IMF is forcing upon Spain, Portugal, and Greece, Belka says, "We don't think the measures announced recently by countries like Spain, Portugal and possibly some others, would have a major negative demand impact."

Uhm, excuse me? The former government employees will have less money in their pocket. Less money means less demand. Given that government spending accounts for roughly 35% of the economy in these nations, even a 10% cut in government spending is going to put at least 3.5% of the economy out of work... further causing demand to decline, causing further people to be out of work.

This is Great Depression 101, folks: Austerity measures are not the solution for dealing with a depression, because depressions are a demand crisis, not a supply crisis. If you have a supply crisis -- too little supply, a shortage of labor, and government siphoning off too much of it -- it makes sense to cut back on government spending and thereby cool off the economy a little. But that's not the situation today. We have a demand crisis -- not enough demand for goods and services to employ everybody who wants and needs a job, since businesses are not charities and will hire people only if there's more demand than they can handle with their current workforce. To deal with a demand crisis, we need to create demand -- and the easiest way is for government to create demand directly, by buying more goods and services in order to, e.g., create more infrastructure, or feed hungry people in order to maintain civil order (since people do *not* willingly starve to death and will do whatever it takes, even if you imposed the death penalty for shoplifting from grocery stores starving people would do so).

So there you have it. WASF.

-- Badtux the Economics Penguin

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