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Ways out of economic depression

  • 18 October 2012

Australia has so far escaped much of the havoc caused by the global financial crisis, but it is not immune from the effects of economic ideology, particularly free-market neoliberalism, which typically calls for reduced public spending, balanced budgets, wage and tax cuts, and a smaller role for governments.

We can see the effects of these views, with the Victorian government recently announcing cuts of 4200 public service jobs, and sharply reduced spending on TAFEs. The Queensland government is abolishing 14,000 public service jobs, many in health services, and reducing spending on social services and housing. Even the Commonwealth government is not immune from pressure, as it struggles to produce a surplus budget.

Political hype about balancing budgets can go to absurd extremes. Tony Abbott warned that Australia could go the way of Greece with excessive debt. Such claims reflect a climate of exaggerated concern about debt. Instead Australia could be taking advantage of historically low interest rates and embark on major infrastructure projects, increasing employment and laying the basis for sustained growth in productivity.

Today's economic debates are similar to those of the 1930s, when people thought of a national economy like that of a household. If you fell into debt, you had to trim back spending. During the Great Depression, governments cut spending as markets collapsed, and sent their economies into a downward spiral only arrested by world war.

Today we face a not dissimilar political climate, with obsessive demands that governments balance budgets by reducing public spending. But cutting budgets will not revive economies.

In the early half of the 20th century, British economist John Maynard Keynes argued that governments could stimulate growth and employment, putting economies back on a growth path. Today one of the clearest voices calling for a return to Keynesian economic policies is Paul Krugman, professor of economics at Princeton University, who won the Nobel Prize in economics in 2008.

In his recent book End this Depression Now! Krugman argues that austerity will only impose more pain, entrenching unemployment.

He argues that the US must vigorously revive its economy, and that warnings about a debt crisis are greatly overstated. US borrowing costs are very low, and have in fact been negative. The US had borrowed $5 trillion in additional debt by early 2012,