Austerity vs. Stimulus – The Debate Continues

In one of his last columns, Lord Skidelsky argued that fiscal stimulus is in order given the current status of affairs of the global economy, especially the United States (Skidelsky, 2013).
Why Lord Skidelsky does recommend stepping aside our threats from deficits and accumulating public debt and trying to re-invigorate the states development function through fiscal stimulus? At first blush, the question of “why” has two aspects semantically: First, for what purpose? And second, for what reason? According to Skidelsky, the classical Keynesian renaissance would be of key importance in coping with the daunting challenge of income inequality, which can be seen as one of the most fundamental causes of the recent economic „perfect storm”. The purpose should be to diminish the gaping gap between the rich and the poor in terms of income inequality. This argument assumes that the recent crisis can be rooted in the dispiriting income inequality that led to excessive borrowing coupled with affluent liquidity and banks that were able and willing to lend. However, this type of reasoning does not show convincingly that income inequality would be the cause (the good reason); what is more, it can also be argued that income inequality is just a symptom of deeper structural phenomena in the developed world.
Income inequality may be the result of a series of highly interrelated and mutually reinforcing phenomena being part and parcel of our new techno-economic paradigm (ICT-based, service sector dominated knowledge or learning economy). This paradigm has some specific features that have been directing towards lower productivity through labour-saving technologies (i.e. automation, standardisation by means of ICT etc.) which entailed downward trends in labour shares as, for instance, Karabarbounis and Neiman (2013) pointed out. There is a secular feature of problems behind the scene rather that one could ascertain that mitigating income inequality via economic policy engineering can result a sustainable ameliorating trend, accordingly.
In our recent paper (Kovács, 2013) we addressed the daunting challenge of current economic recovery by contributing to the better understanding of its secular feature. In so doing we devote special attention to the secular decline in innovativeness by raising three interlinked and interrelated explanatory phenomena: (i) lowering productivity in the new techno-economic paradigm; (ii) the effect of the different degree of employment protection; and (iii) the issue of pent up disruptive innovations. We argued that these phenomena are not black swans; however, they have been developing in commonly unnoticed increments by manifesting the so-called ‘creeping normalcy’ and being endogenous to the market system. The paper drew lessons to be learned for the Central and Eastern European Member States by emphasising the need for a systemic approach which is of paramount importance when it comes to fiscal consolidation.
Our earlier consideration still holds, namely that, for sure, sovereign debt crisis triggered by recent crisis and the crisis management itself will not evaporate in the short term, decreasing public debts will easily become a decade-long task, however, consolidating to the numerical levels in the European Union (stipulated by the Maastricht Treaty and the Fiscal Pact) without considering the demand conditions (which is affected heavily by income inequality, tighter liquidity constraints etc.) would be a Hayekian fatal conceit in terms of growth consequences. Policymakers should therefore follow a more cautious way of stabilisation if they are to avoid stabilisation that is more like destabilisation. The big question is whether Europe can find the new growth model pursuing for instance the sustainable global golden age tailored towards green global economy promoted by Carlota Perez (Perez, 2010).
Karabarbounis, L. – Neiman, B. (2013): TheGlobal Decline of the Labor Share. NBER Working Paper No. 19136
Kovács, O. (2013): Black Swans or Creeping Normalcy? – An Attempt to a Holistic Crisis Analysis. Eastern Journal of European Studies, Vol. 4. No. 1. pp. 127-143
Perez, C. (2010): The Advance of Technology and Major Bubbles Collapses: Historical Regularities and Lessons for Today. Available: http://www.carlotaperez.org/download/PEREZTechnologyandbubblesforEngelsbergseminar.pdf Accessed on: 1.07.2013
Skidelsky, R. (2013): The Incompatibility of Austerity and Economic Reform. Economic Rebalancing Acts. Project-Syndicate. Available: http://www.project-syndicate.org/commentary/the-incompatibility-of-austerity-and-economic-reform-by-robert-skidelsky Accessed on: 1.07.2013