Balanced budgets as a long term policy are a fine thing, and absolutely a good idea. Austerity in the face of recession is madness. This is the Greece/Portugal/Ireland solution, and it's a terrible one. Paul may be one of the few politicians to earnestly care about the first issue; but he's yet another tea party whackjob with his head in the sand about the second.
Actually if you look at the economic growth of the 'austerity' countries it has been better than the economic growth of the 'stimulated' countries. They are both feeble, but Austerity is marginally outperforming stimulating at the current time, and down the track it will beat it hands down.
Yes, it sucks either way, but when debt is the problem, more debt is not the cure. 'Stimulating' is just borrowing future funds to try and get things going now, which, at best, just moves the problem down the road.
Many people are quick to try and string up politicians who point out the truth. Sadly this means the politicians who push the problem forwards and reassure people are the ones that get voted in. And the problem gets pushed further down the track and gets even more malignant.
Greece is a smoking ruin and getting worse. The UK was outperforming Ireland until the new UK government started swinging a chainsaw around in an ideologically-based austerity drive, and now its growth has vanished.
Ireland is improving (hello from Cork) in relative terms because it genuinely had nowhere further south left to go. 20% of the population is on the dole, property prices are down 60% from 2007 and are still falling, mobility of potential jobseekers has been curtailed by the fact that they can't sell up and move because their mortgages are worth twice what the house is.
We also took the old government out back and swung an axe into its head in February. The party of government for 80% of the entire history of Ireland as an independent state is now polling in fourth position. Its erstwhile coalition partner is within the margin of error of zero.
You cannot but imperil private sector growth by removing massive amounts of cash from the economy all at once[1]. Public employees spend that money they're paid.
Couldn't it go either way though? I mean ultimately it just depends on what returns they can get. My impression is that the New Deal in the Depression gave good ROI because the infrastructure improvements opened up new avenues of growth. However if you have massive corruption like in Greece then you're probably better off with austerity.
When you build the Hoover dam and the interstate system, yes.
When you loan money to stimulate defense contractors, non-competitive solar manufacturers and for all sorts of other boondoggles and build bridges to nowhere, no.
The problem is that the process of spending on infrastructure rarely is positive in most places for a whole host of reasons. Therefore, austerity is better because it avoids malinvestment. Doing nothing is better than wasting capital.
If you borrow money to spend, the spending has to create more return than the cost of the borrowed money, or the money is wasted. This is true in the case of the individual, the company and the government. Individuals rarely invest money for greater returns (think : new cars), companies that last always invest for greater returns, but governments have few incentives to do so.
They would much rather make a big splash and announce jobs now, than worry about whether or not they are creating something worthwhile.
The problem, of course, is always in measuring the positive returns of large public spending. But again, in times of over-borrowing, governments should always err on the side of caution.
Honest question: why "austerity in the face of recession is madness" for the countries in Europe, but it is the only proposal given by the IMF to Mexico in 1996 and Brazil in 1996-2000?
Austerity plans are always a tough pill to swallow, and they can cost elections - as it did to Cardoso's sucessor in 2002 - but I fail to understand what is this madness you are talking about. If it were not for the economic policy that forced a surplus in the Brazilian budget, I don't think they would be in the (calmer) situation they are today.
The IMF regime was utter madness and disaster for Brasil. It resulted in a freefall of the Brasillian gdp. GDP growth only happened after Brasil removed and loosened IMF restrictions in the mid 00's.
Wrong in all accounts. The GDP never actually fell. Average growth in 1994-2002 was actually just shy of 3%/year. Not good, but never negative.
As for the boom that came afterwards: Lula kept the basis of the economic policy started by Cardoso. In was only in the last two years of Lula's second mandate (2009-2010) that they tried to loose a little bit on government spending (as a way to fight contagion by Housing Crisis), and inflation had shown signs on creeping up again.
And even that increase in spending was only possible due to the austerity policies from the previous 15 years that allowed the country to grow their reserves. Had they not followed the IMF rules, they would be in the same situation that Greece/Portugal/Ireland/Italy are today.
And this is why politicians can lie with statistics.
GDP in dollars fell in 1998 due to changes in the exchange rate. The price of the dollar went from BRL 1.2 to 1.98 in a matter of a week.
Further, the spike that you see in your chart after 2002 was due to the dollar hitting an all-time high of BRL 4.00 when Lula was elected, and there was huge speculation in the market. After he took office and kept the monetary policy, the market calmed down and the BRL has been rising in value since.
Had the price of the dollar kept stable during these years, you would see a curve that shows exactly the numbers I mentioned before.
The IMF has not been kicked out of the country. Debts with the IMF were paid, but the monetary and economic policy is still there. The Brazilian Central Bank still recommends austerity policies for government spending. They still have the highest interest (inflation adjusted) rate in the world. Your cute chart does not prove anything.
P.S: It's in times like these that I really hate voting in discussion forums, and makes me even less of a believer in "the rule of the mob". You are completely wrong, but your cheap jab managed to convince a couple of uninformed people that what I said is worthy of a down vote.
This is GDP in current US dollars. Not in what US dollars were at the time. This is the only way to meaningfully compute GDP. Of course the choice of US dollars is arbitrary. But if you do some math you would realize that if you calculated it as GDP in current BRL you would get exactly the same curve.
But the only way to meaningfully measure GDP is to measure it against a single unchanging metric, and that's what they did here. Otherwise a country could double its GDP by simply devaluing its currency by half.
Are you sure about that? The chart is showing a growth in GDP of 21% in 2007-2008. The growth rate in 2008 was ~5%.
More importantly, it looks like it works the other way around. If you are devaluing your currency in half, your GDP in dollars (or whatever means of comparison you use) will be cut in half, not double. This is what your chart is showing. It will be a bigger number in the domestic currency, but then it doesn't mean anything because you are just changing the scale.
Anyway, we are arguing over details. The larger point is that the economic policy mandated by the IMF is still largely in place, and whenever the Brazilian government tried to increase government spending, a short growth burst was experienced with a very long bust.
Lula gave a 1001 speeches saying that "they were breaking free from the IMF", but in the end it is just political bullshit: interest rates are still high and it is the only instrument the Central Bank is able to use to keep inflation under control. This is pretty much the IMF "formula".
Update: looks like you are correct that they use current dollars. It still seems a misleading chart. Take a look at http://goo.gl/BCNIo and you can see the numbers I was mentioning.
The IMF does not exist for the well-being of (former) third world countries. It exists for the well-being of its masters, i.e. the US and Western Europe. This explains most of the policies that the IMF likes to push on developing countries.
Note that IMF-type policies of austerity can theoretically "work", if there are sufficient net exports. Even when domestic demand is savaged by austerity measures, the economy can grow by producing goods for the US and the EU at cheap prices. But net exports-led recoveries are a typical case of fallacy of composition: if there is a world-wide recession, then going for net exports will fail (unless we somehow manage to export to Mars...).
The problem facing the US and EU these days is that people seem to have forgotten that austerity was only ever a policy meant for the others.
José Serra, Fernando Henrique Cardoso's successor, actually lost the ellections not because of IMF policies was in place. Cardoso's party (PSDB) showed clear disregard for social problems - a considerable part of the population was so poor that they could barely buy any food, they didn't care about IMF, they had other basic needs.
Luiz Inácio da Silva, on the other hand, was clearly a candidate of the people, he'd go to great lenghts to assure people that his duty was to put food on the table of those very poor people, while not screwing up middle class brazilians.
So, it's not right to blame PSDB's failure on ellections on the IMF policies, it was they ignorance of the more urgent people's needs (not to talk about they selling huge state enterprises priced like bananas, corruption scandals, etc. that got people really tired of PSDB rulling the country).
Ron Paul is the only candidate in the election with a voting history to back his beliefs. He may say some crazy things, but at least he's honest, and on the up and up.
I'll take a dishonest politician who votes for the right things over an honest one who is wrong any day of the week. Paul is a nut. The fact that he's right about a handful of things doesn't mean much: stopped clock, yada yada.
I don't think that someone is a liar because they don't always vote in line with their beliefs. There are good reasons for occasionally voting for things that are not 100% inline with what your goals are for one particular issue. Sometimes compromises need to be made in one area to make progress in another.
