Governments trying to do exactly wrong thing for recovery

Financial markets continue to applaud the various steps that have been taken, ostensibly to counter the economic troubles besetting too much of the world.

However, the economic doctrines espoused by government leaders are exactly the wrong thing. They are ineffective; in fact they do more harm than good.

European leaders had pressured Greece to adopt austerity measures, but the public there, perhaps intuitively, protested violently.

In the aftermath of the financial crisis it was assumed that banks must be bailed out and government spending and social programs had to be restrained. All but forgotten is that those steps were those advocated in the early 1930s.

In fact, Andrew Mellon, the U.S. Secretary of the Treasury under the President Herbert Hoover, said that was required was to “slash, slash” government spending, liquidate programs, and raised taxes to balance the federal budget. It should be noted that Mellon was the founder of the Aluminum Company of America (Alcoa) and was enormously wealthy.

Those policies, it was claimed, were necessary to satisfy financial markets (sounds familiar) and were the only alternative. It was conventional wisdom that government spending cuts would make consumers and business more hopeful.

As a consequence, renewed confidence would stimulate private spending, and would more than offset the negative effects of reduced governments spending.

Almost all commentators accepted that viewpoint, as did most politicians. Governments here and in Britain, France, and Germany concurred. Currently, British Prime Minister David Cameron completely embraces that type of program.

The results are in. The austerity measures that have been imposed by governments entailed a week economy or at best a sluggish recovery. As the economy became trapped, governments revenues contracted, all in a vicious circle. The more government spending was curtailed, the further the business activity weakened.

In the 1930s U.S. President Franklin Roosevelt came into office proposing more of the same, but changed direction quickly. Those governments’ spending soon soared with make-more programs, employing millions of men on infrastructure and other projects. However, it was not until the advent of war outlays that the U.S. economy fully recovered.

Nowadays there is another success story. In Iceland the banks were allowed to fail, the social safety net actually was strengthened.

So, to the surprise of conventional “thinking”, Iceland was able to prevent a  further drop in living standards and the social safety net is intact, preserving the basic dignity of society.

Clearly, we should be pursuing another approach to revive our economy, following a path that has demonstrated better results.


Bruce Whitestone