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October 17, 2012

Must-Read To Understand Why Austerity So Wrong

-- by Dave Johnson

The wrecking society: Economics today

As the evidence keeps telling us, the basic story is about as simple as it gets. The housing bubbles were driving demand prior to the collapse both directly through building booms and indirectly from the consumption generated by bubble generated housing equity. When the bubbles burst the construction booms went bust. And when the bubble generated housing equity vanished so did the consumption for which it provided a basis.

"The economists are instead steering the world toward more years of stagnation and rising unemployment and poverty."

The basic economic problem in this context was finding a way to replace the lost demand. The right-wing politicians and their allied economists can repeat all the nonsense the like about promoting business confidence and tax breaks for job creators, but there is no remotely plausible story in which it would be possible to generate enough demand from investment to make up for the demand lost from the collapse of the bubbles.

This means that in the short-term the only way to make up the demand is from the government budget deficits. This is not even economic theory, it is simply accounting.

Posted by Dave Johnson at October 17, 2012 1:58 PM


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