Lloyd Blankfein's stand against austerity in the short term for the U.S. economy has many backers
|Not A Socialist: Lloyd Blankfein. Picture courtesy: Telegraph.co.uk|
By Francis Adams
Goldman Sachs Inc Chief Executive Officer and Group Chairman, Lloyd Blankfein was not alone or the only one in making the assertion, on Wednesday, that austerity measures in the short term is bad for the U.S. economy.
"You can't austere yourself into a higher GDP," said Blankfein, who is also the chairman of the largest US investment bank. Responding to a query during a talk at the Canadian Club of Toronto in Bay Street, Blankfein said he was in support of budget cutbacks and changes that will help spur growth in the long term but was against large-scale slashing of expenditure programs.
His comments drew widespread, rather global coverage by the print, broadcast and web media, barring a few who chose to focus on his exit from the CEO's position he has held for the past six years. The austerity remark made by Blankfein is though not new.
In April, Christina Romer, Professor of Economics at the University of California, Berkeley who also served as the chairperson of the Council of Economic Advisers in the Obama administration from January 2009 to September 2010, said in her speech "Fiscal Policy in Crisis: Lesson and Policy Implications" delivered at the International Monetary Fund Fiscal Forum that "fiscal changes have large effects on output and employment in the near term, and that unsustainable budget deficits over the long term eventually lead to ruin."
She maintained that the strategies implemented by both Europe and the United States were flawed and would fail to successfully bail the U.S. out of the trio --- financial, unemployment and fiscal -- of crises.
Backing the IMF's finding, Romer said that "countries that have moved immediately to fiscal austerity have experienced worse growth performance than countries that have not."
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Daniel Gros, Director of the Centre for European Policy Studies, Brussels had raised the austerity issue way back in November last year. In an article "Can austerity be self-defeating?" Gros sought to address the growing concern in Europe with the debt to GDP ratio. "The perspective here is that ‘austerity’ might be self-defeating in the sense that the resulting GDP drop is so large that the debt/GDP ratio increases. This matters since the debt/GDP ratio is often taken by financial markets as an indicator of the sustainability. Thus a lower deficit might actually heighten tensions in financial markets," he wrote.
Among the solutions Gros suggested for looking beyond austerity and thinking of viable alternatives was the key role strongly capitalized banks would play by creating additional capital buffers, a point echoed by Blankfein when he said "Banks should have more capital and more liquidity."
Gros, in his article, though warned that despite growing calls for reconsidering fiscal austerity programs in the face of underemployment of labor and capital on potential output, the premise of poor growth in countries reeling from disastrous fiscal positions was not sufficient as evidence against fiscal austerity. "Where sovereign risk is high, fiscal tightening remains an important avenue to bring down deficits at a limited cost to economic activity, as risk premiums recede over time. In addition, fiscal austerity may well have important unobserved benefits, by preventing greater macroeconomic instability which tends to arise in the presence of high sovereign risk," Gros wrote.
The International Handbook of Labour Unions: Responses to Neo-Liberalism while discussing the global recession, its effect of labor and neo-liberalism and American labor deduced that "the neo-liberal austerity packages being pursued by a wide range of governments through 2009-10 appear to be generating a sense of injustice among sufficiently large number of people to provide the raw material for continued collective action and protests."
In her speech, Romer, who said that "not only does immediate austerity accomplish little in terms of near-term debt burdens, the longer-run effects may also be limited" advocated back-loaded austerity. In other words, she called for giving deficit reduction measures a pass during such crisis at the same time focusing on adopting policies that will gradually phase in actual spending cuts and tax increases.
On Wednesday, Blankfein had to reiterate that he is not a socialist as he allayed fears of further recessionary setbacks saying "The punch line is this: The world is not going to come to an end - we are going to muddle through."
However, there are several star-striped economists who believe that next year may turn out to be equally difficult. So, will we be forced to revisit E.P. Thompson’s concept of ‘moral economy’ on a global level? No. Blankfein's two-goals suggestion that the economic system should expand and spread global wealth, goals that both, the world's oldest and largest democracies, the United States and India, are following is the answer and it involves Transnational Capitalists (TNC) and their Transnational investments.
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