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Pragmatic Capitalism

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The point of Austerity?

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I was wondering if there is any economic sense behind implementing Austerity policies? Because no matter how you look at it, it reduces overall economic growth for good or for worse. I know that left wing economists/politicians want absolutely none of it and right wingers want more of it, and that Austerity kinda ties down to the balanced budget mentality. But what are your thoughts on this, Cullen? I’ve searched your blog but couldn’t really find an in depth explanation on Austerity being covered yet. Most of the criticism of Austerity I’ve read about are on left wing sites, so I was hoping to get some of your pragmatic bipartisan views on it.

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Posted by Incognito 7
Posted on 12/14/2016 8:48 AM
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I am a true Keynesian in this matter. That is, when you economy is booming and operating above capacity the govt should actually pull back and disincentivize the private sector. This should theoretically smooth the boom out over time. So yes, there’s a time for austerity, but it’s not when you’re operating well below capacity as many global economies are at present (especially in Europe).

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Cullen Roche Posted by Cullen Roche
Answered on 12/16/2016 12:59 PM
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    Hi Cullen,

    Would do you think about Brazil’s 20 year austerity plan which recently was enshrined in their constitution?

    Do you think something like that could happen in America with Trump?

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    Posted by Incognito 7
    Answered on 12/17/2016 1:52 PM
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      Could happen in the USA. A balanced budget amendment is a very real possibility. Brazil is a bit of an outlier though. Brazil has been trying to implement a version of a command economy in the last few decades. These South American economies have tended towards socialist style economic regimes that are often corrupt and just don’t have the underlying productive output to support the big measures implemented by the govt.

      But back to your question – yes, this is a very real possibility with Trump. But his policy ideas seem to expansive to be deficit neutral. In other words, he thinks growth will offset his spending, but that never happens. It’s Bush 2.0 to some degree. So expect bigger, not smaller deficits.

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      Cullen Roche Posted by Cullen Roche
      Answered on 12/21/2016 2:02 PM
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        The point of austerity is so the government doesn’t crowd out the private sector in terms of borrowing and lower economic growth. That’s the whole basis for that as far as I can tell. Do note however that you can’t really do deficit spending if you’ve got enforced austerity ala fixed exchange rate (whether to gold or the USD or whatever). It will eventually blow up.

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        Posted by MachineGhost
        Answered on 12/27/2016 3:05 AM
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