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Amartya Sen on the Necessary Distinction Between Austerity and Economic Reform

Awarded the Nobel Prize in 1998, Sen is widely recognized as the leading moral voice in the field of economics. The New Statesman carries his analysis of debt and its relationship to economic reform and growth. He points out that debt levels were far higher in the aftermath of WWII, but confident and intelligent investment in growth steadily reduced debt even while social services expanded.

The New Statesman has published his remarks.

Sen’s most heartfelt cry is against the destruction of human capital: in Kansas and other “austerity” states, educational levels and consumer spending are collapsing. In Greece, half of all young adults have never had a job (or at least a job that generated tax revenues). As Adam Smith pointed out in his writings, it is human capital that underpins the ability of nations to generate wealth.

While Sen decries his inability to influence policy-makers imposing disastrous austerity on their constituents, I don’t have any need to be politic. I’ll just follow the money.

As described in The Grand Pursuit, the Great Depression was an existential threat for free market economics because it revealed that the financial elite would not invest in long-term growth when falling prices guaranteed increased purchasing power for their accumulated wealth. It was in their short-term interest to exacerbate unemployment, thereby reducing both demand and wages. It was Keynes who convinced the governments to stimulate demand with deficit spending that brought Europe and America out of the Depression.

In the current era, government debt is in the short-term interest of the financial elites. It is the ready stream of bond placement and foreign exchange fees that fuel the financial system. Reducing debt is against their interest. That they fund candidates that have implemented policies to reduce tax revenues while expanding debt is no mystery.

Sen points out that most electorates suffering under austerity are beginning to recognize that growing poverty proves those policies wrong. Whether they can organize themselves to restore intelligent fiscal policy is another question. There are so many other issues to distract them, and voter restrictions in many states disenfranchise the working poor. (Fundamentally, I don’t see why elections should be on a weekday: anyone for a constitutional amendment to move them to Saturday?)

In the United States, we have been propped up by the Federal Reserve, which has kept interest rates low and pumped cash into the economy. However, that is no substitute for governmental action: when interest rates rise, that cash must be soaked up lest inflation run out of control. This will suppress growth. However, in Europe things have been far worse: the Central Bank has been part of the system of austerity, and is only now beginning to follow the lead of its American counterpart.

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