Grad Student Who Shook Global Austerity Movement

This is one of the biggest problems I have with Obama (and politicians in general): they apply the word "investment" to things that aren't "investments." Have they ever acquainted themselves with the definition of the word? Because the definition of the word is like you said, something which is expected to yield a return. It isn't an "investment" if you're just pouring money into a pit and burning it. Or giving it to people. Or creating or sustaining $50,000/year jobs at the expense of $1,000,000. But "investment" sounds good. So politicians bandy it about. All they're doing is spending.

"The results of this paper have two important policy implications. First, since the results indicate a positive effect of government investment and a negative effect of government consumption, a reallocation of resources from consumption expenditure to investment expenditure is likely to reduce the growth impeding effects of public spending. Second, as government investment crowds out private investment, US policymakers are faced with a difficult task of finding a combination of public and private investment that minimizes the crowding out effect of public investment. According to the 2009 CBO report [1], all components of government expenditure will continue to grow over time. Therefore, it is imperative to assess the growth effect of government spending, particularly, the effects of key components of government expenditure on growth because the impacts of different types of government expenditure are not the same." Source: http://www.hindawi.com/journals/econ/2012/383812/

Did you catch that? Government consumption (which is, I would argue, the vast majority of government spending these days and more and more each year) impedes growth; Government INVESTMENT (and not the pseudo-investment that Obama is famous to talking about) enhances growth, but empirically also crowds out private investment.

And yes, while it's much larger and more complex, a national economy really kinda sorta IS a really big household. It still faces very real constraints and consequences. It is not God.

While I agree with you about the difficulty of understanding complex systems, your post sounds despairing. Accepting the inherent difficulty is vital to better analysis, but isn't a reason to avoid actual analysis.

Note for example that you wonder why austerity was ever considered a good idea. How do you "know" that austerity is a bad idea without analysis. It's only been about 80 years that we've had a better understanding of how a single household's economic considerations are fundamentally different than an economy's solely as a result of scale.

The naive analysis from classical economics would draw a parallel between a decrease in GDP and a decrease in household income, whereby it is prudent to decrease your consumption. However, while a households income is an exogenous factor, GDP is a product of the economy itself. During a contraction, there is generally the same amount of labor, capital equipment and technology as before the inflection point, it simply isn't being utilized or employed at the same rate.

Today, informed policy debates may weigh the continued harm that comes from leaving underutilized people and capital idle, against the reduction in signalling for needed structural change that may result from stimulus. Just as an example, it is easy to argue that rescheduling bridge and road construction that will be needed later to a current period when labor is cheaper and equipment isn't being used elsewhere is prudent. Yet on the other hand, doing so may signal over-investment in construction careers and heavy equipment.

In the past, policy debate would have focused on balancing well-meaning charity of helping out people on hard times against austerity which was believed to be beneficial for the economy as a whole. How can you even begin to determine whether assumptions about belt-tightening being constructive are flawed without economic analysis?

I think the lesson to be learned from this event is first the importance of more rigorous scrutiny of results, but more importantly to be distrustful of the type of politician who searches for studies to support their preconceived conclusions. A good portion of policy makers advocating austerity, have done so from a stance of dismissing the analysis that doesn't fit their ideology, rather than a scientific approach of starting with a hypothesis and assessing the available competing analysis in good faith.