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Austerity – Alt-med of Economics

Posted by Don McLenaghen on June 4, 2012

The very social fabric of society is currently under assault by the forces of economic minimalism. What it means to be a member of a society is radically changing in the direction of extreme libertarian types that believe a society is only a collection of individuals, the government that governs least is best and that personal responsibility means others should feel NO expectation to help their fellow human.

The latest salvo in this assault is “austerity measures” that MUST be passed to avert economic disaster…the Shock Doctrine manifest. Okay, pretty stirring stuff, can I defend this claim….what light can the skeptic tool box shed on this issue. First, we need to define our terms, then seek empiric evidence to support/defuse these claims and lately is there any “test cases” that can be used as data points for analysis.

What is austerity?

Simply put, austerity is the reduction of government spending…well, not really. It is an irony that many governments’ budgets are increasing but this is not due to “social spending” or stimulus spending ; it is due to debt maintenance and financial bailout. Most of this money is leaving the countries in question exacerbating the local economic recessions.

There are three poster children for austerity – Ireland, Spain and the UK. Most people think of Greece or the USA for austerity but these are rather new to the game (Greece) or incomplete (US military spending).

So, let’s check the budgets for Ireland specifically, this was the first to stumble economically and the harshest to follow (with little internal dissent) the “austerity cure”:

Ireland 2008 2009 2010 2011 2012
Total Expenditures 57.722 60.127 54.753 59.160 61.471
Total Capital Investment 11.089 14.609 7.406 10.169 10.249
Debt Servicing 1.939 2.664 4,807 4,904 7.,488
Net Spending 44.694 42.854 42,540 44,087 43.734
Adjust $ (2008) 44.,694 41.,996 40,855 41,494 40.338
The Austerity
Accumulated
0 -2.698 -3.839
-6.537
-3.200
-9.737
-4.356
-140.93
All values in billions of Euros. Sourced from the Government of Ireland Department of Finance

2011 also included €7 billion recapitalization of the banking sector…i.e. bank bailouts…after an emergency bailout of over €4 billion in 2009 and another €7 billion in 2010. The bailout money is important because when we talk about austerity, we mean specifically cuts in government spending on society…the bailouts (although arguably necessary) largely went to foreign debt holders or to maintain the liquidity of the institutions. Although the expenses of the state increased these were offset by equal or greater losses in the economy in general.

Austerity in Ireland meant €6 billion in cuts in 2011, including a quadrupling of student fees, reduction in child benefit, EI, welfare, 4% cut in student grants, reductions in public employee benefits and pay, and an increase in the VAT.

The UK spending followed the same trend: £697 billion (2010), £710 billion (2011), and £683 billion (2012).

Okay so first myth, that governments have not ‘tried’ austerity because some budgets are still growing; dismissed. So, what about the second myth that ‘austerity’ is needed to recover the economy; that painful cuts in government spending will stimulate the private sector and revive their economies?

Well there are two metrics we can use to judge this: GDP and unemployment

IMF GDP (Billion US$) GDP % (Constant Prices) Unemployment
2010 2011 2012 2010 2011 2012 2010 2011 2012
Ireland

207

218

210

-0.43

0.71

0.52

13.63

14.39

14.45

UK1

2,263

2,418

2,453

2.09

0.66

0.82

7.85

8.01

8.26

Spain

1,395

1,494

1,398

-0.07

0.71

-1.83

20.06

21.64

24.20

Canada2

1,577

1,737

1,805

7.98

7.44

7.36

7.98

7.47

7.36

1: In 2010 the Conservatives took power and moved towards austerity measures2: Canada is added as a non-austerity comparison

On the one hand, GDP seems to have recovered but what is GDP? And what does it say about the measure if it does not reflect itself in the employment rate?

This points to a major disconnect in our economy and why austerity, however some economists may insist it is necessary, is ultimately bad for our global economy now. NOW is important and often missed in many discussions about deficit. Why deficits? Well, those who promote austerity do so because they blame rising debt and government deficits for the financial crisis. There is plenty of academic work that shows the cause of the current ‘financial crisis’ has nothing (or at least little) to do with debt and everything to do with under regulated global juggernaut financial institutional gambling (sources below).

That said, debt is not an issue to be ignored indefinably. When in economic boom times we should run fiscal surpluses and pay off the debt…IN TIMES OF BOOM, not Ka-BOOM! In the past we had been promised in good times tax reductions (predominantly for the corporate class) while still maintaining necessary and desired social services. That was society’s failure (or as some more realists believe the result of lobbying and media propaganda by one class for its own benefit). When good times return, the debt should be paid down or eliminated. If debt is such the bane some claim, how has Japan managed to have a robust society and functioning economy for the past twenty years with a debt-to-GDP ratio of over 220%? Greece is barely over 140% and that is supposed to mean automatic economic apocalypse.

But we are not in good times. EVERYONE is cutting back. Tax reductions now (almost exclusively for the corporate class) have not stimulated spending but saving instead. The public is too unsure about the future (largely thanks to political fear mongering about debt and austerity) and put off large purchases for fear of job loss, pension loss or just reduction in pay/hours. The corporations are not spending because there is no demand. If people do not spend, they corporations have no one to sell to. Even in those industries were growth is possible, the corporations are just as nervous of the future as the masses and are saving “war chest” in case of future losses and moments of opportunity to acquire less prudent companies.

For a capitalist economy to function we must have both supply and DEMAND. If the people are not demanding; if the corporations are not demanding; it falls upon governments to stimulate the economy out of recession/depression. This means increasing debt. If government put money into the economy, be it directly through spending or indirectly via hiring, there will be more demand in the economy. This will, if capitalistic logic is valid, cause corporations to supply this new demand resulting in more growth. This leads to inevitable recovery provided enough stimulus is spent. The aborted recovery in the USA shows what too little cannot do. Once the economy is running of all pistons then comes the “adult” moment where we forgo immediate pleasures of tax cuts but instead take the tax win falls and removing the accumulated debt.

So, claim this is simply spending today and leaving the bill to future generations. Well, that is true in one sense; in the future we will have the capacity to pay the debt. It is also true that we are investing today so that future generations will have greater prosperity. That what is spent now will give them the extra needed to pay later. Lacking stimulus now, what we give our children is not a financial debt but a societal one…an economy in ruins; a social contract in tatters; a people in poverty who wished they had the money to pay for today.

As a skeptic we can look to the past. In every economy that experienced depression/recession; the only cure was stimulus. In most cases governments were the source of this spending and only in rare cases has this failed and those times under conditions not likely to be repeated (Weimar Germany). The empirical evidence shows that austerity in the past has failed (Hoover in the 1930s) and it is doing little better today (Ireland). So, that leads to the question why are so many politicians are moving forward with austerity?

“By the way, I think you’ve just given me confirmation of something that people like me tend to say [about those who promote austerity], which is, actually none of this is at all about fiscal responsibility. It’s all about exploiting the current situation to pursue an ideological goal of a smaller state. We could argue whether the British State is too large but Sweden which is weathering this very well with a much larger state presence than [the UK]…that’s suggesting you’re not actually sincere. That it’s not really the budget deficits that concern you but you looking for a way to exploit this definite situation to pursue an agenda” Paul Krugman on Newsnight, 30 May 2012

References:

Austerity falls out of fashion

Austerity

The Austerity Agenda

Austerity is Not About Policy, But Ideology

Austerity Plans Are Based on the Wrong Diagnosis of the Wrong Problem

The Macroeconomic and Distributional Effects of Fiscal Austerity

Britain’s austerity drive as ‘deeply destructive’

Austerity Defenses

Amid EU Austerity Backlash

Greek “Bailout” is a Bank Bailout

Expansionary Austerity

Austerity isn’t working: There is an alternative

Anti-austerity movements gaining momentum across Europe

The “Austerity Myth”

Irish Budget 2011 – Key Points

EU austerity drive country by country

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