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Austerity: Eating Spoiled Fruit

Intuitively, if you reduce spending, it should make your financial picture healthier. It generally works for a family unless they cut something like maintenance, and then end up with giant bills for a new roof and air conditioner. The question is, does this work for a nation's economy. It seems like a good idea.

Nope. It's an easy sell, but it doesn't work as advertised. It's music to some politicians' ears because it supports their agenda of small government.

Political philosophy and the impact on the economy

Before going into austerity and how it hurts the economy, it might be helpful to review what the differing political philosophies are.

The Democratic philosophy tends toward a larger role of government in solving societal problems. And they have traditionally supported labor. The Republican philosophy, which is now very influenced by the Tea Party, believes in a very small government with very specific tasks, and very few of those tasks support social agendas. They also have historically supported business.

So in that dichotomy, you can see that Republicans generally go for small government, and reducing taxes and government burdens on the wealthier business segment of society. Therefore, any mechanism that forces a smaller government is a good thing. Therefore, austerity has to be good because it forces government to cut government programs.

You can't blame political parties for their philosophy. The question is, do these philosophies, when put into action, align with your philosophy and do they help or harm the public. Because essentially this country is for people, and corporate interests are secondary.

Our kind of world. As my friend H. Spoon put it about today's world versus going back to leaner times, "We are no longer a nation that is sparsely populated, rural, agrarian, simple, a rugged individualist nation where the "laws of nature" and the notion of "the survival of the fittest" ruled." We are "a densely populated, urban, techo-industrial, extremely inter-dependent society competing in a global economy and enmeshed in myriad vital and necessary international trade and defense entanglements." This very complicated world requires as much stability as we can give it.

Today's pressures. During recessions, people naturally become more conservative. People are afraid to spend. Corporations cut spending and are afraid to spend to expand. Both people and corporations tend to stop spending and put more money into savings.

Both corporations and people look for very positive trends in the economy before they start spending again. For the last three years there have been very few positive signs, and that's one of two reasons why consumer spending has remained flat. The other reason is they don't have free money to spend. Corporate earnings have been at record levels, and they haven't expanded or made significant investments, except for using record level stock prices to buy other companies. The future is too uncertain for expansion.

During a recession, jobs disappear, wages freeze or drop, and there is a much greater need for jobs and higher wages. For the public, recession is terrible, and causes loss of dreams, loss of college education, loss of homes, divorce, increased crime, lack of medical care that ends suffering and saves lives, and sometimes suicide. The toll of recessions on the public is monstrous.

The minimum wage can play a huge role in protecting low income families. This can help us remain more stable. But the role of government is limited. As my friend Spoon points out, "Government cannot force corporations to increase wages or create jobs, or even preserve jobs.

"Circumstances beyond the control of governments have everything to do with those things...The cost of energy, war, natural disasters, international turmoil and politics have more impact than stable tax rates, high or low... US effective tax rates on taxable income at all levels but especially for large corporations and uber wealthy, after all is said and done, are much lower than the stated rates for income brackets... Federal minimum wage employees make up a tiny fraction of the total workforce... and the impact of minimum wages on the total economy are just as minimal... So much for the ridiculous hysteria the right wing attributes to the federal government's efforts to increase the federal minimum wage..."

Real world results: Raising the Minimum Wage Doesn't Affect Employment (or raise prices)

Corporations and businesses feel no responsibility toward creating jobs, and certainly nothing toward keeping wages up, beyond determining which employees to let go, which is painful to managers. It isn't business responsibility to create or preserve jobs - if anyone tells you it is, it's just a myth. The government and the public have to do what they can to get wages up. The minimum wage has an effect on wage earners above minimum. Government can avoid cutting jobs.

Recessionary times have a very bad impact on the economy and people, partly because of fear and caution. But austerity measures make it worse, and all of these prolong the recovery from recession.

Does austerity work at all?

Austerity is the plan many in Congress promote as the way back to good financial times. It is also the main plan in Europe to resolve the Greek crisis and those of other countries. It isn't hope in a myth - it's hope in a disproven method.

Mark Blyth, in his book, Austerity - The History of a Dangerous Idea, carefully combs through the economic history of many nations, and considers recent studies that have looked again at the effects of austerity as a way to get out of a financial crisis.

Blyth helps us first understand the number of financial tools that are available to states to resolve crisis. "There are (mainly) four ways to get out of a financial crisis— inflate, deflate, devalue, and default." All of these hurt citizens, or in the case of default, hurts creditors.

Debt relief through restructuring or forgiveness are other common ways. Increasing exports or benefiting from increased currency evaluations of other countries are another way.

For example, Blyth advises, during a time of Ireland's supposed economic contraction in the 1980s, an interesting thing occurred. "Ireland’s consolidation 'coincided with a period of growth in the international economy, with the presence of fiscal transfers from the European Union, the opening up of the single market and a well-timed devaluation in August 1986.'"

“'...the average industrial wage rose by over 14 percent in the period 1986– 1989 [which] boosted government revenue and increased … private consumption.' Kinsella concludes, this makes the whole Irish experience look more like a 'proto-Keynesian story...'"

Austerity has been proven repeatedly not to work. "The interwar period [between WWI and WWII]... repeated rounds of austerity in country after country was madness. No good came of it. Apart from a few short-term expansions in the early 1920s when countries were not on gold, not only did the application of austerity not work, it made the depression deeper, longer, and, arguably, laid the foundations for the war that would engulf the world in the 1940s."

According to Blyth, periods of austerity inevitably seem to be followed by deepening recession and slow recovery.

he IMF did its own study, "at the IMF that put together the World Economic Outlook set out to test the entire notion of expansionary austerity from the ground up using new measures and new data. Their main findings strongly contradicted those of the expansionary austerity camp."

And finally, the culminating result of several studies: "...July 2012 paper... Nicoletta Battini et al.’ s 'Successful Austerity in the United States, Europe and Japan'— an examination of the big cases that matter— pretty much pulls any remaining theoretical and empirical supports out from under the expansionary austerity case."

Blyth also wrote that studies have shown that cutting expenses, during a recession, is less harmful than raising taxes.

Blyth advises, "Withdrawing fiscal stimuli too quickly in economies where output is already contracting can prolong their recessions without generating the expected fiscal saving. This is particularly true if the consolidation is centered around cuts to public expenditure.... From a policy perspective this is especially relevant for periods of positive, though low growth… frontloading consolidations during a recession seems to aggravate the costs of fiscal adjustment… [and] greatly delay the reduction in the debt-to-GDP ratio— which, in turn, can exacerbate market sentiment in a sovereign at times of low confidence, defying fiscal austerity efforts altogether. Again this is even truer in the case of consolidations based prominently on cuts to public spending."

Blyth concludes, "Austerity remains an ideology immune to facts and basic empirical refutation. This is why it remains, despite any and all evidence we can muster against it, a very dangerous idea."

The idea that government and federal reserve controls can get us out of a recession through austerity is completely and thoroughly debunked. It makes the problems worse, and causes a downward spiral that is prolonged. There is enough suffering during a recession without making the suffering worse.

Austerity has failed - five notable economists about Greece austerity

Reaping the seeds that Austerity hath sown

Editor - Dorian