Austerity For Dummies: A 3-Minute Guide To A Very Bad (And Very Powerful) Idea
"I feel stupid," someone said the other day. "I consider myself well-informed, but I have no idea what the term 'austerity economics' really means."
Actually it's not that complicated, and most of the lesson plan can be found in today's headlines.
We'll explain austerity to you in six steps, and we promise it it won't take more than 900 words. Since adults read an average of 250-300 words per minute - and we know all of you are above average - our little course shouldn't take more than three minutes.
It's certainly worth knowing. Despite its many failures, "austerity economics" keeps remaking - and unmaking - the global economy. The only disagreement at this weekend's Republican debate was over which candidate would push austerity more aggressively. And austerity dominated the political agenda last year - "Deficit Commission," anyone? - until Occupy came along.
Merriam-Webster named "austerity" the "Word of the Year" for 2010. But like the monster from a 1950's science-fiction movie, it just keeps on growing. This week alone the name was invoked in government houses from Athens to Lagos.
What is this creature called "austerity," and why does it still hold so much power? If you've got three minutes, let's get started.
1. What is it?
The Longman Dictionary of Contemporary English defines "austerity" as "when a government has a deliberate policy of trying to reduce the amount of money it spends."
Wikipedia calls it "a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided," adding that it's "sometimes coupled with increases in taxes to pay back creditors to reduce debt."
Got that? Austerity backers want government to spend less on benefits and public services, and to pay back its creditors more quickly. Higher taxes aren't part of the plan and they're strictly optional.
2. What's austerity supposed to accomplish?
Austerity advocates don't just see lower deficits and reduced debt as tools to promote long-term economic health. They consider them ends in themselves - sometimes even as moral values.
Many austerity advocates see government spending as inherently evil. That goes for all government spending, including police, teachers, nurses, and firefighters.
Sure, some of them will admit there can be necessary evils or useful evils - usually weapons procurement or law enforcement. But spending is always evil.
Other people aren't philosophically opposed to government spending, but have been convinced that it has become unaffordable today.
3. What's the theory behind austerity economics?
To answer that, it's important to understand that the economics profession has been systematically taken over by well-funded conservative academics. They've created elaborate theoretical constructs to prove that government spending is economically destructive.
These include theories like 'Barro-Ricardo equivalence,' which says people won't spend money when they know their government's incurring debts they'll have to pay someday. Conservative economists like Robert Barro insist this is true even in times of widespread unemployement, like now, and argue against stimulus spending to create jobs.
Oddly, they find this theory more compelling than the idea that people aren't spending money because they don't have jobs.
Then there's supply-side economics, which argues that the best way to grow the economy is by cutting taxes. That means smaller government. Supply-siders also rely on the "Laffer curve," which says people will stop investing, producing, and creating jobs if taxes are too high.
Austerity advocates also argue that international markets will lose confidence in governments if they don't curb spending and will charge them higher interest. So they even push cuts in Social Security, which doesn't even add to the deficit, because macroeconomists consider it 'government spending.'
4. Do these theories make sense?
Economists argue about this kind of thing ferociously, but we can look at the record and reach some common-sense conclusions about whether these theories are right or wrong:
Barro-Ricardo Equivalence: Wrong. To affect demand, government spending would have to be much higher than it is today.
Supply-Side Economics: Ridiculously wrong. We've had lower taxes and less regulation for more than a decade. Where are the jobs?
Laffer Curve: Also wrong. This country had a 70% tax rate or higher for top earners and the economy was doing much better than it is today. At 98% or higher, as the top rates once were in Great Britain, this could be a legitimate concern.
But now? Nah.
5. Does austerity work?
A resounding no. That's the conclusion reached in this paper from the International Monetary Fund. (The IMF was once the world's leading enforcer of austerity measures.)
And here are some clips from this week's headlines:
Austerity Reigns Over Euro Zone as Crisis Deepens, New York Times: " Europe's leaders braced their nations for a turbulent year, with their beleaguered economies facing a threat on two fronts: widening deficits that force more borrowing but increasing austerity measures that put growth further out of reach."
Euro-Zone Manufacturing Activity Falls for Fifth Month, Wall Street Journal: " Manufacturing activity in the euro zone declined for the fifth straight month in December, although less sharply than earlier in the fourth quarter, according to a survey of purchasing managers released Monday. The survey is consistent with other indicators of recent activity, and together the numbers suggest the euro-zone economy contracted during the final three months of the year."
Merkel, Sarkozy stress growth a priority in eurozone crisis, call for quick Greek accord, Washinggton Post: "The German and French leaders stressed Monday that boosting economic growth in the 17-nation eurozone is a priority, a recognition that the focus on austerity cuts is unlikely to get Europe out of its debt crisis. Some analysts fear excessive austerity measures will take a heavy toll on weakening economic growth and push the eurozone into recession this year, in turn hindering the region's deficit-cutting efforts.
Austerity's been a disaster for Great Britain and Europe, yet leaders are demanding more of the same - there, and here. They're ignoring the approaches that have worked in the past, as in the Great Depression: Invest in short-term growth, put people back to work, and then address long-term deficit issues once the economy's back on its feet.
6. Why do people still push austerity?
Some do it because they're still under the influence of economists indoctrinated in that profession's conservative intellectual orthodoxy.
It's also in many politicians' interests to promote austerity, since wealthy and powerful people like the idea of lowering their own taxes.
One thing's for sure: They're not doing it because they're looking at the facts.
__________________
That wasn't too bad, was it? And it only took 877 words. If you were one of those who felt you didn't understand austerity, hopefully this has helped. You probably realize now that you understood more than you realized. In fact, you were never the problem.
The real problem with austerity economics is that there's less there than meets the eye.
That hasn't stopped leaders all over the world from insisting that it's the solution to the very problems it has caused, and to other problems which it didn't cause but has made even worse. They're trying to impose even more of it on the global population.
Who's the dummy now?
. . . require limiting your word count?
;)
Corruption favors the wealthy.
...to make sense of deliberate bullshit. Austerity economics is deliberate bullshit. Its numbers don't add up, which one might suppose would be important for an economist. Its history of failure is 100 percent, which one also might suppose would be important to an economist.
Of course, I'm making an assumption that some economists would consider charmingly naive. I'm assuming that the goal of economic policy is to create a system that nurtures the development of a large, healthy middle class. You know, kind of a "promote the general welfare" thing.
Poor, dumb Jimbo would be laughed right out of Harvard, Yale or Chicago, right?
Austerity DID work, in Canada in the 90s.
By 1992, Canada had been running high structural deficits every year since 1969. The national debt was so high, almost 40% of tax revenue was spent on interest on government bonds. This crowded out other forms of spending, especially on social programs, and forced the government to borrow massively, and add even more to the debt, just to pay interest. Canada had its AAA credit rating cut, economic growth and investment declined, and government bond issues became ominously harder to sell to international investors. Canadian economists began to warn of a potential fiscal crisis and/or catastrophic currency devaluation. One prominent bank economist even advocated a currency union with the US to save the Canadian dollar.
In 1993, the Liberal government of Jean Chretien reversed fiscal policy and enacted a severe austerity program. All government spending programs were cut by 20% across the board. Virtually nothing was spared. This deepened the recession that had begun in 1991. Unemployment increased and the government was criticized for adopting neoconservative policies.
Within 3 years, the deficit was ended and turned into annual surpluses. Government budgets began a 12-year run of surpluses that paid down a huge chunk of the national debt and slashed interest payments. Taxes were NOT cut until after the deficit problem was resolved and debt repayment was underway.
In a few years, Canada went from having the highest debt-to-GDP ratio after Italy to the lowest among industrial nations.
There is no question that austerity worked in Canada, and made it possible to preserve public health care and other forms of public spending. Here's why it worked:
- the world economy grew through most of the 1990s, boosting Canada's economic recovery.
- Canada's stable, well-regulated banking system continued to provide credit to business, homeowners and consumers through the recession.
- interest rates fell through the 1990s and 2000s, magnifying the benefits of cutting public debt.
- the Canadian dollar stayed low even after the national debt began to decline, which helped Canadian exporters.
- commodity prices were depressed for most of the 1990s, but began to recover and boost growth by the end of the decade. The commodity boom, however, began long after the budget went into surplus.
- the GST (Canada's national sales tax of 7%) augmented the government's ability to pay down debt. The US is the only country in the industrial world without a national sales tax.
- the real estate market stayed healthy and consumer debt was manageable for most people.
- a majority of Canadian voters supported deficit reduction and the government's economic strategy.
Most of these conditions do NOT apply in the US at present. This makes austerity economics a dubious proposition. Canada's experience proves austerity can work - but the conditions have to be right, and the economy has to generate private demand and growth to make up for lower government spending.
This is the latest of several such anti-austerity articles on C&L. None of them acknowledge Canada's long-term austerity program or the success thereof, though it is the model for Britain's current austerity program.
Richard RJ Eskow - do you care to comment?
Nicolae Ceaușescu, he was leader of romania 1954-1989. He put an austerity program in place, it paid off Romanias foreign debt. http://en.wikipedia.org/wiki/Nicolae_Ceau%C5%...
Got shot for his troubles Christmas day 1989
Canadian austerity worked to reduce out of control deficits and reduce debt, it did not work to counteract an economic downturn - which is what is being promoted today in the insanity of 'stimulative austerity'. In fact it caused one. Canada had sound banks and good credit and an international economic boom to ride out it's austerity recession. Europe and USA today do not.
What Canada did was an extreme example of what Keynesians say you should do during prosperity - cut spending, increase taxes and pay down debt. That's the magic second half of Keynesianism that no one likes to do. If Canada had done that all along it would have been a gentle process. Clinton proved that the US can do that too, if we don't pay attention to the lunatics pushing insane tax cuts and the fantasy of stimulative austerity.
conveniently (for those advocating lower taxes on the wealthy) omits one extremely important fact about all government spending: the bulk of government spending, at all levels, is done locally, contributing to the local and national economies. in turn, this generates tax revenues at all levels, exactly what you need in a recession/depression.
austerity "economists" would have you believe that government expenditures just disappear into thin air, never to be seen or heard from again, and have no direct impact on the economy as a whole. once this grand fallacy (the "foundation built on sand") is shot down, the rest of "austerity economics" comes quickly tumbling down on top of it.
Instead of going into my typical rant here about how austerity isn't really happening in Europe despite what the papers say, or the fact that the world debt load is too heavy for austerity to do any good at this point.
Instead I'll pose the question to C&L and other posters here.
What do you think the solution is?
Or do you think this isn't going to bite us in the ass?
Goodnight, Frau Blücher
Quit cutting taxes, stop starting wars that aren't paid for, raise taxes on those with the means to pay for it, get the economy growing again and then when the economy is sound enough start dealing with the debt and the deficit.
As it stands now austerity is nothing more then sucking money out of an economy that desparately needs the infusion of cash.
During the Great Depression the government spent a massive amount of money alleviating the Great Depression.
And then the conservatives kvetched and demanded austerity measures so the government cut spending.
The result?
The Great Depression came right back stronger then it was before.
You deal with deficts and debts, Vegas, when the economy is doing well enough to absorb the fact that the government is spending less money. In the middle of a recession cutting government spending is just digging the hole deeper. Exactly how is that a sane thing to do?
Oh and I forgot one: Cut stupid tax breaks that the rich get like the tax break on their second homes or the fact that brokers pay the lowest income tax rate.
For example the 25 richest brokers on Wall Street get a tax break that costs the United States government 10 billion dollars.
The 25 richest brokers on Wall Street need that tax break like I need a bullet to the head. Since they do nothing of value with that money they're getting they really don't need a tax break to keep more of it.
Another good way to deal with the problem is to stop electing Republicans until they get their heads out of their asses.
But according to the CBO if we simply got rid of Bush's tax breaks and held spending level we'd have the deficit paid off in 10 years.
Right now borrowing money by the US government is practically free because there really is no other good place to put it that will guarantee a return on your investment and the US government is the #1 place to lend money to. Don't believe me? Where else can you borrow money for less than a 2% interest rate.
So borrow 2 Trillion dollars and plan to spend it all within the United States in 10 years. Infrastructure, teachers, firefighters, police men, NASA, loans to new technologies, etc. Doesn't really matter as long as it is stimulating investment in the United States. Tax breaks are the least stimulative measure as they can be saved or immediately spent overseas and may not increase demand. After the economy is stimulated to the point where you start getting to below 6% unemployment rate the US government should start slowly implementing austerity measures, cut back on some spending raise taxes, etc.
What does this do?
1. Increases the tax base by employing more people. Most of the problem we have with the deficit isn't because government has been on a spending spree, rather it's because government revenues fell by about 400 billion dollars a year after the depression kicked in 2008.
2. Reduces payments for unemployment. Less people collecting unemployment, less government deficit.
3. Increases profits for businesses. For example, concrete manufacturer's make more money when government buys more concrete for bridges. Also better infrastructure = reduced congestion = less time and less energy to transport goods = more profitable businesses.
4. When you do implement some austerity as the economy gets better it will have less of a devastating effect. Government will be able to raise taxes or cut spending without causing too much damage to the economy.
5. All of these listed above serve to cut the deficit. Immediate austerity in the middle of high unemployment does the opposite. Decreases tax revenues, increases unemployment payments, decreases companies profitability.
Cliff1982
Likely that it's just a matter of time , the entire house of cards will fall . It may be a good thing , as it is it is a hopeless situation , unbridled greed and insanity still prevails . Why not ? The scoundrels and crooks at the top of the pyramid came out like champs , were even rewarded , it was win / win ! What did they learn ? That they can get away with anything , they literally own the government .
Austerity in this case is the government taking from the poor and middle class to pay for the debt caused by corrupt politicians , by the government , by the corrupt banksters and the wealthy elite ( who's billions buy them the politicians and power) . They rob the bank , get rewarded for it , the bank is in trouble , the crooks keep the stolen money , they keep the reward $ , no one goes to jail , the innocent ( the middle class and poor ) takes the hit and is to make up for the theft . Break up the too big to fail institutions ,regulate and police the financial institutions , get the friggin lobbyists and the money out of DC , out of the political system . Take from the ones who caused the debt , make them pay for it . Only one problem , it ain't gonna happen , these same crooks and scoundrels are still in office , still in charge , still have the $ and the power , they still call the shots and we the people , the middle class and poor , are still powerless .
Annoyed Canuck, so what ?
The worlds biggest economy was booming right next door to Canada for that decade.
I do not see how your experience informs the argument. Things are not even close to the same.
I will say, "good job Canada"
Aldo -
If you read what I said in my post, you'll see one of your points is already made, that "things are not even close to the same". Conditions for successful austerity of the kind pursued in Canada between 1993 and 2007 do not exist today in the US.
I was just making a point that Canada did resolve its fiscal crisis through spending austerity, in contrast to what Mr. Eskow claims.
BTW, US economic growth from 1969 to 1992 didn't create budget surpluses in Canada - we ran our debt through the roof in spite of a healthy trading relationship with the US. We solved our debt problem with hard fiscal discipline, while maintaining a well-capitalized, well-regulated banking system.
more importantly to note, Canada solved its debt problem without repudiating its social values, its economic recovery, or its international obligations. Of course implementing a national sales tax of 7% didn't hurt.
I pledge allegiance to the Constitution of the United States of America, and to the republic which it established, one nation from many peoples, promising liberty and justice for all
People who push austerity economics often compare a country's economy to a family's budged, then go on to explain that when a family falls on hard times, belt-tightening is the only way to see things through. THat may be fine for a family, but it doesn't work on larger scales; nor do the loyalty factors that affect family relationships hold for corporations and nations.
The haves have always preached austerity to the poor as a virtue. A virtue they themselves do not practice.
"Anyone that makes less than $150K in this country, has no business voting Republican."
Best case in point was Gingrich recently going on about how New York City DOE could be more austere with their janitors (hire kids, basically). Of all our Trillion dollar problems, and this idiot finds a Guliani playbook in a country club lavatory or something?? "Tell ya what "we" should do... "
Really, though, it's an old game they're playing.
"When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a communist. " Bishop Camara, many decades ago.
Pacem.
To increase economical activity you spend more money. If you spend less money you decrease economical activity and increase unemployment. The more money the rich get the more money that ends up "dead" since the rich do not spend their money. To improve the economy the government needs to tax and spend. Yes. Tax and Spend.
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