Austerity Is Not Working

Give to the WealthyI’m trying, as much as possible, to make my political writing more understandable. It’s very easy to throw around words that don’t mean much to most people. One of those words is “austerity.” In a general sense, there is nothing special in the word. I live a life of great austerity because I don’t have much money. And in a political context, it means much the same thing. Unfortunately, it implies a lot that is just nonsense.

In America and especially in Europe, people who call for austerity are really calling for deficit reduction. But as we’ve seen, it is not just any deficit reduction. When France reduced its budget deficit by raising taxes instead of cutting spending, European Commissioner for Economic and Monetary Affairs, Olli Rehn was furious. Rehn and others claim that raising taxes is bad because it will slow economic growth while making poor people go hungry will not. You don’t have to know much about economics to know what nonsense this is. What’s really behind this is that Rehn wants budgets to be balanced on the backs of the poor because they aren’t his friends; he doesn’t want them balanced on the backs of the rich because they are his friends.

Austerity in 1937The idea is all the same, though: balanced budgets will lead to business confidence and the economy will improve. I’ve shown many times before that this just isn’t true. Let me repeat it here very briefly. When the economy is booming, government borrowing depresses the economy because private businesses have to spend more money to borrow so they can invest in and grow their businesses. But that isn’t the case right now! In fact, private businesses are sitting on trillions of dollars of cash and doing nothing with it. So all that a balanced government budget would do is take even more money out of the economy and make the economic downturn worse.

This morning, Paul Krugman put together a great graph that shows how this is working in Europe. There are five countries in Europe that have been struggling the most: Greece, Italy, Portugal, Spain, and Iceland. These countries are usually referred to as GIPSI (gypsy) or, by people who are jerks, PIIGS (pigs). For the last 5 years, these countries have been cutting their budgets like good little boys and girls, because the heads of the European Union have told them that this is the medicine that will fix their ailing economies. Well, how is that going? Not well:

State of the Euro

On the y-axis, we see that the countries can now borrow money at a lower rate. This is because the European Central Bank (ECB) decided, after a long delay that they would be the lender of last resort; in other words, the ECB is guaranteeing that the countries won’t go bankrupt. But look at the x-axis. Despite all the austerity: the budget cuts and “belt tightening,” the governments of all these countries now owe more than they did before!

How can that be? After all, aren’t they spending less than they were before? Well, yes they are. The problem is that by spending less money, they put less money into their economies. This meant that more people lost their jobs—both government workers and private sector workers. Consider an example. There’s some government worker who was planning to buy a new car. But now that he’s lost his job, he can’t buy a new car. That means the guy who was going to sell him that car didn’t make his commission, so he isn’t going to buy that flat screen television he was looking forward to. And on and on. By cutting government spending, the economy gets even more depressed.

But how is it that the government that is spending less actually owes more money now? Well, spending is only one side of the budget. If you cut your spending by 3% while reducing your revenue by 5%, you are going to owe more. All those spending cuts meant that people in the economy didn’t have as much money. As a result, they didn’t owe the government as much taxes. Thus, all the austerity—all the hardship placed on the working classes—actually made the problem worse.

What’s especially bad about this is that all of this was predictable and was predicted by a large number of economists. It isn’t hard economics. In fact, the economics used to justify such austerity programs was hard. Economists and politicians had to twist themselves into knots to justify how cutting spending in a depressed economy would help. They used an idea called “expansionary austerity” promoted by a guy named Alberto Alesina, who by all accounts is a very smart economist. Instead of the obvious idea that if people have money they will spend it, Alesina flipped this on its head. He claimed that if businesses see governments getting their budgets in order (But only through spending cuts, not tax increases!) then they will have “confidence” that will make up for the massive decrease in demand that budget cuts cause.

That’s fancy foot work. And I have to admit, as a non-economist but someone who is very good with math and all that, I’m impressed with the theory. It does take a smart guy to come up with a theory like that. But it fails the Ockham’s razor test. We already had a very simple model of how the economy works. And as is usually the case, the simple model was the one that was right, not the complex one with its loopy loops.

Yet here we are. Throughout Europe and the United States, conservatives are calling for more budget cuts. It doesn’t matter how much evidence piles up that this is exactly the wrong thing to do. But they aren’t pushing these policies because they work. They are pushing these policies because these are the policies that they always favor. And now they have an excuse for pushing the policies. The fact that the work of Alesina & Ardagna and Reinhart & Rogoff has been shown to be wrong doesn’t matter. They still use this work to justify their policies. They want to enrich the rich and impoverish the poor.

We declare our right on this earth to be rich, to be ever richer, to be respected as the rich, to be given the supreme rights of the rich in this unjust society, on this earth, in this day, which we intend to bring into existence by any means necessary.

Afterword

It was easier to parody Malcolm X’s quote than Sartre’s. Actually, Sartre’s quote is closer to what I believe. Malcolm X’s quote is almost plaintive, “We demand to be respected.” In our society he was thought to be so radical and scary. But what was he asking for? Just the simplest of things: human dignity and respect. Our society seems to have gotten worse since that time. Now Sartre better speaks to our larger problems, while Malcolm X’s demand still largely goes denied:

I was not the one to invent lies: they were created in a society divided by class and each of us inherited lies when we were born. It is not by refusing to lie that we will abolish lies: it is by eradicating class by any means necessary.

By the way: those means do no include armed rebellion. Modern war is the most unjust thing imaginable. If a group of people want to go to war, that’s their business. But they always end up harming those who just want to live their lives. These are the other 99%—Jesus’ meek. War makes things worse. War exists to perpetuate itself. It is not a form of politics.


Images are from a great cartoon by Brian McFadden in the New York Times. Check it out!

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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