Austerity Is Not Working
Austerity programs are now becoming in vogue in the West. The irony is that the policy was first imposed on developing Nations as a way to ensure that they paid back loans. If Western nations paid attention to the results of such economic policies they would arrive at the conclusion that they are not successful. If austerity in combination with other neoliberal economic policies were truly effective Third world nations would be enjoying increased economic growth and improved living standards. The reality is the opposite.
So why are Western nations like the U.S. using policies with such disastrous results on themselves? One is misunderstanding how balancing budgets work and a reliance on ideology rather than hard data. We are seeing a battle politicized that should be guided by data more than rhetoric. So to better understand what is going on lets review what fiscal and monetary policy is and how governments use them to build economies and balance their national check books.
Fiscal Policy
Simply put, fiscal policy is how national governments balance their revenues against their expenses. The revenue is the taxes, fees, and profits from government owned businesses that a government collects to run daily operations such as law enforcement, utilities and maintenance for public buildings and properties, and social programs. These daily operations are just some of the expenditures that governments make everyday. One that is particularly huge is defense. Anyone who has played Sim City or runs their own finances know how the game is played. Your goal is not to spend more than your earn and if you do so to pay that back as soon as you can.
Fiscal Policy for nations has this basic function with some more complicated motives. For example in some cases its is good for a nation to take on debt to encourage investment or finance important projects. The debate lies in how much to borrow and what to spend it on.
Austerity
Austerity is in part the brainchild of neoliberal economic policies. The tenets of these ideas is that the market is the most efficient distributor of goods and that governments should intervene as little as possible. This in the case of budgets is to spend on only the most basic functions of government that support an open market. Social spending is considered redundant because the market will provide for public goods more effectively.
Austerity is not a completely new idea. In times of scarcity in revenue, governments have always sought to increase revenue through raising taxes and/or limit spending. Austerity in many cases works effectively to help balance a national budget and restore it to health. The big argument is when and how austerity should be applied. Those on the political left feel that austerity should be the policy of last resort in economic downturns. Proponents of the right see it as a necessity to righting the financial fortunes of ship of state even if means cutting social programs that citizens rely on.
The problem with Austerity is that is has an effect on the economy. Basic Econ 101 teaches us that there is a difference between public goods and market goods. Public goods in fact operate under different rules and measured by general benefits to society against increased inefficiency in the market. So when a government spends money to develop a power plant or build a port there is the benefit of increased economic activity. If a program like the GI Bill is passed. An increase in the skilled workforce and more affluent consumers is a result. For those who argue about the effect on the market there is also the basic economic fact that governments are the buyers of last result. When a government spends money on providing services it increases the aggregate demand in the national economy. So practicing a policy of economic austerity can do just as much harm as good.
Why the enthusiasm for Austerity?
If this seems so obvious what makes so many countries and states supportive of Austerity? There are several good reasons. First, too much debt is bad. Second, economic downturns seem to make such policy necessary as scarcity increases. Finally the idea that financial housekeeping of the national budget looks good to markets.
It is common sense to shed debt when times are bad. If you have a limited income you know that you are throwing away money needed for necessities on servicing debt. If you are too mired in debt in key sectors it can affect future borrowing and your income. History shows that governments that are not able to control their debt face weakening or complete collapse. However, the circumstances for national debt vary based on the country. The more powerful have more tools to work with and the time to use them. Austerity is really a move that smaller countries with limited options would be likely to pursue.
Second economic downturns create a crisis of scarcity. Governments know that they take a hit in income if citizens aren't working and paying taxes. The natural response is to cut back on spending to match the new reality. The problem is that governments are not people. The work under different constraints and realities. In the US a person that lost a job would have to cut back on extra spending and focus on surviving until a new job is found. The US has such a strong position as a borrower that debtors know will repay them in time. This gives the US the ability to borrow money to cover short term costs until a recession ends.
Third it looks good to markets. In financial markets looking like you are financially responsible is considered a good thing. It like a person using a credit regularly but consistently paying down the balance. Just like a bank will be more willing to lend money to a consumer a financial market will be more willing to invest in a national government by buying public debt. To a government in debt Austerity would like a life saver in financial market. The problem with market-oriented thinking is that markets by nature focus on short-term gains over long-term development.
The issue with adopting austerity in these times is simple. You don't starve yourself in a time of scarcity; you eat until the growing season returns. National governments interested in quick recoveries need to ease the pain of recessions by creating demand in the market in the short-term and investing in future growth in the long-term. Countries that spend on improving healthcare and infrastructure recover faster while those that cut back face longer economic downturns. If debt is a problem the issue increasing the tax base by creating demand for products.
Tega Jessa - I am a freelance writer who focuses on sciences, politics, and sci fi television and have written on them for three years.
