This blog was co-written with Michael Cauvel
Economic policymakers in Europe and the United States argue that slashing government budget deficits will spur economic growth, even in the midst of a global slump. This doctrine is known as austerity, or fiscal consolidation, and is accomplished by reducing government spending on social services, public assistance, and wages of public-sector workers, in addition to raising taxes. High deficits, austerity proponents argue, will slow growth because government spending will "crowd out" private investment by increasing interest rates. Critics of austerity suggest that during recessions government spending should rise to offset the decline in private spending and taxes should fall to help offset the decline in aggregate income. This expansionary fiscal policy would pay for itself in the long run by actively stimulating economic growth and tax revenue. In the absence of increased government spending, aggregate demand could remain depressed, leading to prolonged and elevated unemployment.
There is fierce debate surrounding austerity policies in Europe that is threatening to tear apart the European Monetary Union, and deficit reduction--most notably in the so-called "fiscal cliff" negotiations--has become the leading issue in American politics despite more pressing problems, such as high unemployment and anemic economic growth. So why is austerity such a contentious issue? And why are so many governments reducing spending at precisely the time that additional spending is needed--on the heels of the deepest global recession since the Great Depression?
We argue that austerity policies provide political cover for a pernicious class war whose main goal is not to generate economic growth, but to transfer resources that benefit the poor and elderly to the wealthy. By reducing government spending, as in Europe, these policies ensure that indebted nations have money to repay bondholders and creditors, and, as in both Europe and the United States, they roll back government services--health care, Social Security, and public pensions--to free up resources to fund tax cuts for the wealthy. Fiscal consolidation is not the true end goal. The primary objective is power consolidation among the world's economic elite who look to cement their position atop the economic hierarchy by extracting wealth from those beneath.
Although proponents of austerity have a theoretical justification for their policies, evidence contradicts their assertions. Our own research finds no evidence of crowding out. In fact, we find the exact opposite effect: "Crowding in" results when higher levels of government spending--and thus higher deficits--reduce interest rates by increasing investor confidence due to active government stimulus. Additionally, the International Monetary Fund recently found that austerity is self-defeating and estimated that for a one percent decrease in the deficit-to-GDP ratio, GDP will fall between 0.9 to 1.7 percent. In other words, reducing deficits reduces growth.
These findings have been confirmed by recent economic events in Europe. In the United Kingdom, David Cameron sharply reduced government spending, driving the country into a double-, and possibly, a triple-dip recession. Similar spending reductions have been implemented in Spain and Greece, causing unemployment to spike to 25 percent of the total labor force, and over 50 percent of the youth labor force, sparking massive protests and strikes.
Yet austerity policies continue to enjoy popularity among policymakers despite the unnecessary suffering they cause and the overwhelming evidence that they reduce growth. Why do politicians continue to push for policies that are so clearly ineffective? Our explanation is that deficit reduction functions as political cover for ideologically driven policy changes that would otherwise be extremely unpopular and punitive. Austerity policies are part of a one-sided class war being waged by the wealthy against the elderly, poor, and middle class. This is the only way to explain the contradictory calls for spending cuts alongside tax cuts, primarily for upper-income earners.
Even champions of austerity admit that unions and retirees--that is, the working class and the elderly--are the major obstacles to the success of austerity programs, since they involve cuts to public-sector wages and pensions. Furthermore, their argument that only spending cuts, and not tax increases, would be expansionary seems ideologically convenient for groups attempting to fortify their economic power.
There is no justification for continuing austerity policies at this point in time. They reduce growth and punish vulnerable groups. The only way these policies can be reconciled with economic events is that they conceal a class war by and power consolidation for the world's economic elite. Such a one-sided attack on the poor, middle-class, and elderly has already led to Spanish locksmiths refusing to participate in eviction processes because of the needless suffering these policies create. If austerity measures continue, that kind of resistance might spread beyond groups directly affected and radicalize additional segments of the population, potentially igniting full-blown class warfare.
Michael Cauvel (mj26cauv@siena.edu) is an economics major at Siena College in Loudonville, NY, and writes about the macroeconomic effects and political economy of austerity.