The Costs of Austerity: Squandering $2.3 Trillion Yearly of our Productive Resources

01/14/2014 10:44 am ET | Updated Mar 16, 2014

The meaning of the term austerity has undergone a significant transformation. It was originally used in Britain during the Second World War when the challenge was how to maximize the output of war materials and how to ration popular consumption.

The "modern" version of austerity began in the western industrialized countries during the mid-seventies, and has been continued at irregular intervals until today. Modern austerity is deliberately created, justified by the need to reduce government debt and fight inflation. Modern austerity policies generate artificial scarcity, rising unemployment and idle productive resources. After the 2008 financial crisis, many nations had to borrow heavily to rescue their banking systems, increasing public debt. This increased debt was then used to justify more austerity in order to satisfy the financiers "worried" about the debts governments had taken on to save them. Public spending is being cut further, reducing aggregate demand. Austerity policies thus create scarcity that is then used to justify the need for more savings. The implementation of austerity becomes its own justification.

Both the extent of the freely available but unused production potential as well as the level of unemployment have subsequently been at record levels in most countries. In the most affected countries, unemployment has reached figures ​​in excess of twenty per cent, in the area of ​​youth unemployment even up to fifty percent. A whole generation is thus being denied the transition to a normal working life.

This dramatic waste of productive resources is especially scandalous because these resources are needed to address urgent global problems such as climate change and poverty reduction. Even the use of a fraction of the available free productive capacity could have a major impact.

The constraints on demand caused by austerity policies mean that we unnecessarily live beneath our actual means. The value of unproduced useful goods and services are the costs of austerity.

We live below our human potential because we fail to use all the productive resources available to us and, as a result, over 200 million people are unemployed around the world. On the other hand, we live beyond our natural limits because we use more natural and finite resources than is sustainable. A huge opportunity thus presents itself: by employing even a portion of the 200 million global unemployed and by implementing a better degree of utilization of available productive capital we can increase our economic potential so as to make significant investments in the transformation of our energy consumption and in the sustainable restructuring of our production methods.

The size of the untapped economic potential has been analyzed by the World Future Council (WFC) in a first study. The annual global cost of austerity that can be identified totals at least 2.3 trillion U.S. dollars. The corresponding value for the Euro Zone is at least 580 billion Euros. This evaluation assumes that only half of the unemployed persons identified by the ILO are employable and does not include underemployed persons. It is therefore very conservative.

There may of course be a mismatch between the unused industrial production reserves, the qualifications of the currently unemployed, and the structure of new demand. But, sudden changes in the demand structure and the need for adaptation are by no means unusual. Market economies are designed to quickly respond to changes in the demand structure.

Of course, taking advantage of this available additional economic potential requires the monetary financing of the additional production and demand. Given the huge sums currently provided by the central banks to the banking system, money as such is clearly not the impediment. So what could have been done -- and can be done -- differently? Tiny Iceland faced one of the most serious banking crises in 2008. It has overcome it by allowing failed banks to fail and focusing on providing a social safety net and re-building the real economy. Japan's post-war economic miracle was supported by Central Bank lending guidance to the banking sector, ensuring that such lending financed productive investments. The quickest way to reduce funding through government borrowing is to restore the right of central banks to create new (debt and interest free) money to fund new production. As long as such new money is used to fund new wealth creation by the public and private sectors i.e. investments generating corresponding new products and services, it will not be inflationary. Newly created money would lead to new value being created rather than existing assets being bought and their prices driven up on a path to the next bubble.