"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 unemployment, 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, Washington 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?
Follow Richard (RJ) Eskow on Twitter: www.twitter.com/rjeskow
Austerity is the rule which is to not spend more than you earn, stupid! You do not choose the Austerity, it will eventually be imposed on anyone who does not respect this rule! Everyone is against it but who will pay? Be responsible.
Our country both cannot and should not operate like a household with a fixed income. Creating demand to get the economy moving is required when the economy stalls badly. Not doing this creates an endless spiral of higher unemployment, leading to even less demand, and even less tax revenue. Its possible that cutting government spending will in essence cause greater debt due to lack of tax revenue. Before cutting spending or paying the debt down we need to get the economy much healthier. The thing you should be worried about is not the debt, but the resolve to pay it down once the economy recovers. IMO, that is far more important.
The idea that we need to reduce taxes -- already at modern historic lows -- in order to create incentives to hire people is a joke. I don't care if my tax rate goes up 3% if it means that people will have money to spend to buy my goods or services. If I have more customers I can hire more workers, and I will.
Bottom line: we have not yet tried austerity.
So the comparison is not only not applicable, but weak at best.
First, there needs to be pursuit of health care fraud, estimated to be between $ 100 billion and $ 500 billion:
http://www.hks.harvard.edu/news-events/news/testimonies/sparrow-senate-testimony
Harvard Kennedy School - Malcolm Sparrow Testifies Before the Senate Subcommittee on Criminal Prosecution as a Deterrent to Health Care Fraud
And going after unpaid federal income tax:
http://www.huffingtonpost.com/2012/01/11/nina-e-olson-irs-budget_n_1199002.html
Nina E. Olson: IRS Budget Too Small For The Agency To Do Its Job
"...Olson's report came just days after the IRS estimated that people and companies underpaid their taxes by a huge $385 billion last year after audits and other enforcement efforts, compared with around $2.3 trillion that the agency collected..."
Then there's the military budget...
I agree that there is health care fraud and we should go after it. Having the government involved with Obamacare will only make it worse.
Not sure about the unpaid taxes, this is the first I heard about unpaid taxes rather than the usual "companies should pay more."
So how has the war on poverty worked out? Spent trillions and still have the same percentage of poor. Uh oh, looks like spending not working.
Or the trillions spent to get the economy going since 2008. Unemployment up. Uh oh, not working.
Spending more than you make is a stupid long term policy -- cut spending.
Austerity is a killer in the middle of a recession. Great Britain is following such a policy now and economic growth is forcast at .06% - leaving a strong possibility of recession. We have example after example.
What we have to assure is that we pay down the debt after the economy is healthy. We have done that a couple of times in the last 70 years (in the years after WWII and in the late 1990's) and it can be done again. That means some sort of long term consensus that goes beyond a 2-4 year election cycle.
Not to point out the obvious....ha....but making the economy worse to make it better is going to...make it worse. We need to do the opposite.
That's exactly the kind of reasoning going on among the austerity camp. There's a 40 year history of austerity measures forced on debtor countries by the IMF, and in every case it sends the economy into a death spiral. But presumably if the country's economy hadn't stubbornly gone into a death spiral, austerity would eventually have worked.
The only thing that's really "improved" by austerity measures is the country's ability to pay off the onerous debts contracted by corrupt governments. In other words, it's austerity for the people of the country and prosperity for the wealthy corporate criminals who drained the country's treasury in the first place.
Some of their ideas were: Cut taxes for the job creators. lol
Don't have the money for war? Borrow the money.
Actually none of the republican ideas have worked for the 89%, but are wonderful for the top 10% or so.
Sovereign Debt Restructuring
People usually find a way around rules.
There was a cartoon of a graduating high school football player talking to a college coach. The coach said"
"Conference rules only allow us to pay for tuition, room and board, and laundry. But the laundry grosses $ 2,500 a week."
Still, nations must have laws and regulations.
I have not dealt with any robot machine by phone that had good sense and could understand what I am saying. They are a form of mental torture.
Too many times when they do hire someone to answer the phones they are overseas. I am not going to deal with trying to understand what they are saying and I am not going to repeat things over and over.
I am tired of a 3 minute call having to be a 15 minute call because of who answers the phone.
They can speak english but they don't comprehend it and can't understand what a person is saying.
http://ibnlive.in.com/news/us-bill-aims-to-choke-call-centres-in-india/213811-7.html
US bill aims to choke call centres in India - Business News - IBNLive
"Houston: A bipartisan bill has been tabled in the US House of Representatives to make companies that move call centres overseas ineligible for grants or guaranteed loans from the federal government, a move aimed at stemming the tide of jobs heading to nations like India.
Introduced by Rep Tim Bishop and Rep David McKinley, the US Call Center Worker and Consumer Protection Act would also put some aggressive mandates on call-centre operations.
"Outsourcing is one of the scourges of our economy and why we are struggling so to knock down the unemployment rate," said Bishop.."
In 2004, the Bush administration stated that the offshoring of blue-collar and white-collar jobs would enrich the U.S. (link available upon request)
In 2011, the Obama administration selected GE's CEO, a high priest of the offshoring cult, to be the jobs czar.
http://gethuman.com/
Phone Numbers, Customer Service Tips & Reviews - Companies Worldwide | GetHuman.com
"Barro-Ricardo Equivalence: Wrong. To affect demand, government spending would have to be much higher than it is today." [Citation needed]
Government spending accounts for over 20% of our GDP currently. That's not enough to affect demand in the slightest?
"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."
I'd take your analysis a lot more seriously if you actually seemed to know what the Laffer Curve represents. It has nothing to do with how marginal tax rates affect economic activity. It has everything to do with how marginal tax rates affect government revenue.
Good piece, though, if the goal is for the blind to lead the blind.
And the laffer curve is wholly dependent on assumptions about the incentives of participants in the market place at a given tax rate, so it's effect on economic activity is implicit.
Cutting government spending is like lowering your car payment by buying a less fancy car. If you go from spending $750/month on a car to $200/month, you would be more prosperous. You may not have all the luxuries of the more expensive car, but you have more disposable income. We don't need much of what the government does now. we don't need the "sun roof."
Laffer all the way to the bank.
Meanwhile, lax regulation allowed financial professionals to line their own pockets at the expense of the stability of their own companies and the nation's economy. One financial giant after another would have been ruined without massive federal bailouts.
Mainstreet however, has been left to flounder, with millions unable to produce revenue for themselves, much less pay taxes, because they lack jobs, while government commitments remain.
But the real "job creator" is consumer demand, which is depressed because so many don't have jobs; and many who do have jobs are earning less than ever before.
Moreover, give-away Fed interest rates are enriching banks (that now report high profits) while decimating depositor's savings because banks have no incentive to pay even inflation-matching interest rates.
It is argued that benefits to the public (such as unemployment insurance) are a disincentive to work, while massive giveaways to large businesses, such as tax cuts and bailouts, move them to hire. But why bother hiring messy and costly employees to service absent demand when profits are soaring without them? We have been trying this strategy for years and it is still not working.
What happens if the consumer gets a bigger slice of the pie?
The wars in Iraq and Afghanistan cost about $1.3-3.0 trillion (depending on the source) over the last 10 years. That's $130-300 billion per year. The fedeal government spends $3.8 TRILLION per year so the wars cost about 3-7% of the federal budget. This is hardly enough to drive the current economic situation. Also, much of that cost is fixed because we have an all volunteer army. So unless Obama is going to pink slip hundreds of thousands of soldiers, the net cost of the wars is much less than I stated.
Testify !!