Saturday, April 13, 2013

Austerity Gets A Bum Rap!

In reality blaming the medicine for illness taken after someone becomes sick does not makes sense. Austerity is a term that recently has been given all kinds of negative connotations because it is often painful. Economic growth tends to mask a multitude of problems, in economics austerity refers to cutting spending often by lowering and reducing the amount of benefits and public services.  Austerity policies are often used by governments to try to reduce their deficit spending. Spending cutbacks are sometimes coupled with increases in taxes in an effort to demonstrate long-term fiscal solvency to creditors.  It is easy to point your finger at measures taken to reduce runaway or wasted spending and blame them for creating a reduced spending spiral but that is unfair.

Supporters of austerity predict that a major reduction in government spending can change future expectations about taxes and government spending, encouraging private consumption and resulting in overall economic expansion. Critics argue that, in periods of recession and high unemployment, austerity policies are counter-productive, because. reduced government spending can increase unemployment, reduced government spending reduces GDP, which means the debt to GDP ratio examined by creditors and rating agencies does not improve and short-term government spending financed by deficits supports economic growth when consumers and businesses are unable to do so.

Austerity measures are typically taken if there is a threat that a government cannot honor its debt liabilities.  Such a situation may arise if a government has borrowed in foreign currencies that they have no right to issue or if they have been legally forbidden from issuing their own currency. In such a situation, banks and investors may lose trust in a government's ability and/or willingness to pay its obligations and either refuse to roll over existing debts or demand extremely high interest rates.  One reason austerity is unpopular is that it is often painful to the people and the voters.  Social spending programs are often targeted for cuts.  Taxes are raised, port and airport fees, train and bus fares are common sources of increased user fees.  Retirement ages may be raised and government pensions reduced. 

 In many cases, austerity measures have been associated with public protest and claims of significant decline in the standard of living. The argument by contemporary Keynesian economists that budget deficits are appropriate when an economy is in recession bolster this movement. They claim it reduces unemployment and helps spur GDP growth, and that in an economy one person's spending is another person's income. If everyone is trying to reduce their spending, the economy can be trapped in what economists call the paradox of thrift, worsening the recession as GDP falls. If the private sector is unable or unwilling to consume at a level that increases GDP and employment sufficiently, thus the argument often heard that the government should spend more, and not less.

In fact many economist argue that austerity measures do not necessarily increase or decrease economic growth.  All attempts by central governments to prop up asset prices, bail out insolvent banks, or "stimulate" the economy and deficit spending makes stable growth less likely.  Often the typical goal of austerity is to reduce the annual budget deficit without sacrificing growth.  Over time, this should reduce the overall debt burden, as the economy grows.  Blaming austerity for the blow-back from governments living beyond its means is more then unfair, we should at all times conduct business and run our government  with responsible reigns on spending. If a government spends and runs its business in an austere way the issue of when to start cutting or tightening should never surface.

Footnote; At some point the present and the future intersect, it is not just about the deficits of today but the promises you make coming due. These promises and how they effect the financial landscape must be factored in. At some point the bill will become due. A look at the ugly math of today is a real eye opener,



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