We would be far better off if the term austerity was replaced or renamed sustainable spending. An article that was published several months ago on Project Syndicate by James McCormack titled, "The Quiet Demise of Austerity" states the merits of austerity seem to have been forgotten just when it is needed again. In the article, he points out that debates about the potential advantages of using stimulus to boost short-term economic growth, or about the threat of government debt reaching such a level as to inhibit medium-term growth, have gone silent. It is possible that the problem with the general concept of austerity lies in the moniker we have chosen to use to describe it, we might have been better off calling it sustainable spending.
Thr reason for this article is that Washington is currently putting together a tax bill promising both reform and tax cuts which means our deficit spending is again being ignored. It is as if the whole world has capitulated to the idea that we can spend our way out of the debt. In the article I sighted McCormack wrote; Objections to austerity were understandable after the 2008 financial crisis when growth was languishing below 2% and sizeable negative output gaps suggested that overall employment would be slow to recover. But now the merits of austerity seem to have been forgotten just when it is needed once again.
|Austerity Is Often Seen As Heaping Misery On The Poor|
Those who oppose austerity often cling to the idea that a major reduction in government spending can change future expectations about taxes and future government spending that encourage private consumption and propel forward overall economic expansion. They further 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. In truth, short-term government spending financed by deficits does support economic growth when consumers and businesses are unable to do so.
Years ago I wrote a piece about how Austerity has been given a bum rap and how blaming it for the problems we faced was often akin to blaming the medicine taken after someone becomes sick for the illness, this does not make sense. This is especially true when austerity is introduced as a way to bring unsustainable out of control government spending back in check. Austerity is a term that recently has been given all kinds of negative connotations because it is often painful. The recent trend has been to blame austerity for the pain it causes, however, again I reiterate, it doesn't make sense to blame the medicine taken after someone gets sick for the discomfort the illness has caused.
|Federal Government Expenditures Have Exploded|
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 a 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 economists 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 make 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 than 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 affect the financial landscape must be factored in. The bill for overspending does eventually come back to haunt you. A look at the ugly math of today is a real eye opener.
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