What Austerity Has Failed?!?!?!

[Chris]

In today's Independent: Austerity has failed, eurozone on brink as world crisis rages (http://www.independent.ie/national-...e-on-brink-as-world-crisis-rages-2841917.html)

Now my question to Jody Corcoran is "What actual austerity has failed?"

Ireland's budget deficit went from about €25bn in 2009 to about €18bn in 2010 and is expected to be up again this year to about €22bn. Now which part of this shows that Ireland actually had austerity? I now that taxes are up, but spending isn't down by any significant amount in the last 4 years since the start of the crisis. My conclusion is that Ireland is still in a mess because it raised taxes and didn't lower spending significantly which has a detrimental affect on the economy.

Greece is said to be going through austerity programs, but 1 year after the first bailout a second one was needed because Greece had actually failed to cut spending. Let me say that another way, Greek "austerity" has resulted in an increase in spending! So again, there is talk of austerity but no actual evidence that austerity is taking place.

Now look at the US, which went on the opposite track of increasing spending, the deficit and total debt. The Fed has increased its balance sheet by about $2tr while the US government has increased debt by $6tr since the onset of the crisis. In return for this anti-austerity measure worth $8tr they have received 2% GDP growth last year and indications that it will be less this year. 4% growth would mean less than $600m added to the GDP, while no change has been made to employment.

If anything, government actions around the world show that not following through with austerity, or doing the opposite, has failed. It makes my blood boil to see such incompetence or blatant lies.

 

[DerKaiser]

Ireland's budget deficit went from about €25bn in 2009 to about €18bn in 2010 and is expected to be up again this year to about €22bn.

The declaration that austerity has failed is certainly a bit premature.

On the other hand though, the figures you quote above are misleading in terms of the levels of austerity as you are not looking at the current budget deficit, rather including figures for bank recapitalisation.

We have engaged in austerity. Income taxes have increased massively. There has been some action on the spending side, maybe not enough, but you have to acknowledge the facts that rising unemployment makes stabilising, let alone reducing, the budget deficit an enormous task in itself.

How many more jobs will be lost if we take say €10bn in purchasing power out of the economy? 150,000 jobs losses might be a conservative estimate. It wouldn't be a stretch to imagine that any gain from spending cuts would be largely wiped out by the negative impact of effectively killing domestic demand.

 

[Chris]

The declaration that austerity has failed is certainly a bit premature.

On the other hand though, the figures you quote above are misleading in terms of the levels of austerity as you are not looking at the current budget deficit, rather including figures for bank recapitalisation.

We have engaged in austerity. Income taxes have increased massively. There has been some action on the spending side, maybe not enough, but you have to acknowledge the facts that rising unemployment makes stabilising, let alone reducing, the budget deficit an enormous task in itself.

I agree that the bail out countries have cut back on certain spending that is having a significant affect on people's lives, and thus it is perceived by the public that this is austerity. But the idea of austerity is to cut back on total spending, and this has clearly not happened.

How many more jobs will be lost if we take say €10bn in purchasing power out of the economy? 150,000 jobs losses might be a conservative estimate. It wouldn't be a stretch to imagine that any gain from spending cuts would be largely wiped out by the negative impact of effectively killing domestic demand.

Government cannot create a net gain to jobs. Let's take that €10bn figure; by your argument, if government spends €10bn less then x amount of jobs will be lost, or in other words, in the absence of that €10bn there will be less jobs. The problem is that government has to take that €10bn out of the economy in the first place, which also causes an absence of €10bn which also results in less jobs. At the very best there is zero gain, as the money for every created job has to inevitably cause another job to be destroyed or not created.
But I think that we somewhat agree to the extent that a reduction in spending has to also be accompanied by a reduction in taxation for significant effects to take place in the shorter term..

 

[DerKaiser]

But I think that we somewhat agree to the extent that a reduction in spending has to also be accompanied by a reduction in taxation for significant effects to take place in the shorter term..

A counter cyclical policy where the govt take money out of an overheating economy & put it back in when private demand is weak will be beneficial. A smoothing out of demand in the economy will lead to steady employment levels and a steady macro economy.

Our problem is that we can't get money to put into the economy now as no one believes we will pay it back. Except for the EU/IMF.

This leaves us with a dilemma. Can we really turn down this money in the short term (next 3 years)?

My gut feel is that we have a greater chance of surviving by taking the money and not succumbing to unemployment levels of up to 600,000. That would be end game for the economy whereas a large debt to be repaid more than a few years from now will probably also lead to failure, but keeps us on life support for long enough for some miracle to happen.

In my mind that's our choice. Fail now or hold out for a miracle with the likelihood of failing more spectacularly a few years down the line.

 

[Chris]

A counter cyclical policy where the govt take money out of an overheating economy & put it back in when private demand is weak will be beneficial. A smoothing out of demand in the economy will lead to steady employment levels and a steady macro economy.

Our problem is that we can't get money to put into the economy now as no one believes we will pay it back. Except for the EU/IMF.

That is the Keynesian theory, but unfortunately it has never worked. What is actually happening these days (last 20 years) is that when there is a slump government's have gone heavily into debt to "boost" the economy, but when good times returned they never reduced the debt. I believe this is something that even Keynes himself would have opposed. The result is total debt spiral that most of the western world is seeing.

This leaves us with a dilemma. Can we really turn down this money in the short term (next 3 years)?

My gut feel is that we have a greater chance of surviving by taking the money and not succumbing to unemployment levels of up to 600,000. That would be end game for the economy whereas a large debt to be repaid more than a few years from now will probably also lead to failure, but keeps us on life support for long enough for some miracle to happen.

In my mind that's our choice. Fail now or hold out for a miracle with the likelihood of failing more spectacularly a few years down the line.

But by borrowing heavily now, when the state is already over-indebted means that if a recovery materialises then the benefits have to be reduced to pay off the debt. This means that unltimately there will be no benefit, just higher debt.
The other effect is that as governments go deeper into debt they reduce the amount of capital available on the market, which means there is less capital available for the private economy to grow. Basically what is happening is that government is taking money out of the capital market and tries to inject it into the economy; government is merely moving capital around, it cannot create a net benefit.