Wortpresse

People who know me have come to realize fairly quickly that my knowledge of economics comes down to close to nothing. Nada, zip, ziltch.

But I believe that this makes me a good advocate for learning about economics, since I find it an interesting subject regardless of my legendary lack of expertise.
So, I have decided to talk about simple economic issues on this blog. People who know about eco-nomics: please don’t be too hard on me. I really try to get the big picture.

The first topic I wanted to tackle is economic austerity. We live with the term and concept every day, with most of Europe in economic turmoil and shouts of an austerity czar being controversially discussed. In 2009, David Cameron called out the “Age of Austerity”, and in 2010 the time-honored Merriam-Webster dictionary made it its Word Of The Year. After reading headline after headline about austerity measures and the like, I have tried to understand what it entails.
So here’s my question in a nutshell: what is austerity in its foundations, and what principle guide it?

In principle, austerity measures are government policies to reduce the amount of money it spends. Deficits are cut, and a reduction of the amount of benefits and public services provided is sought. Austerity advocates don't just see lower deficits and reduced debt as tools to promote long-term economic health. They often consider them ends in themselves as moral values. Government spending is perceived as something inherently wrong. Of course most advocates of economic austerity will make concessions – police, firefighters, teachers, nurses, you get the picture. Still, the point is to reduce all government spending to a bare existential minimum.

The theories behind austerity measures are widely contested. These include theories like the 'Barro-Ricardo equivalence', which says people won't spend money when they know their government is incurring debts they will have to pay someday. Conservative economists like Robert Barro insist this is true especially 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. Many critics claim that this theory is not applicable in reality as government spending would have to be much higher to actually affect buyer behavior.
Then there's supply-side economics, which argues that the best way to grow the economy is by cutting taxes and creating smaller governments. Supply-sider theorists argue that people will stop investing, producing, and creating jobs if taxes are too high. This, I am pretty confident to say, is bullshit. Even Warren Buffett, the best of the best in the investment business, said that no investor will ever shy away from a deal even if taxes were sky-high.

So do austerity measures work in real economies? I would tend to say they do not. Austerity has been a disaster for Great Britain and Europe, yet many leaders are demanding more of the same. They are often ignoring the approaches that have worked in the past, as in the Great Depression: Invest in short-term growth which gets the work force back into employment, and then address long-term deficit issues once the economy is back on its feet.
Also a point that is often misinterpreted is that debt is not something inherently bad. You can’t compare a credit you take up to pay for your house with that of a national household. The same goes for the interpretation that a debt burden will have to be paid off by future generations. That is because, unlike private individuals, a nation will repay debts by borrowing new money. As for the interest burden that is said to arise when the interest is paid by taxation rather than by fresh borrowing, it is merely a transfer payment. Income is transferred from taxpayers to bond-holders. In Germany as in many European countries these bond-holders are domestic. The transfer is therefore a redistribution rather than a loss of income. Although this is obviously a model and is not always applicable as in the case of Greece, where most bond-holders are not domestic.

In this whole ordeal of austerity-mania, the disconcerting thing is that it is a mainly politically-driven phenomenon. Look back in time, and fifty years ago most economists would have already spoken out against austerity measures in economic depression due to their empirical findings during the Great Depression. But austerity has come back in the form of political doctrine, and to the detriment of millions of workers who are paying the price.