The Case For Austerity

Submitted by Looking Glass

Greek police clash with a protesters over economic austerity measures. Photograph: Angelos Tzortzinis/AFP/Getty Images

A major feature of the recently concluded G20 Summit was a shift in focus from stimulus to Fiscal Consolidation (FC) otherwise known as Austerity; that is to say cutbacks in social service spending, pensions, benefits and tax increases. Why the FC when most of the countries are still in deep deficit and recession? According to the official communiqué further stimulus to revive the global economy would “undermine consumer confidence and hamper economic growth.” The same solution for countries with different capabilities, capacities and resources is indeed questionable. It raises questions about economics.

Prior to the Summit either the Bank of England or the British government–I don’t recall which one— warned the people against saving and urged them to spend. So it is left to business to invest and generate growth and employment. Really?

The consumer is king. If for whatever reason the consumer doesn’t spend then the economy is in big trouble. Government will likely have to borrow to maintain the level of public/social services. The financially well endowed will hopefully continue to spend in an era of high cost of living and recession. However, it is unlikely this small group can or will spend enough to generate economic growth and jobs. On the other hand the masses living hand to mouth and now burdened with austerity have little or nothing to spend.

In an era of stalled GDP, increasing government and household indebtedness and unemployment from where will come the revenue needed to facilitate growth and maintain public/social services? Without additional short term stimulus government will need to borrow more and people recourse to credit. That Business alone will or should undertake the enormous investment needed to generate growth and employment might turn out to be wishful thinking.

No one denies that the deficit finance stimulus efforts helped to partially arrest the economic recession and helped to boost the economy and increase GDP in 2009. It created jobs in the face of rising unemployment most of which were temporary. Today many countries among them Portugal, Ireland, Greece and Spain remain mired deep in the abyss and deeper in debt even though there is not yet inflation.

With consumer spending, credit and real unemployment down almost everywhere ending financial stimulus (at least for those countries) will likely result in declining GDP and increasing joblessness. It happened in the USA when President Roosevelt New Deal stimulus expired in 1938.

As in the past austerity (FC) burden will fall on those least able to shoulder the burden– the jobless, the marginally employed, pensioners and others dependant on government– and will widen the inequality gap. A long time ago, in the age of plenty, the OECD decided that government must assist workers to find jobs where they can be productive and earn wages sufficient to keep them from poverty. Such assistance is needed in an era of lingering recession. Yes austerity is necessary but it should be accompanied by more short term stimulus.

The same approach does not hold true for tourism and import dependant Barbados. There are no real value-added employment generating sectors and not much to stimulate. Construction, much of which is foreign investment, is short term and generates little by way of sustainable employment. Building homes for people and office space, however necessary, is a band-aid solution. Like borrowing it leaves the wound to fester.

Perhaps government could stimulate (even invest in) agriculture but may have to rely on foreign labour. We disdain soiling our hands. In the case of tourism stimulus should be directed to marketing and advertisement but not the hotels per se. Facilitating more hotel excess capacity, as in the case of Pickering, is tantamount to adding fuel to fire. The stated benefits amount to heresy. More on that and related matters later. Except for agriculture none of the above are likely to create many jobs, in part because they depend on factors beyond our control.

The fact that the Central Bank cannot earn enough revenue to cover operating expenses speaks volumes about the economy not the Bank’s management. The government burdened with an ever increasing national debt, trade and other deficits lack the where-with-all to stimulate the economy in a meaningful way. As in the past it needs to borrow in order to pay pensions, salaries and maintain social and public services, which will further increase the debt burden. Obtaining funds to expand or create new production, especially in the export related sector is unlikely. According to an unwritten law government is deemed to have no business in the private sector.

The economy as constituted simply cannot absorb the current labour force. GDP growth will likely be too languid to absorb the currently unemployed. Lay-offs and a growing labour force suggest higher unemployment rates. And short term structural reform is a bad word With revenue in decline government has little choice but recourse to austerity and more borrowing. It would slow/temper the “collapse” which unfortunately will continue, and I suspect lead to unrest.