BTC donation

Please Donate To Bitcoin Address: [[address]]

Donation of [[value]] BTC Received. Thank You.
[[error]]

Saturday, 27 April 2013

Rejecting Austerity, or just accepting the inevitable?

There have been several articles recently (such as this one) espousing the view that 'austerity' has fallen out of fashion with governments around the world, as they come to realise that deficits are not always a bad thing. However, it seems more likely that many governments have abandoned trying to balance their budgets 'over the economic cycle' since the GFC, simply because the problem is proving too overwhelmingly large to address through relatively painless amounts of belt-tightening, and savage austerity cuts are too painful to maintain long enough for the long-term positive effects to be realised.

The amount of austerity measures required to bring a national budget back into balance within a time-frame of years rather than decades is proving time and again to be simply too large for either the economy or the population to tolerate for long. Excessive austerity measures ruin public confidence, and hence have a psychological 'multiplier effect' that makes the immediate negative impact on economic activity far outweigh the potential benefits of reducing the deficit. Also, in a democracy voters tend to support the party that promises they can have their cake and eat it too - with economic fantasies such as reducing the deficit without budget cuts that negatively impact voters or increase their taxes. It was no coincidence that most of the G20 countries had a change of government within an election or two of the GFC becoming apparent - no matter which side of politics was in power and therefore supposedly 'responsible' for the crisis.

I suspect that 'austerity' budgets are proving too toxic for elected governments (or opposition parties) to continue to support, hence the move towards the view that deficits aren't really such a bad thing after all. The danger is that having gone through a cycle of weak economic 'recovery' without being able to balance the books, the next recession will produce such large deficits that government debt will become a major drag on economic activity. While the 2010 paper 'Growth in a Time of Debt' by Reinhart and Rogoff has lost much of its pro-austerity influence (due to errors in the data analysis used to reach their conclusion that their was a distinct economic 'tipping point' when debt reached 90% of GDP), there will come some point where debt is so large that governments have to resort to inflation to keep their debt levels manageable. Rather than austerity falling out of fashion, it seems that governments are simply resigning themselves to living with deficits 'as far as the eye can see', and in a strange version of the Stockholm Syndrome, are starting to view deficits as the lesser of two evils. Whether embracing deficits rather than austerity budgets proves to be good economic policy or  unsustainable political expendiency only time will tell.

Subscribe to Enough Wealth. Copyright 2006-2013

No comments: