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Wed May 1, 2013, 07:29 AM

The Austerity Delusion

Unable to take constructive action toward any common end, the U.S. Congress has recently been reduced to playing an ongoing game of chicken with the American economy. The debt-ceiling debacle gave way to the “fiscal cliff,” which morphed into the across-the-board cuts in military and discretionary spending known as “sequestration.” Whatever happens next on the tax front, further cuts in spending seem likely. And so a modified form of the austerity that has characterized policymaking in Europe since 2010 is coming to the United States as well; the only questions are how big the hit will end up being and who will bear the brunt. What makes all this so absurd is that the European experience has shown yet again why joining the austerity club is exactly the wrong thing for a struggling economy to do.

The eurozone countries, the United Kingdom, and the Baltic states have volunteered as subjects in a grand experiment that aims to find out if it is possible for an economically stagnant country to cut its way to prosperity. Austerity -- the deliberate deflation of domestic wages and prices through cuts to public spending -- is designed to reduce a state’s debts and deficits, increase its economic competitiveness, and restore what is vaguely referred to as “business confidence.” The last point is key: advocates of austerity believe that slashing spending spurs private investment, since it signals that the government will neither be crowding out the market for investment with its own stimulus efforts nor be adding to its debt burden. Consumers and producers, the argument goes, will feel confident about the future and will spend more, allowing the economy to grow again.

In line with such thinking, and following the shock of the recent financial crisis, which caused public debt to balloon, much of Europe has been pursuing austerity consistently for the past four years. The results of the experiment are now in, and they are equally consistent: austerity doesn’t work. Most of the economies on the periphery of the eurozone have been in free fall since 2009, and in the fourth quarter of 2012, the eurozone as a whole contracted for the first time ever. Portugal’s economy shrank by 1.8 percent, Italy’s fell by 0.9 percent, and even the supposed powerhouse of the region, Germany, saw its economy contract by 0.6 percent. The United Kingdom, despite not being in the eurozone, only barely escaped having the developed world’s first-ever triple-dip recession.

The only surprise is that any of this should come as a surprise. After all, the International Monetary Fund warned in July 2012 that simultaneous cuts to state spending across interlinked economies during a recession when interest rates were already low would inevitably damage the prospects for growth. And that warning came on top of the already ample evidence that every country that had embraced austerity had significantly more debt than when it started. Portugal’s debt-to-GDP ratio increased from 62 percent in 2006 to 108 percent in 2012. Ireland’s more than quadrupled, from 24.8 percent in 2007 to 106.4 percent in 2012. Greece’s debt-to-GDP ratio climbed from 106 percent in 2007 to 170 percent in 2012. And Latvia’s debt rose from 10.7 percent of GDP in 2007 to 42 percent in 2012. None of these statistics even begin to factor in the social costs of austerity, which include unemployment levels not seen since the 1930s in the countries that now make up the eurozone. So why do governments keep on treading this path?

http://www.foreignaffairs.com/articles/139105/mark-blyth/the-austerity-delusion?cid=emc-may13promoa-content-043013&sp_mid=41417061&sp_rid=

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Reply The Austerity Delusion (Original post)
Sherman A1 May 2013 OP
Thav May 2013 #1

Response to Sherman A1 (Original post)

Wed May 1, 2013, 09:36 AM

1. I'm not sure if the above is a copy/paste, but the second paragraph has two statements...

that blow the whole "austerity works" out of the water.

"Austerity -- the deliberate deflation of domestic wages and prices through cuts to public spending"
and
"Consumers and producers, the argument goes, will feel confident about the future and will spend more, allowing the economy to grow again."

That's the theory, however the people can't seem to put two points together: If you cut wages of consumers, they will have less money to spend, so they will not spend more no matter the confidence in the future. If consumers spend less, producers will make less.

Another point in this theory is that prices will fall as well. Only they didn't. Consumers have less money, prices are the same, therefore consumers buy less.

I just don't understand how they think that less money available means more spending.

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