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May 16, 2013
Mark Blyth’s Austerity: The History of a Dangerous Idea looks at the ideas of those austerians who have succeeded in casting government spending as useless profligacy that has made the economy worse and centered the economic policy debate on budget on cuts to government spending.
Austerity is the only way to restore prosperity is their claim. The idea of “expansionary austerity,” the proposition that cutting spending would actually lead to higher economic growth, is what sits behind this claim. As the Business Council of Australia constantly reminds us confidence-inspiring policies ( ie., the sustainability of public finances or budget surpluses) will foster and not hamper economic recovery, because confidence is the key factor.
David Rowe
Blyth argues that in the current situation post global financial crisis the accumulation of debt by the public sector throughout the industrial world has far more to do with the direct and indirect effects of financial distress than it does with government profligacy. Indeed, countries such as Ireland and Spain had more favourable records of government debt accumulation than even Germany before the crisis. He makes a strong case that at times such as the present, austerity can actually be self-defeating in that its adverse effects on growth exceed any direct benefits from reduced borrowing.
He has a point, as the turn to austerity after 2010 was drastic, particularly in European debtor nations. Greece , for instance, imposed spending cuts and tax increases amounting to 15 percent of GDP; Ireland and Portugal imposed 6 percent. The United Kingdom’s economy shrank due to the austerity imposed by the Cameron Conservative Government. In these countries austerity did not lead to a surge in confidence nor enable these countries pull themselves by their own bootstraps out of the quagmire. It had major adverse economic effects, so much so that the IMF reversed its position on the idea of austerity actually boosting economic growth.
The history of economic policy shows that governments have experimented with austerity, it has led to disaster, and yet a couple of decades later, their successors try again, with equally dismal consequences. The current lot run a morality tale about the need to reduce government debt by ending entitlements and hacking away at out-of-control government spending. In doing so they avoid the bad behavior of the private sector in the global financial crisis and the way that finance capital made taxpayers liable for banks’ morally hazardous behavior.
It is faulty economics. Free market economic liberals acknowledge that economic crises have happened, but they have thought of them as an inevitable hangover from previous economic exuberance. All that the state could do was balance the budget, and perhaps even raise taxes, to restore economic confidence. Under this theory, austerity was something like allowing the economy to purge itself between successive bouts of overindulgence. The pain is necessary as it is part of an inevitable cleansing process to “purge the rottenness” from the system.
Greece is the poster child
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The idea of “expansionary austerity,” the proposition that cutting spending would actually lead to higher economic growth, is what sits behind this claim."
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...