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Four Reasons Why Economic Austerity is an Awful Idea
By Learned Nand | 22nd June, 2013 | 12:17 pm | Here's Where You're Wrong


Four Reasons Why Economic Austerity is an Awful Idea

That article on the founding of Israel wasn't controversial enough, so now I'm going to talk about economic policy, yet another subject that by all rights should be incredibly boring, but nevertheless tends to rile people up in fevered and uninformed debates. One of the primary theories dominating economic discussions today is that of austerity. Austerity is the idea that governments should, in a time of recession, reduce their deficits by spending cuts or tax hikes. In the United States, the national deficit and national debt are all you ever hear about, mostly from Republicans, but also from Democrats. Considering the nature of political discourse, you'd think that a budget surplus would solve all of our problems. Unfortunately, it won't, and the steps we take to get there could hurt us. Before hopping on the austerity bandwagon, consider the following:

#4: Austerity Doesn't Reduce the Debt

Though austerity economics certainly dominates American politics, it is most prominent in Europe. European economists have successfully convinced many major European governments that, to deal with the global recession, they have to cut spending and reduce their deficits. When considering the potential impact of austerity policies in America, it's a good idea to look at how they've worked in Europe. So what effect has austerity had in Europe? A profoundly negative one. Though America has been recovering from the unemployment caused by the recession, European unemployment has skyrocketed.

Is this pain worth it? Is the pain, as the OECD puts it, "producing results"? Short answer, no. Long answer, nooooooooooo. The national debts in Europe are rising, and the size of the economy (the GDP, or Gross Domestic Product) is shrinking. When the economy shrinks, that means lower tax revenues. With lower tax revenues, the government has less money to spend, and with less money to spend, debt and deficit increase.

Austerity isn't just painful: it doesn't work. Austerity policies reduce employment and shrink GDP so that the government has less revenue, meaning their deficits, at least in the short term, increase. Surely this is reason enough to avoid austerity policies. They increase unemployment and fail to reduce the national debt. But at least they keep inflation in check, right? Well...

#3: Inflation is too Low Already

Talk to any Libertarian about his economic ideas. If you come out of that conversation not scared of inflation, then you either weren't paying attention or already read this article, in which case I thank you for your loyalty as a reader. Inflation can be scary: we all know about German hyperinflation in the 1920's, where people lost their life savings, had to barter to buy groceries, and used Deutschmark bills as wall paper. For a less pronounced but more personal example, we can look to the 1970s in America, when inflation increased faster than wages, and people couldn't afford the same lifestyle they could before. Clearly, we don't want this to happen again. So should we take drastic measures just in case it does?

No, we should not. At the height of inflation in the 1970s, inflation rates were at 11.8%. At the height of German hyperinflation, inflation rates were at 20.9% per day, or about 30,000% per month.

"Holy Shit, that's a lot of inflation!"
-- Everybody

As of April 2013, in America, inflation is 1.1%. Inflation right now isn't just too low for a crisis, it's actually low when compared to healthy economic times. In the 90s and mid 2000s, for example, inflation generally sat between 2% and 3%.

"Holy Shit, that's a lot of inflation!"
-- Only Austerity Economists

It would seem like we have nothing to worry about when it comes to inflation. But in fact, we do have reason to worry when it comes to inflation; not because it's too high, but because it's too low. Low inflation can be a problem, particularly in our current economic situation. When inflation is low, people don't see a need to invest or trade. They can just sit on their money, and they don't have to spend it to make more, which would stimulate the economy. Low inflation also makes it more difficult for people to pay back their debts: if I take out a loan of $400,000, it's much easier to pay that back if, by the time I have to make payment, that loan is now worth less.

The situation is no different in Europe: as of April 2013, inflation in Europe is at a mere 1.2%. Yet some European economists from the OECD are still advocating austerity measures to avoid inflation, even though their own models don't predict inflation. Admittedly I'm no economist, but I believe that we should base our economic policy on reality, not hysteria. Policy drafted in a state of hysteria tends to do more harm than good.

#2: Austerity Literally Kills People

Even if economic policy didn't affect people at all, it should be clear at this point that austerity is not a good policy. Of course, economic policy does affect people. Politicians (and even their constituents) forget this, but unemployment rates represent real workers who don't have jobs. Median household income represents real families and the money they make. Cost of living represents what real people can afford. When we draft economic policy, we aren't just changing numbers, we're affecting people's lives.

So how does the policy of austerity affect people's lives? It ends them. When the economy does poorly, that can mean unemployment. Unemployment can mean depression, and depression can mean suicide. Greece used to have one of the lowest suicide rates in Europe, but those rates have jumped 60% since the economic crisis and the implementation of austerity policies. We've known about the link between unemployment and suicide since the 19th century: there's no excuse for these policies.

Austerity doesn't just cause deaths through depression. Cutting government spending often means denying people healthcare. In the United States, where people buy their healthcare from privately owned insurance companies, the economic recession caused 9 million Americans to lose health insurance. A lack of health insurance increases your chance of dying by 40%. In Greece, hospitals are unable to keep full stocks of hundreds of medicines, and some even lack surgical gloves.

Austerity policies have caused the deaths of thousands of people. They've caused tens of thousands of people to lose their homes, and millions to lose their livelihoods. No government or electorate could morally implement such policies given any choice. No economist could morally advocate such policies unless they were absolutely necessary. These policies aren't necessary: we can do something about the recession that doesn't involve mass unemployment, homelessness, and death.

#1: You Have to Spend Money to Make Money

There is a way to reduce the national debt in the long term, reduce unemployment, increase the GDP, and not suffer the horrors of austerity: stimulus spending. Whereas austerity economics advocates a reduction in government spending to reduce the deficit, some economists like Nobel Prize winner Paul Krugman advocate an increase in government spending to compensate for the decline in private sector spending. In a recession, the private sector isn't spending as much money employing people and giving out loans, and so the government has to step in to cover for the private sector. If people remain employed and economically healthy, then the theory goes that they'll be able to spend money both to support themselves and corporations.

The theory seems sensible enough, and in fact, works in practice. The International Monetary Fund (IMF) estimated that recent fiscal multipliers were about 1.6. This means that, for every dollar the government spends, the GDP grows by about $1.60. Despite what you might hear, the government isn't like a household. When it spends money, that money doesn't disappear, never to be seen again. That money goes to somebody who spends it on something, and a portion of that transaction is taxed, bringing money back to the government. Then maybe the next person who received the dollar spends it again. A dollar spent by the government goes around the economy, paying for itself along the way.

Stimulus spending also has a positive effect on employment. The American Recovery and Reinvestment Act (ARRA), often called the stimulus package, created an estimated hundreds of thousands, if not millions of jobs. The American Jobs Act would have created another 1.3 million to 1.9 million jobs. This would have reduced unemployment by about a percentage point.

Economist-speak for "Stimulus: it works, bitches."

Unfortunately, the American Jobs Act did not pass, because Republicans voted against it. Europe is stuck in a recession and America is experiencing sluggish growth not because the economic situation is so dire we aren't able to easily escape it, but because we've specifically adopted policies that hurt us and avoided adopting ones that help. This article isn't of much use if it's not put into action, so write your congressmen. Tell them that you want to see stimulus spending, and that their constituents will thank them for the reduction in unemployment. Until we make our opinions known, politics will continue to be dominated by lethally counterproductive austerity policies.

Tags: Accept that you are wrong, Economics 24

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