Austerity

It’s fashionable among economic propagandists to argue that "austerity" has failed in a few European countries.

I would point out a few things. First, if it’s already legitimate to conclude that austerity has failed, then it’s equally legitimate to conclude that High Church Economics (i.e. Keynesianism) has failed.

More substantively and less propaganda-y, I like to think of the current economic slowdown as a confrontation with truth. The truth is that every poor immigrant from Mexico can’t own his own five-bedroom house. The truth is that the country cannot afford to pay everyone’s medical bills. The truth is that high finance is built on a foundation of sand. Etc.

There is going to be a lot of pain associated with accepting these new truths. We have two choices: 1) spread out the pain over a long period of time or 2) get it over with.

I favor getting the pain over with as quickly as possible – this is not the popular answer.

Austerity is much closer to second camp. Therefore, it should not "work" in the short term, but only in the long term. I assumed this was obvious.

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One Response to Austerity

  1. Handle says:

    First of all, the whole argument that “Austerity has failed” is just wrong if the measure is supposed to be “market reaction to new budget”. In the UK, the new “Austere” budget has reduced the British risk-premium spread with Germany from 100 to 50 basis points.

    Since nothing much else has changed in the British situation since the new policy, I think that’s a valid counter-factual assessment. This means the market’s judgment is that “Austerity” for the UK means a future path of economic growth that is slightly more likely to pay them back – that’s a positive assessment.

    But the problem with even talking about “Austerity” is that it isn’t even remotely “Austere”. Talk about your Orwellian language.

    Look at the UK, for example. They cut, what, only 40 Billion pounds from their spending? Big deal. Their latest GDP estimate is 1.47 Trillion Pounds, while their new “Austere!” 2011 budget of “Total Managed Expenditures” is still 710 Billion (50% of GDP, the “Austerity” having prevented it from being 52-53%) with tax revenues expected to come in at 589 (40% of GDP, so a 10% gap for deficit instead of 12-13%).

    For comparison, this would be like the US (combined with state and local) having a budget of $7.44 Trillion instead of the actual number for 2011: $6.16. If the Brits were to spend as much as we do on government, they would have a balanced budget. And lord knows, life in the US is Austere.

    This doesn’t count the unknown liabilities from “recent financial interventions” (saving/nationalizing their banks) which are presently indeterminate but could end up being gigantic.

    This is the same problem we have after the nationalization of Fannie and Freddie. There are all-but-certain liabilities of several hundred billion dollars of losses sitting in MBS’s which are guaranteed by the Treasury but not currently counted as “debt”. These are formal financial instrument, not informal legislatively-amendable, promises, but we still aren’t counting them, and neither are the British until they absolutely have to. Talk about your fraudulent accounting.

    But nothing fundamental about the nature of the British welfare state, bureaucracy, or apparatus has been changed, and the long-term public budget picture is still only slightly less precarious than it was two years ago.

    Some minute tinkering has been done at the margin, which is the bare minimum required to restore some semblance of correspondence with reality, and in the end it only amounts to some slight reductions in a few corners of the giant Matrix of subsidies and transfers that all but defines what remains of the modern British system.

    If this is what qualified as “Austerity”, and furthermore, the non-movement of UK bond-prices in the past year or so qualifies as “evidence of the failure of austerity” then I can’t wait to hear what they call it when the real rationalization comes.

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