Debunking Austerity

There’s been a lot of talk about austerity measures lately.  Greek angst over proposed austerity measures threatens to steer Greece (further?) off the cliff. Spain’s government faces pressure from voters angry over cuts to social programs, and France recently elected an avowed socialist bent on opposing German-led austerity programs. Should you have tuned into Real Time with Bill Maher a few weeks ago, you would have caught two of the country’s most well known economists, Paul Krugman and Arthur Laffer, debating whether austerity measures were the tool to bring the U.S out of recession [depression, if you listen to these two.]

But what really is austerity? Austerity measures really only refer to a government refusing to spend money it doesn’t have, paring back government programs intended to redistribute wealth from one sector of the economy to another. It’s simple fiscal discipline. If I’m earning $1,000, and I simply refuse to rack up $2,000 in credit card debt I can’t afford, I’m implementing austerity measures. If I were the government, though, and spent more than I took in, I’d be ‘stimulating the economy’ and creating jobs.

So why is a policy as simple as fiscal discipline given an inherently negative sounding term by its opponents? It’s called the Framing Effect. Spin a question or phrase so that it sounds negative, and you get a negative reaction to it. It’s the reason we have two ‘pro’ camps on either side of the abortion debate. Neither side wants to put a negative spin on their own platform. So instead of debating the effectiveness of government spending in order to stimulate the economy, there’s a propaganda campaign afoot to make common sense fiscal reform sound draconian by calling it ‘austerity.’

The other reason there’s so much opposition to ‘austerity’ is because it’s generally accepted that either the New Deal or WWII was responsible for ending the Great Depression. As both the New Deal and WWII involved massive amounts of federal spending, if either of those were indeed responsible for lifting us out of the depression, it would provide some legitimacy to the argument that government spending stimulates the economy. But in fact, neither did anything beyond temporarily moving capital from one sector of the economy to another. Failed New Deal policies did little to substantially and legitimately lower unemployment; federal spending during WWII created only temporary demand for industries that had a very narrow focus. It was the post-war decrease in federal spending, tax cuts, and the repeal of the protectionist Smoot-Hawley tariff that brought about lasting economic recovery.

Leaving aside the moral problems with government spending (remember, the government only has what it takes), spending yourself out of a recession just doesn’t work.

Grover Norquist is fond of one analogy. Imagine the government fills a bucket of water from one side of a lake, and pours it into the other side, announcing that it is stimulating the lake to great depths. Government ‘stimulus’ spending is just as ludicrous.