Something is definitely afoot. A cursory glance at current political discourse (as well as the relevant actors) will show that the political discussion on how to resolve our current economic crisis is being dominated by right wing thought to the extent that alternatives are not even being considered. It’s not a case of, is hard line austerity the answer but exactly how hard line and exactly how fast. This is wholly unfortunate and bewildering-its a sobering thought to realise the sheer degree to which the western world is gripped by this bout of fiscal conservatism mania. In all honesty, there should be no one who does not recognise that most if not all western governments have lived beyond their means (like many of their citizens) and that a degree of fiscal consolidation is necessary. However, the scale of what is demanded is unrealistic and damaging.
From the insanity of the Tea Party in America who have held the world hostage to their ridiculous demands to Germany and the IMF’s brutal imposition of austerity on Greece, Portugal and Ireland, quite frankly, we’re in trouble. The pain inflicted by this austerity drive on the ordinary tax payer would be worth it if it at least was the correct route to take towards recovery. As the UK’s growth figures have shown, the slash and burn approach leads to almost no growth at all, which will damage the chance of recovery in the long term-and that is if it doesn’t push the UK back into recession. The approach does not seem to be working anywhere else either. Lets start with a simple analogy. Rightists love to use the family budget as an analogy for the state budget, saying how we must all tighten our belts and reduce spending when times are lean. Of course, that is true, even though the economy of a state is much too complex to simplify in such a way. Even if you accept the simplification however consider this. If you are in personal debt that means that your income (ie salary) is lower than your outgoings. The conservative way is to drastically slash your outgoings. This works in principle and must form a part of any sound economic plan. However, while in your personal finances you can easily decide what you can do without, it is not the same to make that decision for an entire country-for example deciding that the country can do without a chunk of its policemen (the folly of that was very recently exposed) but there is no need to ask banks and the like to contribute proportionally to solving the mess they themselves created. To carry on the analogy, if you need to boost your budget, sure you can cut spending in the short term but the only way to improve your situation permanently is to boost your income. In a one person situation that means getting a higher paid job. For a state that means increasing tax revenue.
There are two main ways to increase tax revenue-raise the tax rate and/or boost growth which leads to higher spending and income and therefore a higher real terms tax revenue from the same tax rate (or even higher if the tax rates are raised also). Fiscal conservatives, like most conservatives, fail to see the big picture. Crushing the state to lower your deficit in one quarter and appease the markets will only come back to haunt you when there is no growth, lower tax revenues and your deficit rises again. Furthermore, since austerity leads to unemployment, that increases your benefits bill and further eats away at the state’s income. It should be becoming obvious that it is impossible to balance the state budget without real growth and therefore our policymakers need to start delivering credible plans for growth.
The entire European, UK and US policy approach is centered around pleasing the markets and the ratings agencies. Three things need to be said about this. Firstly, politicians are elected to lead, not follow and so must make up their economic policy in a way that they and their experts believe will be best for the country rather than what would please the markets most-the two are connected but not identical. Secondly, kowtowing to the credit agencies and paying serious attention to their “expertise” is a dangerous game-after all these are the same people who gave several now bankrupt US banks a clean bill of health despite their disastrous financial situation. I would tremble if these same people also thought everything was ship shape in my economy. Their astounding lack of judgment could mean either stunning incompetence or potential corruption-both are not the traits of people who should be trusted to judge on the health of a state’s finances. Lastly, even though the markets often act like a pack of preschoolers (and media coverage of investors being constantly “spooked” does not help that impression) there are plenty of investors who are in no way stupid. What these people want to see is both a credible plan for controlling runaway state spending and a credible plan for growth-they (apprently more than our politicians) realise that you need both. Don’t take my word for it however-here’s the head of the IMF saying pretty much the same thing: http://www.moneymarketing.co.uk/politics/lagarde-deficit-reduction-plans-must-not-damage-growth/1036306.article
Christine Lagarde is many things, but a left winger she is not. If such a prominent fiscal consolidator is telling you to think about growth, it may be time to listen. As head of the IMF, she is right in principle to demand that Greece undertake some austerity in order to receive more money-the Greeks have taken much more than their fair share of foreign funds with no return so they are due a lot of austerity, however not on the absurd scale demanded by the bail out Troika. This is counter productive. Such harsh austerity will paralysis the country (if nothing else through civil disobedience) and eventually bankrupt it. Then there will be no return at all. Greece needs to start making money to repay money and unless the Troika get wise to this fact soon things will get worse quickly. Throwing money at them and demanding more austerity wont fix the problem and Greece will eventually have to default-a lot of economists seem to hold that opinion already or at least fear that scenario. Even Germany will run out of money eventually, besides they are badly needed elsewhere. This applies to all troubled Eurozone states-assuring the market that they are backed up with cash will do nothing, since this crisis is as much political as it is economic. It seems apparent that market forces are in a way making a run on the Euro and trying to bring down the single currency for one reason or another-therefore they will not stop unless it is patently absurd for them to continue. The only way to make it so is to return the troubled states to growth and start mending their public finances that way (with appropriate levels of austerity to speed the process along without grinding their economies to a halt).
As a last example of an alternative we have Hungary. They have undertaken a program of deficit reduction which shuns cuts in public spending . Have the markets turned on them-no. In fact their credit rating outlook has been raised lately by two of the three main rating agencies. Whether their judgement is accurate is currently irrelevant-the point is that the markets and rating agencies have not savaged a government which has not implemented austerity and is instead cutting its deficit by a series of emergency taxes on big business. While politicians are busy cowering at the mere mention of the markets or rating agencies, they should consider that what their tormentors want to see is not necessarily extreme austerity but a balanced approach which works-this involves fiscal discipline AND growth. Fingers crossed they figure this one out before they send us into the Great Depression MkII.