Understanding 'Austerity'

A couple of years ago, the terms "too big to fail" and "bailout" were the trendy buzzwords. Currently, the "in" word seems to be "austerity." On both sides of the Atlantic, public officials and media pundits are debating the need for fiscal austerity programs -- i.e., governments shrinking deficits by increasing tax revenues and/or reducing expenditures.

Favoring "austerity" are those worried that today's swollen budget deficits and national debts, if not corrected, will trigger an economic catastrophe through a sovereign debt crisis (i.e., inability of governments to find buyers for their bonds). Opposing it are those who profess concern about imposing economic hardship on innocent victims and those who believe that the right economic policy is to increase government spending even more than it already has been.   

"Austerity" connotes hardship, deprivation, a harsh cutback in one's lifestyle. That is accurate, and yet somewhat misleading. Another way of looking at it is to say, "It's time we begin living within our means and not spending on things that we really can't afford."   

Traditionally, so-called "austerity programs" have been attached to IMF (International Monetary Fund) bailouts of heavily indebted, virtually bankrupt third-world governments.  For governments to obtain a loan, the IMF has required them to get their fiscal affairs in order and reduce their budget deficits.

The record of these IMF austerity programs is problematic:

First, it doesn't take a gaggle of IMF economists to figure out that when you run out of money, you should spend less. By demanding spending cuts, the IMF provides a scapegoat for the recipient government. Foreign leaders blame the IMF for the ensuing unpopular cuts in government subsidies, salaries, and handouts, even though those cuts have been necessitated by the government's own unsustainable overspending. Thus, the perception grows that the IMF compels third-world governments to squeeze their struggling citizens to make payments to rich first-world bankers. No wonder they hate the IMF (and by extension the USA, since we are both the home of and the largest player in the IMF).

Second, the IMF routinely demands tax hikes. That is not only politically unpopular, but economically counterproductive. You don't want to kick an economy while it's down by increasing the tax burden. Such wrongheaded IMF recommendations are another way by which our tax dollars purchase the hatred and resentment of millions of people.

Third, by standing ready to lend billions to profligate governments, the IMF has increased moral hazard. Foreign leaders know that they can spend beyond their means and then receive billions of dollars. Such loans prop up profligate governments, often delaying needed reforms; thus, the IMF helps to subsidize and prolong poor governance.

What is different about today's looming austerity programs is that the cast of countries flirting with national bankruptcy has changed. For decades, Americans and Europeans looked down on third-world countries that have had IMF austerity programs imposed on them. "Those poor, backward people just don't know how to govern themselves prudently"; "There go those corrupt foreign leaders, bankrupting their governments by buying votes to entrench themselves in power" -- such were our condescensions.

How times have changed. Today, some of the wealthiest countries in the world are the ones facing austerity programs. We have heard about the dangerous indebtedness of the PIIGS (Portugal, Ireland, Italy, Greece, Spain). This has deflected our attention from the salient reality that the USA has comparable degrees of debt and deficits. We, too, are on the brink.

We should be ashamed and alarmed that we are even talking about "austerity programs" for the United States of America. The very fact that we are doing so means that we have lapsed into the same quagmire of fiscal incompetence and over-indebtedness as have so many third-world IMF client-states. Fiscally, the United States has degenerated into a banana republic, with a corrupt political class using tax dollars and borrowed funds to buy political support for their own career advancement. 

We have been living beyond our means for too long. Uncle Sam has been behaving like someone earning $40,000 who, with the help of borrowing, has been spending $60,000 per year. It can't last. In fact, such a person can't repair his balance sheet by reducing consumption to his actual income of $40,000; he has to consume less than $40,000 because he has to service his debt obligations. So it is with Uncle Sam.

In recent years, our government has gone on a spending binge. Now we are hung over. Yet Keynesian economists like Paul Krugman tell us that we haven't binged enough. We've been belting down doubles, but Krugman says that the cure for our economic hangover is to go back to the bar and starting chugging triples. No thank you.

Other pundits on the left are calling for tax increases instead of spending cuts. It's obvious that the primary concern of these lefties isn't economic recovery, for even Keynes taught that you don't increase taxes during an economic slump. These commentators oppose austerity because their primary goal is the redistribution of wealth. 

They are concerned about the alleged unfairness of spending cuts. This raises the question of whether the various existing government payments to specific recipients were fair in the first place. There isn't space to debate this question now, but the overriding problem is this: If we don't cut federal spending significantly, we will end up suffering a sovereign debt crisis and economic crack-up that will cause even more economic pain for even more people. What could possibly be fair about that?

It is clear what we must do: Government spending must be slashed. Taxes should not be raised while we are in this weakened economic condition. 

What some call "austerity" is simply a return to fiscal sanity and economic reality.  We cannot indefinitely spend more than we produce. The adjustments will be painful, but the longer we wait to bite the bullet, the more painful those necessary adjustments will be.

One final point: The blame for the pain caused by "austerity" belongs not to those who make the politically difficult decisions to cut spending, but to those in the past who made politically facile decisions to spend beyond our means. They are the ones who got us into this mess. 

Mark W. Hendrickson, Ph.D. teaches at Grove City College.
A couple of years ago, the terms "too big to fail" and "bailout" were the trendy buzzwords. Currently, the "in" word seems to be "austerity." On both sides of the Atlantic, public officials and media pundits are debating the need for fiscal austerity programs -- i.e., governments shrinking deficits by increasing tax revenues and/or reducing expenditures.

Favoring "austerity" are those worried that today's swollen budget deficits and national debts, if not corrected, will trigger an economic catastrophe through a sovereign debt crisis (i.e., inability of governments to find buyers for their bonds). Opposing it are those who profess concern about imposing economic hardship on innocent victims and those who believe that the right economic policy is to increase government spending even more than it already has been.   

"Austerity" connotes hardship, deprivation, a harsh cutback in one's lifestyle. That is accurate, and yet somewhat misleading. Another way of looking at it is to say, "It's time we begin living within our means and not spending on things that we really can't afford."   

Traditionally, so-called "austerity programs" have been attached to IMF (International Monetary Fund) bailouts of heavily indebted, virtually bankrupt third-world governments.  For governments to obtain a loan, the IMF has required them to get their fiscal affairs in order and reduce their budget deficits.

The record of these IMF austerity programs is problematic:

First, it doesn't take a gaggle of IMF economists to figure out that when you run out of money, you should spend less. By demanding spending cuts, the IMF provides a scapegoat for the recipient government. Foreign leaders blame the IMF for the ensuing unpopular cuts in government subsidies, salaries, and handouts, even though those cuts have been necessitated by the government's own unsustainable overspending. Thus, the perception grows that the IMF compels third-world governments to squeeze their struggling citizens to make payments to rich first-world bankers. No wonder they hate the IMF (and by extension the USA, since we are both the home of and the largest player in the IMF).

Second, the IMF routinely demands tax hikes. That is not only politically unpopular, but economically counterproductive. You don't want to kick an economy while it's down by increasing the tax burden. Such wrongheaded IMF recommendations are another way by which our tax dollars purchase the hatred and resentment of millions of people.

Third, by standing ready to lend billions to profligate governments, the IMF has increased moral hazard. Foreign leaders know that they can spend beyond their means and then receive billions of dollars. Such loans prop up profligate governments, often delaying needed reforms; thus, the IMF helps to subsidize and prolong poor governance.

What is different about today's looming austerity programs is that the cast of countries flirting with national bankruptcy has changed. For decades, Americans and Europeans looked down on third-world countries that have had IMF austerity programs imposed on them. "Those poor, backward people just don't know how to govern themselves prudently"; "There go those corrupt foreign leaders, bankrupting their governments by buying votes to entrench themselves in power" -- such were our condescensions.

How times have changed. Today, some of the wealthiest countries in the world are the ones facing austerity programs. We have heard about the dangerous indebtedness of the PIIGS (Portugal, Ireland, Italy, Greece, Spain). This has deflected our attention from the salient reality that the USA has comparable degrees of debt and deficits. We, too, are on the brink.

We should be ashamed and alarmed that we are even talking about "austerity programs" for the United States of America. The very fact that we are doing so means that we have lapsed into the same quagmire of fiscal incompetence and over-indebtedness as have so many third-world IMF client-states. Fiscally, the United States has degenerated into a banana republic, with a corrupt political class using tax dollars and borrowed funds to buy political support for their own career advancement. 

We have been living beyond our means for too long. Uncle Sam has been behaving like someone earning $40,000 who, with the help of borrowing, has been spending $60,000 per year. It can't last. In fact, such a person can't repair his balance sheet by reducing consumption to his actual income of $40,000; he has to consume less than $40,000 because he has to service his debt obligations. So it is with Uncle Sam.

In recent years, our government has gone on a spending binge. Now we are hung over. Yet Keynesian economists like Paul Krugman tell us that we haven't binged enough. We've been belting down doubles, but Krugman says that the cure for our economic hangover is to go back to the bar and starting chugging triples. No thank you.

Other pundits on the left are calling for tax increases instead of spending cuts. It's obvious that the primary concern of these lefties isn't economic recovery, for even Keynes taught that you don't increase taxes during an economic slump. These commentators oppose austerity because their primary goal is the redistribution of wealth. 

They are concerned about the alleged unfairness of spending cuts. This raises the question of whether the various existing government payments to specific recipients were fair in the first place. There isn't space to debate this question now, but the overriding problem is this: If we don't cut federal spending significantly, we will end up suffering a sovereign debt crisis and economic crack-up that will cause even more economic pain for even more people. What could possibly be fair about that?

It is clear what we must do: Government spending must be slashed. Taxes should not be raised while we are in this weakened economic condition. 

What some call "austerity" is simply a return to fiscal sanity and economic reality.  We cannot indefinitely spend more than we produce. The adjustments will be painful, but the longer we wait to bite the bullet, the more painful those necessary adjustments will be.

One final point: The blame for the pain caused by "austerity" belongs not to those who make the politically difficult decisions to cut spending, but to those in the past who made politically facile decisions to spend beyond our means. They are the ones who got us into this mess. 

Mark W. Hendrickson, Ph.D. teaches at Grove City College.

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