Tuesday, May 8, 2012

"Austerity" and Growth

Lately there has been some talk among the chattering classes that the so-called "austerity" budgets (in reality, budgets that are just less spendthrift than before, as they generally still run substantial deficits) are a Bad Thing because they reduce economic growth. The more sophisticated version of this argument continues: reducing growth also triggers more spending in the form of automatic stabilizers (unemployment benefits, for example), and thus both impoverishes a nation and fails to solve the debt problem.

In some trivial sense, that argument is correct. If Uncle Sam borrows money and spends it - whether on social welfare programs, government employment, or "loans" to soon-to-be-bankrupt solar energy companies, current GDP is higher than otherwise. If Uncle goes on a spending diet, the beneficiaries of this largesse have less to spend, current GDP takes a hit.

In a broader sense, however, the argument is absurd. Borrowing a dollar to give to someone incurs an obligation to pay that dollar back - plus interest. If people were infinitely-lived, that extra dollar of consumption today would mean somewhat more than an extra dollar of less consumption at some point in the future. Because people are not infinitely-lived, and because future generations don't get to vote on current spending, the electorate and the governments that represent them can borrow money today for a higher standard of living, leaving someone else to pay it back. There's no free lunch here. Only by forgetting that the money has to be repaid can people delude themselves into thinking otherwise.

European governments - such as the one in Britain - are coming under pressure to increase spending again. How selfish.


Edward Pearse said...

At the risk of getting into an ideological debate, it's true that borrowing a dollar incurs an obligation to pay it back (unless you're a bank who's lost millions on the stock market, or an auto manufacturer, or a corporate financial broker, or...) the problem in many cases is that countries are being asked to pay back money that was "borrowed" by the private sector.

Iceland is a perfect example. Many of it's financial institutions lost money in the GFC. Rather than giving these private corporations taxpayer funds to bail them out, they let their banks fail and their "dollar" drop. Three years on they're doing remarkably well, while the US and many European countries wither under austerity.

If I borrow a dollar I should pay it back. What has happened is that someone else borrowed a dollar, lost it, and now wants me to pay it back for them.

In 2009 the Australian government sent out a $900 "stimulus payment" to everyone who had paid tax in the previous year. Things are a little tight here, but our dollar is higher than the US, our unemployment is around 5% and our economy has been able to avoid the bulk of the nastiness that's hit the rest of the world.

But then we're a bunch of hippie socialist pinkos, because we have public healthcare.

Rhianon Jameson said...

I don't mind a good ideological debate, Mr. Pearse. :)

Actually, at the risk of sounding reasonable, I agree with your view that the financial crisis involved some people losing substantial sums while others were bailed out - where "bailed out" means "bailed out with your money." One could debate the merits of specific bailouts - for example, we were told that the US bank bailouts were necessary to keep the entire system from collapsing, and in hindsight didn't cost any taxpayer money (waving hands a bit) - but it's certainly true that some institutions were given a pass, and that sticks in everyone's craw.

Having said that, the financial problem with both the US and the European problem children is not the cost of the bailout, but the structural deficits that, by definition, drag on year after year. We can have different views about how that gap should be closed - you might suggest taxing the recipients of bailout largesse, for example (she said cheekily) - but my point is that it's no solution at all to punt the problem down the road.

Your "stimulus payment" is, in my humble view, just as dumb an idea as the "partial Social Security tax holiday" the US has had the past two years - not enough to stimulate anything meaningful, and large enough in the aggregate to be real money. The difference, of course, is that Australia could afford it much more than the US. As you point out, Australia is in much better shape than the US or much of Europe - a result of both conservative and liberal governments being more frugal with a dollar in your part of the world. (I will guess, but don't know, that Australia largely escaped the subprime loan debacle, which surely helped during and after the financial crisis.)

As far as public health care goes, while you know my position on the subject, I'm not going to be critical of any country that chooses that route. And I would never call you all hippie socialist pinkos - my limited understanding of Australian society is that independence, individualism, and a pragmatic conservatism are all part of the national ethos. If I'm wrong, don't disillusion me!

Rhianon Jameson said...
This comment has been removed by the author.
Rhianon Jameson said...

(The deleted comment was a duplicate of the one above, caused by an itchy trigger finger, not me calling anyone a pinko. :))