Top: Getting Money Right

Austerity is a Policy Choice

Stanley Dundee

2018-01-25 v. 3

Scoldy bankers raise a fuss about deficits when a sovereign runs a persistent excess of spending over taxation, demanding austerity in the form of spending cuts and asset sales. But unlike any subject, the sovereign can never be forced into bankruptcy. Deficits by the sovereign are only of concern when they spur inflation. Spending cuts by the sovereign in pursuit of elimination of the deficit are cruel and harmful and often worsen the deficit! The sovereign can always choose to spend money into existence to mobilize unused resources. Nothing requires a balanced budget by the sovereign. Austerity is a policy choice.

Arguments for austerity are based on the series of lies (as well as some others) that are under consideration throughout Getting Money Right. Here's Bill Mitchell laying out the lies of austerity (2012):

Austerity is built on a sequence of lies. Neoliberals claim that governments, like households, have to live within their means. This analogy resonates strongly with voters because they can readily understand their daily household finances. We know that we cannot run up debt forever. But government issues the currency and can consistently spend more than it earns. Whereas households have to save to increase future spending, governments can purchase whatever they like whenever there are goods and services for sale in the currency they issue. Governments can never run out of money... Neoliberals say that continuous deficits cause hyperinflation like in Zimbabwe. But increased government spending will not cause inflation if the economy is operating below full capacity. Neoliberals say that deficits drive up interest rates! Deficits have risen sharply in recent years but interest rates have remained close to zero. Japan has been running large deficits since the early 1990s and has maintained zero interest rates and low inflation ever since. The neoliberal lie forgets to mention that the central bank sets interest rates, not the market. Austerity denies history. The Great Depression taught us that without government deficit spending, capitalism is prone to delivering lengthy periods of unemployment. The neoliberal assault on the use of fiscal policy began in the 1970s, with the rise of monetarism. Since then, most nations have failed to create enough jobs relative to the preferences of their workforces. Neoliberal economists and their supporters failed to predict the crisis and their solution, austerity, is now making things worse... The major economies are suffering from deficient private spending and a massive overhang of private debt. Persistently high unemployment means that our economies are forgoing massive production and income-earning opportunities. Unemployment also causes many other social problems. As long as private spending is subdued, governments should expand budget deficits. That's the only way the advanced economies will drive growth fast enough to absorb the huge pool of unemployed.

Austerity is cruel, inflicting its worst harms on the most vulnerable members of society. Here's Henry Giroux on trickle-down cruelty: (2011)

...austerity-based cuts are used to reward corporations and billionaires with tax breaks, while simultaneously exploiting the budget crisis in order to eliminate protections provided by the welfare state. The resulting reductions in state spending have drastically cut many basic social services so as to endanger the lives of many young people and others at the margins of society structured in massive financial inequality... austerity in this instance is designed to reward the fabulously wealthy while imposing in some cases poverty, suffering and severe hardship on those marginalized by race, disability and class... This conservative assault is not just about the enactment of reactionary government policies, it is also about the proliferation of a culture of cruelty whose collateral damage is harsh and brutalizing, especially for young people, the unemployed, the elderly, the poor, and a number of other individuals and groups now bearing the burden of worst economic recession since the 1920s...

Imposing austerity as a response to deficits is not only cruel but ineffective. From VOX, via Bill Mitchell, here's Paul De Grauwe (2013):

Countries that imposed the strongest austerity measures also experienced the strongest declines in their GDP... The more intense the austerity, the larger is the subsequent increase in the debt-to-GDP ratios... those countries that applied the strongest austerity also saw their GDP (the denominator in the debt ratio) decline most forcefully. Thus, it can be concluded that the sharp austerity measures that were imposed by market and policymakers’ panic not only produced deep recessions in the countries that were exposed to the medicine, but also that up to now this medicine did not work. In fact it led to even higher debt-to-GDP ratios, and undermined the capacity of these countries to continue to service the debt.

Austerity punishes the innocent and benefits those who caused the 2008 financial crisis. Here's Ann Pettifor in The Production of Money (2017):

Contractionary austerity policies shrink public investment at the very time when the private sector is over-indebted, weak, lacks confidence in the future and has slashed investment. By cutting public investment in a period of private sector weakness, governments curtail not just public sector activities but also private sector activity, profits, wages, incomes and tax revenues. As such, austerity serves to exacerbate the indebtedness, the overhang of private debt, of western firms, households and individuals as well as that of states. Austerity effectively punishes those innocent of causing the crisis — those dependent on state welfare — while deflationary pressures increase the value of assets owned by those responsible for the crisis. (p. 65)