The folly of Austerity

Austerity: a failure whenever it is tried

Why did global economies – of countries and regions (like Ontario) – that borrowed and invested debt capital do far, far better than countries and regions that retrenched and tried to cut expenses to get through the global recession recovery?

That ‘cut’ strategy is called austerity: the deliberate deflation and reduction of domestic wages and prices through cuts to public spending to reduce or minimize a country’s, or a region’s, debt or deficits.

As the world emerged from the shadows of the global economic near-collapse of 2008-10, the results of austerity strategies are clear to see in countries and regions that tried it. Every country and region that embraced an austerity strategy had significantly more debt than it did when it started, and most saw their Gross Domestic Product go down as they pursued an austerity strategy.

Those that did not, like Ontario and the Scandinavian countries, saw their GDP go up, and their net-debt-to-GDP ratios go down, like Ontario. This is hardly a surprise. The International Monetary Fund warned in 2012 that simultaneous cuts to public sector spending, across closely-linked economies, and during a recession when interest rates were declining, would impede growth.

Brown University (USA) professor of international political economy Mark Blyth wrote in 2013, “Austerity is a seductive idea because of the simplicity of its core claim: that you can’t cure debt with more debt.” Prof Blyth punches three key holes in the austerity ethos:

  1. The effects of austerity are felt far more at the bottom of the income scale than at the top. Cuts in public spending mean that those who can pay more won’t, while those who cannot pay are asked to pay more. The people who consume the public services that austerity measures cut are at the bottom and the middle of the income scale. Austerity doesn’t work – anywhere;
  2. In global terms, everybody cannot all cut at the same time. If, as was the case during the recession, everybody tried to cut at the same time, while businesses were also not spending, there would be little left for those in the middle and at the bottom to earn or save. The only outcome would be contraction of the overall economy. This was the reality in Europe and many U.S. states;
  3. The notion that slashing spending boosts investor confidence is simply false. To assume that financially-unsophisticated consumers and small businesses will stimulate the economy by spending when they are terrified of losing their jobs or their companies is foolish.

During a recession, governments need to keep spending while the private sector pays down its own debts. The time for governments to balance their budgets, look at raising taxes, and minimize new debt is when the economy is strong.

To see a 2013 interview with Prof. Mark Blyth on The Agenda, on TV Ontario, click or touch here. Austerity is a strategy that has failed every time, and every place it has been tried.