ORIGINAL PUBLICATION DATE, JULY 14, 2015
SUBSTANTIALLY REVISED, UPDATED AND REPUBLISHED, OCTOBER 30, 2016
What is austerity? Prior to the term being hijacked by government propagandists, being austere was a moral virtue. When in financial trouble, debt, one must cut spending and pass through a period of austerity until the burden has passed. That might mean no meals out for a while, no new cars, and no new clothes. After all, during tough times individuals or families may not have the resources for luxuries, instead ensuring that only basic needs are met. Absent securing new, greater, sources of income, the only alternative is to keep on spending and the accumulation of debt, debt that cannot possibly be repaid. It is common sense, but it is rejection of this truth that forms the basis for anti-austerity support.
What is debt? Debt is a claim on future production. So, if an individual has no money and purchases a truck using $40,000 of borrowed funds, over the length of the loan, 3 – 8 years typically, $40,000 worth of after-tax production plus interest is earmarked for repayment of the debt. Now, not all debt is bad. If this individual purchased a truck for a landscaping and snow removal business, and that business will generate adequate profits to pay for the truck, the borrower and his customers, the lender and the truck dealer will all have won. If purchased for purely entertainment purposes, and absent other sources of income, whether this individual produced the income or someone else did, everybody does not win. So, accumulation of debt, accompanied by sufficient production, is completely beneficial. Those that error in propagandizing against government austerity, are unable to draw a distinction between good and bad debt. If they can do that, they are unable or unwilling to make any valid calculations or projections regards to future productivity of proposed projects or, so called, fiscal stimulus, that entails more debt.
Relatively speaking it was not that long ago, one hundred years or so, in the United States that many in government, including the federal government ran state finances the way any prudent family would run theirs. It was not until the progressive era, capped by John Maynard Keynes General Theory, that being austere was no longer a virtue. It was now postulated that, while that (austere) approach to debt works well for a single household in trouble, it does not work well for an entire economy. The idea was advanced that, spending cuts only worsen the problem. This is known as the paradox of thrift: belt-tightening causes people to lose their jobs, because other people are not buying what they produce, so their debt burden rises rather than falls. This notion is based on a foundation of fallacies and an inability to see beyond first effects.
Prior to the “new economics”, which was and continues to be a re-hash of failed experiments from past centuries, austerity on any scale would simply force prices downward, reinvigorating consumer demand. If families all over the country binged on consumer goods or businesses over-extended themselves a period of time was necessary to pay down debt, re-accumulate savings and sell-off excess inventory. Capital equipment, buildings and land may need to be earmarked for use in other industries and their prices, accordingly, in one or various parts of the country may need to adjust. The labor market would find clearing prices and once consumers were back on solid footing the economy could move forward again. Absent government intervention, this exact scenario played itself out many times over many centuries. As for government intervention, it was true then and remains true today, that the more government intervention to prevent markets from readjusting, the longer it takes for economies to recover. The Great Depression was a complete failure and pure construct of government interventionism. The very problems of today including low growth and productivity, low work force participation, poverty and inequality are all caused by the very actions government promoters forward as the solutions. But, you wouldn’t know that by perusing pop media or listening to the supposed experts.
The term austerity, today, is used almost exclusively in the context of government interventionism. A standard definition might be; measures or attempts to significantly curtail government spending in an effort to control public-sector debt, particularly when a nation is in jeopardy of defaulting on its bonds. Wikipedia states the following: “austerity is a set of economic policies implemented with the aim of reducing government budget deficits. In most macroeconomic models austerity measures generally increase unemployment as government spending falls, reducing jobs in the public and/or private sector”. Macroeconomics, in practice, is not the study of economics at all, it is a study of engineering or, at best, an incomplete study of government interventionism. Economics, now referred to as microeconomics, is a social science or phenomenon based on subjective valuation with human action, towards maximum economization of resources, at its core. To help in understanding austerity, it is important to understand its antithesis, what we have here to fore referred to as government spending or interventionism, stimulus. The opposite of austerity is stimulus.
The vital key to understanding the role of any government in the economy, the role which macroeconomists are paid directly, or heavily subsidized, by taxpayers to ignore, is that government cannot give to one citizen, without taking it from another. To believe in the virtue of government stimulus might be termed the Santa Claus fallacy. That gifts magically appear without anyone having to bear the cost of those gifts. If you believed in Santa Claus when you were eight, you are surely forgiven. If you believe in Santa Claus as an adult, you are either being paid to do so or lack a clear and complete connection to reality. For government to tax or borrow to spend today, an equal claim on production must be made respectively today or in the future. For our purposes currently, it will suffice that this is a zero-sum game, though the administrative and compliance requirements involved in transferring wealth from one citizen to another is surely counter productive and costly. With this in mind, let’s study this statement from Wikipedia referred to above; “In most macroeconomic models austerity measures generally increase unemployment as government spending falls, reducing jobs in the public and/or private sector”.
Anyone can construct any model to say or do whatever they want it to. That does not mean it forms the basis for any valid conclusions. If government spending falls, a government-created job, and perhaps secondary and tertiary employment, will be impacted, but whether the funds to employ government workers comes directly out of the pockets of citizens in the form of taxes, or is borrowed, an equal loss of employment is felt in the private sector. If you actually take this reasoning to its most extreme case, the truth becomes evident. If the federal government shut down tomorrow, and citizens all over the country were free to spend or invest the fruits of their labor, instead of paying it out in taxes, and lenders were compelled to seek out borrowers in the private sector, in their own communities, there would be an enormous flowering of prosperity across nearly the whole of the country. Those privileged beneficiaries of federal government entitlement, and those living and working in Washington, DC, surrounding counties, and in federal-government-favored industries and businesses elsewhere, would be forced to consider other business and employment opportunities. Again, this is more than a zero-sum proposition. The entire economy, if we ignore for the moment state and local government, would be focused on producing to the needs and wants of each citizen, versus the priorities of highly paid government officials and macroeconomists. To those that can satisfy the needs and the wants of citizens in the most effective way, the rewards will flow.
So, is austerity, and we continue to use this term in its government context, a bad thing? As we are learning, that depends on who you are. There are several stakeholders, some with more skin in the game than others. Who are those stakeholders?
- Bureaucrats. Unelected, life-long, wards of the taxpayers who earn their living, and an even longer retirement, coordinating payments from one group of citizens to another group of citizens, preferably themselves. Their work is, at best, completely unproductive, at worst, counter-productive, to generating true wealth for the average citizen.
- Politicians. Having spent the last century claiming that government is here to save you, there is a lot of pride and face-saving on the line, in addition to the benefits derived from unchecked power and access to nearly unlimited taxpayer funds. Using other people’s money (OPM), this group exists solely to sell favors to their clients, special interest groups and their lobbyists, and nearly always to the detriment of the citizens they are supposed to represent.
- Political “Crony” Capitalists. Their power and money is gained through nothing more or less than perfected contractual extortion, bribery or insider access to bureaucrats and politicians and usually in alignment with anyone, bureaucrats, politicians, trade and union members and vested entitlement recipients, that will cooperate with them in lining their own pockets at the expense of the average citizen.
- Trade Group and Union members. Concentrated members of special interest groups who exploit the political means and opportunities inherent in a system that separates the producers of wealth from the spenders of wealth. Specialists in bullying, intimidation, bribes, kickbacks, rigging elections and the formation of trade-group cartels for the benefit of them and to the detriment of the public.
- Entitlement recipients. Slave masters, who, through age or circumstance, are bestowed involuntary privileged access to the fruits and labor of other’s hard-earned property and resources through a system of taxation and under a veil of money. This group broadly includes the beneficiaries of legislated welfare and entitlement programs to economic and trade preference program recipients.
- Government/Sovereign Debt Holders (creditors). Voluntary enablers of state profligate spending and a vast squandering of valuable human and physical capital who are rewarded with virtually risk free income and return on speculative capital. Let me refer to groups 1 – 6 as the Privileged.
- The Unprivileged Masses. The last stakeholder. Well, not a stakeholder in the existing state of affairs at all and, by far, the biggest stakeholder in a change of the status quo. Most important to the topic at hand, the biggest stakeholder in austerity.
Thus far, we have looked at austerity within two separate contexts; that of the individual or family curbing their voluntary spending, and of voluntary or involuntary government belt-tightening. With regards to the latter, it seemed that the government debt train would continue to run forever. It was not until the global financial crises, commencing in 2008, that those in and outside government, really began asking questions about the efficacy of continuing government stimulus, debt accumulation, efforts. There is a third type of austerity that has not been considered, that has been completely ignored, and a discussion of which will serve to close out the remainder of our subject matter. To explore this third form of austerity, it would be helpful to consider the following counter to pro-austerity efforts:
There is a way out of this trap, but only if we tilt the discussion about how to lower the debt/GDP ratio away from austerity – higher taxes and lower spending – toward debt-friendly stimulus: increasing taxes even more and raising government expenditure in the same proportion. That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines.
This kind of enlightened stimulus runs into strong prejudices. For starters, people tend to think of taxes as a loathsome infringement on their freedom, as if petty bureaucrats will inevitably squander the increased revenue on useless and ineffective government employees and programs. But the additional work done does not necessarily involve only government employees, and citizens can have some voice in how the expenditure is directed.
The Opposite of Austerity, Robert Shiller, March 20, 2013 (Link)
So, understand what Professor Shiller is proposing here; by increasing taxes and government spending equally, the public will be better off. Let’s get this straight; the government will further limit the public’s control over their own property, will place even more limits on how they choose to spend their own money and will further destroy the businesses and employment opportunities created through the public’s free choice, in favor of more bureaucratic government jobs and employment. Traditional Keynesian stimulus relies on the government spending more than it takes in from current taxpayers, deficit spending, but not through tax cuts. This, and its close cousin, supply side economics, in practice (not planned or in theory) what amounted to promises of tax cuts but to maintain or increase spending, both create a deficit, and both require increased borrowing. Whether the deficit occurs, however, through increased spending or a tax cut, the goal is an illusion of benefits, with no additional cost, the Santa Claus fallacy. Otherwise, any five-year-old can figure out that if you take $20 from your left pocket and place it in your right pocket, you still have the same $20. You are no better off. The fact that a five-year-old can figure this out, and a Nobel Prize winning economist cannot, offers us no comfort moving forward.
Keynesian stimulus policy is habitually described as deficit spending, not tax-financed spending. Stimulus by tax cuts might almost seem to be built on deception, for its effect on consumption and investment expenditure seems to require individuals to forget that they will be taxed later for public spending today, when the government repays the debt with interest. If individuals were rational and well informed, they might conclude that they should not spend more, despite tax cuts, since the cuts are not real.
We do not need to rely on such tricks to stimulate the economy and reduce the ratio of debt to income…
The Opposite of Austerity, Robert Shiller, March 20, 2013 (Link)
He actually concedes that Keynesian or supply-side economics is a form of trickery, then goes on to propose balanced-government-budget stimulus. Again, taking $20 from your left pocket, and placing it in your right pocket, economic stimulation. Professor Shiller goes on to explain that businesses are not spending enough on new plants and factories, and ultimately “better” highways, and that “aggregate demand” is, according to him, not high enough. Government economist like Dr. Shiller are always quick to conclude that business owners are so greedy they would dive in front of a steamroller to retrieve a dime or shake down their grandmother for cold hard cash, but somehow government economists, bureaucrats and politicians are skilled at finding investment opportunities that millions of these greedy bastards, their words not mine, cannot locate.
Simply put, Keynesian stimulus does not necessarily entail more government debt, as popular discourse seems continually to assume. Rather, stimulus is about collective decisions to get aggregate spending back on track. Because it is a collective decision, the spending naturally involves different kinds of consumption than we would make individually – say, better highways, rather than more dinners out. But that should be okay, especially if we all have jobs.
The Opposite of Austerity, Robert Shiller, March 20, 2013 (Link)
What Professor Shiller wants us to seriously consider, is that restaurant owners and their employees should willingly give up their businesses and jobs, to willingly refuse service to their customers, and to recommend that their former customers would be better served by sending their meal money to Washington, DC, so that “better” highways might be built. If we divert resources from eating more dinners out to “better” highways, we will not have more jobs. We will have more jobs in highway construction, typically a monopolized government-controlled industry, and less in the restaurant industry. Further, to any degree that construction employment might pay more on average than an average job in the restaurant industry, the additional costs of labor will actually reduce overall employment as not all jobs lost in the restaurant industry will be absorbed in highway construction. Alternatively, if there is a one-for-one trade off of jobs from lower to higher paid employment in road construction, the additional cost of employing labor in the new jobs must be diverted from other industries. In addition to not being able to eat out, the amount of income that might have been spent on, say, buying furniture for your house or apartment, would now have to be spent on building “better” highways.
Some form of debt-friendly stimulus might ultimately appeal to voters if they could be convinced that raising taxes does not necessarily mean hardship or increased centralization of decision-making. If and when people understand that it means the same average level of take-home pay after taxes, plus the benefits of more jobs and of the products of additional government expenditure (such as new highways), they may well wonder why they ever tried stimulus any other way.
The Opposite of Austerity, Robert Shiller, March 20, 2013 (Link)
Professor Shiller not only suffers from the Santa Claus fallacy, he is completely delusional as well; “raising taxes does not necessarily mean hardship or increased centralization of decision-making.” What government economists like Dr. Shiller would have us believe, is that by centralizing the flow of funds and decision making to Washington, DC, which is what taxes do, wealth will multiply. Is it logical or rational to believe that if we send $1 to Washington, DC, we will receive $5 back, and at somehow no cost? When the American public, as a whole, sends $1 to Washington, DC, they get back, max, 80 cents. While it is true that some send in as little as $0 in and get $5 back, that is only because others are sending in $10 and getting $0 back. And, the person sending in the $10 is robbed of the opportunity to hire the person that sent in $0 and received back $5 to do productive work that might actually benefit society. On the whole, and to make the point again, sending money to Washington, DC is far worse than a zero-sum game.
This brings us to the third form of austerity. It is rarely, if ever, discussed or even pointed out but, I tell you, it has been around for some time now. If you are not part of one of the privileged groups I described above, you have certainly been subject to the most severe form of austerity, austerity for the unprivileged masses. This is not due to running up your credit card balances or because the tax-paying public is being stingy with their own hard-earned money, it is because governments have been not only taking taxes from you and spending it counter to your own wishes or interests, but they have legislated privileges to a select group of special interests that make the cost of the products and services you buy every day, much higher than they would otherwise be and these same politicians and bureaucrats have systematically limited your opportunities to earn a better living.
I would not agree with the assertion, but one can argue that taxes are necessary to one degree or another. That does not change the fact that income and other taxes imposed by all levels of government impose a harsh form of austerity on those unlucky enough to be selected as a taxpayer. Privileged tax consumers would have it no other way. Is it austerity when the working poor must fork over the first 15.3%, in the form of payroll taxes, of their wages to collectively the wealthiest generation of Americans that have ever lived? I say it is. Before you feed yourself, some wealthy 65 year old might want bionic hips and shoulders and boner medication so they can live out their dreams, without depleting their own stock portfolio, of course. But, you dare not buy steak instead of chicken and God forbid you put the 15.3% in to your own investment account, that’s breaking the law. Are wealthy seniors and their enablers not imposing austerity on the working poor?
Or, do you mean the austerity union members, both in and outside government, shower on the non-union member masses? Not unlike their fellow brethren, the government Keynesian economists, labor unions have had a choke hold on government at every level as well for decades. Not through incomprehensible economic quackery did they gain power. No, unions did it by bullying and bribing politicians and bureaucrats, naked corruption, through public-private partnerships where crony capitalists, union members and government employees made out like bandits inflating costs tenfold while the taxpayers, their children, and their children’s children will pay for it one way or another for decades or perhaps centuries. Does not inflating the costs of government and public-private projects through collusion force austerity upon non-public-private members?
Austerity, today, has nothing to do with scaling back or eliminating entitlement programs, cutting government spending and foregoing unproductive state-sponsored “investments” in the face of fiscal shortfalls and massive debts. Austerity, is better defined as the imposition of laws and regulations by the privileged, to benefit the privileged, against the will and to the detriment of the unprivileged. What is crystal clear to me, is that this austerity for the masses, for decades now, has accrued lucrative benefits to its privileged recipients and I, for one, say we need a lot less of it. While self-imposed voluntary austerity remains a virtue, involuntary government-imposed and enforced austerity on innocent people remains morally bankrupt. Lastly, far from being enlightened, further efforts to stimulate the economy, based on fallacious arguments and counter-productive measures, will only serve to further stack the deck against those same unprivileged masses and should be ended once and for all.