Austerity is the new buzz word; and not just in Europe. Since protests and civil strife have begun to plague the western world people are now beginning to question the importance of minimizing debt. At first, I thought this issue was relatively logical. The more you save meant that your economy was essentially more stable. Apparently I was wrong.
As we discussed in class, Austerity policies are designed to tighten fiscal spending in order to reduce the national debt. If you reduce the debt then you don't have to print money to pay it off. In short, Austerity policies are anti- inflationary policies. We also learned that these policies are painful to implement. Countries that are already struggling financially (Greece, Ireland, and Portugal) are having a hard time forcing austerity policies onto an already poor society. They simply cannot afford it. Elsewhere in Europe the complaints are beginning to gain international attention. The link below gives a profile of each european countries' prospective on austerity policies which I found to be enlightening. http://www.guardian.co.uk/business/2012/may/08/austerity-europe-what-does-it-mean.
"The 90 % Question" was an article that was posted yesterday (4/20) in the Economist regarding the debt to GDP ratio that we recently discussed in class. This article called into question the 90% ratio in which some economists believe is the threshold at which debt becomes bad for the economy. As we saw in class, there are some irregularities with the data used to explain the findings that 90% is the magical number to explaining debt. Rather, this article generally agrees with the fact that debt is not good for growth, but also insisted that there is no right number at which countries experience low growth. They did mention that above a ninety percent debt/GDP ratio perceptions of risk were higher but this does not doom the economy. However, sometimes in economics perceptions can account for a lot. This is a good article that proposes both sides of the Austerity debate. http://www.economist.com/news/finance-and-economics/21576362-seminal-analysis-relationship-between-debt-and-growth-comes-under.
In the Economist article, "A World of Cheap Money," the authors provide their insight on historically low interest rates in Great Britain, Japan, Switzerland, the U.S., and others in the Euro zone. The low interest rates appeared after the global recession in 2007-2008 and were thought to have disappeared after the economy recovered. Years later, the interest rates have stayed the same and prospects are not looking much better. What does it mean when interest rates are close to 0%? Well, as we all know, low interest rates should be good for entrepreneurs and the capital sector. Low interest rates mean that more loans will be demanded which means that people will be spending money. It also means that people who own real estate will have more money in their pockets which should further stimulate the economy. If this is the case then why is the economy not getting better? Richard Katz (Oriental Economist Newsletter) provided the answer when he said, "Businesses do not invest because the economy is weak; the economy stays weak because businesses do not invest."
Click on this link above and notice the slogan before the article.
"The Federal Reserve is making a better job of it than the European Central Bank"
Is this a question of austerity again? Everyone seems to strongly believe that austerity is killing the economy by discouraging spending. I tried to take an unbiassed stance on the issue but it seems to be true. I have been so critical of Keynesian economics in the past, but maybe I was wrong to do so.
An interesting contrast to what you mention here is in an article by the Business Insider that suggests that austerity is a consequences not a way to try and increase economic growth. In cases like Italy, it borrowed against the future hoping it would get more more in return in the future than what it paid for in the beginning. Unfortunately, countries run up these large debts and then a crisis hits. No longer are investors willing to provide these countries with low rates and they lose their cheap access to the bond market. Many countries are part of a currency union and others members of the union cannot allow other members to run up the debt or the whole union will collapse. Countries that have austerity forced upon them ran up large amounts of debt and now have to pay it back. Countries like Italy cannot expect the rest of the world to fund their deficits and they have to deal with austerity to keep access to the bond market.
ReplyDeleteThe main point of the author's article is that austerity is not meant to produce growth, but is supposed to reduce fiscal deficit that will reduce economic growth in the short term. He points out the many countries followed Keynesian economics, but only half of it. Keynes' second part of his prescription is to pay off debt when times are goods, but most countries just allowed it to accumulate until they reached a point where debt becomes a problem.
http://www.businessinsider.com/austerity-is-a-consequence--not-a-punishment-2013-4
Austerity policies might hurt in the short run, however in the long run it will help the economy. Some critics think that a large debt is a sign of a growing economy, you have to spend money to make money. However i do not believe this to be true. Most national debt comes form military and welfare spending. If the correct policies are in place then debt should not be an issue. Austerity policies help countries from falling into the financial crisis such as Greece, Italy, and Spain. It is very hard for countries who are already in great financial debt to put austerity policies into place, because in the short run it will hurt the people. To ease some of the short run pain the countries already in debt could slowly put austerity policies into place. Maybe every few years add one policy. This might ease the pain for the current population by letting industries adjust.
ReplyDeleteAll three of those countries have fallen into the crisis though. Even military and welfare spending help to stimulate the economy. Welfare at least puts money into people's pockets so they can spend money in our market. The level of austerity being pushed in Europe has to meet EU standards which is distorted by rich countries like Germany. saying that austerity is hard to impose is an under statement. These countries are barely able to get by and austerity keeps them in a stalled economy. Nobody wants to invest there. I think it's important to be disciplined but at this point they need help getting the machine moving again.
ReplyDeleteI find it interesting that economists and politicians so narrowly focus on just austerity to resolve a country's debt to GDP ratio. The Reinhart and Rogoff study, showing that once the ratio hits 90% growth will decline sharply, has been an underlying foundation for policies enacted to reduce a country's debt. However, shortly after their study was challenged, they pointed out that they "did not stress any single number in their analysis," but rather came up with 90% as an estimate from the calculations they did. Complex causality should be at the forefront of policy-makers minds as they are deciding what route to take in reducing a nation's debt--even if a country reduces its ratio far below that of 90%, this does not mean that all will be fixed, as there are several other factors that go in to a financial crisis. I think it'd be interesting to see what else is out there, instead of the go-to "austerity measures," especially since many countries are not showing much improvement despite adhering to tight fiscal reforms.
ReplyDeleteI have to counter with the idea that implementing austerity measures slowly will only turn what was supposed to be short lived contraction becomes long-term economic contraction. Because of this we have to think critically about if the payoffs of austerity are work the pains a country has to go through, the worst of which I believe is cutting of education funds which is essentially taking a cog out of the countries future engine, disabling it. As this guardian blog post states:http://www.guardian.co.uk/commentisfree/2013/apr/17/imf-criticism-uk-austerity-things-bad "Government spending cuts, especially cutting its own investment, only reinforce this hoarding of private capital. All schemes based on slower, shallower austerity run into the same problem.". I guess im just not a big believer in austerity in solving large scale problems, we need to invest and grow, not stagnate and contract.
ReplyDeleteAusterity measures, as we've all seen over the last few years, have been extremely painful. Although they are done in the best interest of the long term health of the respective nations' economies it would be easy to argue that austerity measures have not fulfilled their promises. The idea is to get governments to get their affairs in order, albeit at the expense of jobs. Had any of these countries been able to print their own money the outcome could have been vastly different. Yes, inflation would occur, but inflation is a curable problem as long as it occurs concurrently with reforms. The key is simply to spur investment. Neither direction is particularly desirable.
ReplyDeleteDo you think we have a harsher view about austerity because we are living in the U.S.? Our media is really critical of the austerity policies in Europe. I wonder what German, French, or British students think about them.
ReplyDeleteAusterity is not the REAL problem. The real problem is too much wasteful government spending that created a mountain of debt. If government spending and massive amounts of debt created prosperity ( for anyone else besides the politicians ) the European economy would be doing super! I think Keynesian economics has a place. Note the key words - "in the short run". Never ending government spending was not Keynes' intent - his ideas are not intended to be a permanent fixture of economic policy.
ReplyDeletePoliticians simply get addicted to the stimulus and can't take their finger off the button! The solution is a combination of reduced spending, some more money printing and a lot more savings, investment and hard work.
Think, savings, investment and better, faster, cheaper!