Wednesday, January 11, 2012

What Is Austerity Good For?

Read this article about Greece and weep:
Deeply indebted and nearly bankrupt, this Mediterranean nation was forced to adopt tough austerity measures to slash its deficit and secure an international bailout. But as Greece’s economy slides into free fall, critics are scanning the devastated landscape here and asking a probing question: Does austerity really work?

Unemployment has surged to 18.8 percent from 13.3 percent only a year ago. Overburdened public hospitals are facing acute shortages of everything from syringes to bandages because of budget cuts, with hiring freezes forcing the mothballing of operating rooms even as more unemployed are relying on the public health system. Rates of homelessness, suicide, crime and HIV cases from intravenous drug use are jumping.

Greece has been forced to cut spending and raise taxes in the middle of a severe downturn, slashing pensions as well as state salaries, jobs and services. As public confidence has evaporated, consumer spending — the biggest driver of the economy — has plunged, generating cascading losses at private firms. The result is a dizzying economic plummet and social crisis that is bringing the cradle of Western civilization to its knees.

That quote asks whether austerity really works! But of course! A country is almost demolished in a few years! Those who were living high on the hog are whipped and put on low rations if peasants, left alone if feudal lords and ladies. The value of thrift is drilled into the Greek skulls. A moral lesson is being taught. And doors open for the Shock Doctrine.

But that's probably not the politically correct answer to the question. (Note that I'm using the dated p.c. term here in the correct form.) That has to do with something called expansionary austerity, the idea that cutting government spending could result in the expansion of economic activity.

Dean Baker explains the theory of expansionary austerity and also the reasons why it's mostly a mythical beast and Paul Krugman links to another study with similar results.

More from Krugman on that linked Washington Post story about Greece:
Most of that is right — but not the bit about regaining the confidence of investors — or at any rate, that’s not what it’s about these days. For it’s quite clear that at this point investor confidence is unregainable. Greek borrowing costs aren’t coming down to affordable levels for a very long time.

So now the austerity isn’t market-driven — it’s political, the pound of flesh official lenders are demanding for maintaining the trickle of cash. And it really is in large part about punishment; we’ve now seen a fairly impressive demonstration that big budget cuts in a depressed economy hardly even reduce the deficit, because they drive the economy down and tax receipts with it.