The Smart Money: How's austerity working out?

Posted Wednesday, May 29, 2013 in Analysis

The Smart Money: How's austerity working out?

by Gina Hamilton

A funny thing happened this week.  Japan announced that since it reversed its decade-long austerity policy in January, switching to a stimulus policy, it has experienced growth.  Not anemic growth, either; it is experiencing a healthy growth of 3.5 percent.  For its part, Prime Minister Abe's administration credits a three-pronged economic strategy, dubbed Abenomics: "unprecedented monetary stimulus, a big boost to government spending, and structural reforms designed to make Japanese industry and institutions more competitive."


In Europe, the eurozone - read, Germany - which is practicing an enforced and highly unpopular austerity, is heading back into recession.  And not just profligate-spending nations like Greece, nor exemplary nations with rotten timing and bad luck, like Spain.  The eurozone as a whole has had a full year and a half of economic contraction, and tens of millions are unemployed across the continent.

In economic terms, this is "bad news".

Which brings up two important questions - why isn't Europe paying attention to what is happening in Japan and following suit, and why aren't American leaders jettisoning any plans for austerity and trying to boost the fragile economy in the U.S.?

The short answer is, austerity hawks in Europe, and the right-wing leadership in the U.S. are vested in believing their own hype, that "debt" is the crisis, not unemployment, not economic contraction, not government infrastructure failures. 

It doesn't seem to matter that economists can point to periods in U.S. history when debt was historically much higher than it is today, and the economy boasted full employment with good-paying jobs, high housing starts, high participation in higher education, and American industry and export was unparelleled. 

It doesn't seem to matter that every time austerity has been tried as an economic model, it leads to recession or depression, a high "misery index" for the people, and depressed job creation.

None of what constitutes reality matters, because it doesn't fit the new conservative mantra that debt is the most serious problem we as a nation face.  Or in the case of the eurozone, that it is the most serious problem the group of nations faces. 

That's because conservatives believe firmly in the top-down model.  That is, when really wealthy people have more money in their pockets, they're going to do something with it that benefits the rest of us.  They open factories.  They open chains of discount stores.  Their personal spending stimulates the economy.

But the problem with that fantasy is this.  When people can earn more in the stock market or in foreign tax shelters (and pay a lot less in tax) than they can as business owners or corporate CEOs, there is no incentive for them to invest in the economy at large.  The very wealthy live on the margins; the sum of money they receive as dividends, carried interest, or return on investment.  They don't work because their money works for them, and they pay 20 percent in tax instead of the 39 percent they'd be paying if they got those sums from honest labor.

The way the real economy works has no resemblance to the rarified world of tax shelters and carried interest lifestyles.  This is how it really works:

People work for a living.  The poorer the person, the more likely that he or she will spend every dime he or she earns, however, even most middle class people spend virtually everything they bring in, with perhaps a small savings fund for college or retirement.

Because they're spending so much, local businesses collect a lot of this money and use it to hire more people, or purchase more goods, which has the effect of hiring someone somewhere.  These new hires start spending their cash, causing a greater need for employees, and the cycle continues as long as everyone's income rises and there's money to be made.

The economy chugs along in a healthy way.  With all these new people paying money to the government for taxes, there is more money to deal with infrastructure, relief for the poor and needy, higher education, and so forth.  These new government spending programs also create jobs and the stimulus continues. 

From time to time, especially when businesses are feeling very uncertain, it's important for the government to jump-start the process, even when the immediate result is greater debt.  Because, eventually, with more people working, there will soon be money in the coffers to pay for debt reduction.  That is, if someone doesn't decide to cut taxes before any of this necessary and valuable work can be completed.

Which is what Japan did in January.  And the result is obvious to anyone who is willing to open his eyes and take his fingers out of his ears. 

Will conservatives in the U.S. and the eurozone be willing to look at the Japanese recovery? That remains to be seen.

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