Recently I have been frustrated by the controversy over whether Britain’s policy of austerity has led to a double dip recession in the UK. Progressive economists like Paul Krugman assert that a policy of austerity has been an utter failure, proving that government spending is needed to lift an economy out of malaise and put it back on the track of prosperity and growth. Laissez faire economists argue that Britain’s debt has in reality increased while they have touted a course of austerity. Therefore economic stagnation in the country cannot be attributed to a policy of austerity because such a policy has not actually been carried out.
I find both sides to be misleading in this whole conversation. I hope to clear up what austerity is and the real implications it has for an economy, both in the short run and the long run. “Austerity” essentially entails a government policy aimed at cutting budget deficits through either increased tax revenue and/or reducing government debt. In even simpler terms, it is a policy in which the government aims to not spend what it does not have. If you need further help in understanding the concept, I would recommend viewing this Saturday Night Live skit that explains the simple truth that families cannot buy stuff they are unable to afford without getting into trouble financially. The same concept can be applied to the government.
The reality is that in the very recent past and present time, governments around the world have been more irresponsible in spending money that they do not have than at any point in modern history. I recommend watching the documentary I.O.U.S.A. to gain perspective on just how irresponsible our own government has been relative to its entire history.
Two Implications of Austerity
Pain in the Short Run: This is where I believe laissez faire economists have been misleading their readers. There is every reason to believe that a policy of government austerity will cause economic pain in the immediate future. Either a) government raises taxes on its citizens to acquire more money, leaving households with less wealth to spend and invest themselves and/or b) government cuts spending and decreases the benefits received by households. Therefore with a policy of government austerity, we should expect tough times economically in the immediate future or what economists call the “short run.” A good economist should not be surprised if the economy seems to stagnate in the wake of austerity. Consider the fact that the Wall Street Journal reports that half of US households currently receive government benefits. If our government would pursue a course of austerity, these benefits would decrease and those households benefitting from handouts would have less wealth.
Prosperity in the Long Run: This is where Keynesian economists such as Krugman have it wrong. They push for increasing the level of government spending, accelerating the magnitude of budget deficits and the accumulation of debt in hopes to lift the economy out of recession. However, this is a completely unsustainable way to achieve economic progress. While such a policy of active government can reap prosperity in the short run, such prosperity is artificial and cannot last for long. A policy of austerity, on the other hand, will lead to prosperity in the long run. The point at which people start dealing with economic reality is the point at which real economic growth can occur. Governments around the globe have been trying to distort economic reality through accumulating debt and manipulating the money supply. Our global economic woes are a direct result of governments attempting to circumvent the economic laws of nature. While Keynesians may argue that austerity is no solution, it is in fact a necessary and healthy step towards accepting reality and getting back on a path where individuals are given the opportunity to increase their standards of living. Any alternative will only result in economic stagnation and a decrease in living standards in the long run.
Call to the Economist
The good economist should predict there will be some economic pain as a result of austerity in the immediate future. In this regard, there is some truth in what Krugman argues. On the other hand, the economist should remain adamant that a policy of austerity is absolutely necessary for prosperity in the long run and that any benefits of government activism in the short run are illusory and only lead to more problems. Just like a household cannot continue to spend what it does not have without incurring increasing amounts of financial trouble, neither can a government. Claims to the contrary are not only facilitating the erosion of the economic well-being of many countries, but more importantly are chipping away at the virtue of responsibility among the citizenry of those countries.