Short Thought on Austerity

My view on austerity is pretty simple:

If a business is flagging, the owners have to generate income.

A company cannot create income by reducing expenses. They may widen their profit margin temporarily by lowering outgoings. But ultimately, without sales and receipts the company will die.

So the idea that to get a country back on its feet by cutting will only lead to a medium term perishing.

Ironically, it is often business leaders and financial experts who are calling for austerity. They use the argument that the state is too large. And they see the state as the thing that needs to die a little. (I feel a song coming on.)

But there is no question that cutting expenditure will not get a country back on its feet.

The question is whether austerity is a bit of ideological opportunism by those who want to shrink the state or a genuine emergency measure to get us out of financial danger.

Well, the Eurozone is pretty good proof that as a way to get countries back on their feet austerity doesn’t work.

The UK appears to recovering in the GDP stakes. (But be aware that the UK’s recovery has been very late to get going. Just have a look at this long forgotten graph from 2012. (Courtesy of DeLong.)

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There are also questions for the UK about why tax receipts are lower despite lower unemployment, why GDP per head gives us a different picture and what the real effect of QE has been.

The US however has had a stronger and more sustained recovery. (Also with QE) But guess what? There was a fiscal stimulus.

I’m not going to rehash more nuanced and better verified points made by more qualified people like Martin Wolf, Krugman and Wren-Lewis.

I just wanted to add this simple metaphor to the overflowing pot of opinion that austerity isn’t the solution.

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