Google Reader Shared Items 2011-08-26

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  • Why Austerity Hurts: The Government’s Budget is Not Like Yours

    This post is from new staff writer Sarah Gilbert. GRS readers liked Gilbert’s recent post on economics and current events, so today she’s offering more of the same.

    Unlike “entitlements,” the word “austerity” has come to mean something akin to “godliness” in modern political circles. And along with austerity goes the concept of running the government’s balance sheet like a personal budget. Everyone, from President Obama to his bitterest rivals, have been known to stick a pointer finger in the air and demand, “I wouldn’t run my family’s finances that way, and neither should Washington!”

    When I say I don’t agree, it isn’t with everyone. It’s just with the political soundbite and the conventional wisdom; austerity, for a government facing a growing deficit and struggling economy, isn’t at all desirable. And no, the government should not run its budget in any way like the budget of a home — at least, not in the way politicians and pundits are suggesting. Let me explain.

    What is austerity?
    Let’s begin with “austerity,” a word which seems very close in dictionary definition to “frugality,” and what it has come to mean in global finance.

    As James Surowiecki wrote in the New Yorker‘s “Financial Page” earlier this month, Republicans in Washington are pushing for austerity that will look like cuts in “public spending — on infrastructure, basic research, and defense,” and for a wholesale halt to all “stimulus” type spending; anything that the government can do to actually create jobs (think the Civilian Conservation Corps after World War II) and, as Surowiecki posits, “it’s possible that Republicans will block the extension of unemployment-insurance benefits and of the current payroll-tax cut.”

    In other words, for most Republicans — and many Democrats as well — “austerity” means something like this: reducing spending, especially on support for groups benefiting from so-called entitlements — the low-income, the older Americans, the mentally ill — yet continuing to support businesses through tax breaks and incentives.

    Another way of looking at austerity through the eyes of modern American politics is that it is meant paradoxically to decrease spending on Americans while expecting that Americans will increase spending (through jobs, is the hope of those who use the term “job creators” as shorthand for “upper class and businesses,” supplied by the private sector) and, eventually, grow the economy by the very strength of their frugal will, and eventually, put more money back in the public coffers. In Europe, this pro-austerity point of view is more about maintaining faith in a country’s financial health, and therefore keeping bond rates low; in the U.S., that’s either working or not a concern, depending on how you interpret the market data.

    Looking at the past
    Historical data on government-mandated austerity is inauspicious at best. In an illuminating and prescient series of reports by NPR’s Planet Money team, two similar countries, Jamaica and Barbados, were analyzed as they both suffered financial crises. Both went to the IMF for foreign currency loans in the early 1990s, and both were told they were going to have to take austerity measures to make sure this situation didn’t happen again.

    The IMF has two suggestions:

    • devalue currency, or
    • cut government services

    Most countries simply cut government services, as the U.S. is planning to do do. When the people of the country have less money in their pockets, the idea goes, they can’t buy so much — so that foreign money comes into the country via tourism and trade, but the people aren’t spending it on foreign goods (because they’re too poor), re-establishing a balance.

    In Jamaica, the government sucked it up and cut services. Classrooms got bigger; infrastructure support was cut; public service jobs were eliminated. But in Barbados, the unions, the government, and businesses got together and negotiated a deal: keep all government services in place, keep classrooms small and public health services running, but workers would get an across-the-board 8% pay cut. To make up for that, businesses agreed not to raise prices, but accept smaller margins on goods in inflationary situations.

    Two decades later, things have gone from bad to worse in Jamaica, while Barbados’ economy is strong. As the Planet Money commentators reported, today:

    Median income in Barbados is twice what it is in Jamaica. Literacy rate in Barbados, over 95% … in Jamaica, it’s estimated that a fifth of the population is functionally illiterate. And Jamaica has one of the highest murder rates in the world, while Barbados is near the bottom.

    Given our country’s size, and the near-constant change in the tone and party of leadership, it’s unlikely that we’d end up like Jamaica — not, at least, in many respects. But economists agree that the very worst thing to do in a period of joblessness is to reduce spending. An economy will not improve (at least not quickly) if you take away income from the people most likely to spend it right away.

    Running the government like a family
    How can you improve revenue in a tight economy with very high unemployment? By putting people to work. And historically in economies like the U.S., that has best been accomplished by giving them government jobs.

    My own grandfather was one of the three million men employed by the Civilian Conservation Corps, a model many pundits believe should be duplicated today. That would put money in people’s pockets, stimulating the economy, increasing the prospects for businesses so they could hire more people, thereby increasing tax revenue and decreasing the need for services — while the deficit would at first increase, it would quickly decrease until our budget was more manageable.

    That’s not what is happening. Instead, we are — as politicians say — running our government like a family. The problem is that government should not be run like a family, as its mission is very different than that of a family. Let me make an analogy that may seem Swiftian but I believe is, in fact, simply a reflection of our modern political will.

    As government’s debt increases, Washington has moved to take away services from the weakest members of society — those who have been unemployed for many months, older Americans who are dependent on Medicare and Medicaid, families struggling below the poverty line, families with mentally ill children or adults.

    If we were to compare this to our own families, it would be something like this: Dad lost his job and Mom’s hours were cut. We have to pay our rent and our utilities and buy food and pay the credit card bill. But we have to live within our means! Let’s stop paying to feed and clothe this four-year-old with severe ADHD (he’s so hard to deal with and makes Mom miss work all the time). And Dad can go too (he should just look harder for a job — he needs more of an incentive to get back to work!).

    So, maybe a government should be like a family, but in this way: Just as we don’t pull services (food and a key to the front door) out from under members of our immediate family when they’re not producing, a government will end up with bigger problems if it does the same.

    A higher calling
    But a government’s potential problems are different than a family’s. A government does not have a finite time frame, and will not stand to inherit money when Aunt Sue dies. A government must be concerned with the impacts of its fiscal decisions on both a huge variety of stakeholders — citizens, corporate “people,” public organizations, global markets, third world countries, trading partners — as well as the long term realities of governmental spending.

    For example:

    • Invest in nutrition programs for two-year-olds today, and perhaps you will save money in 10 years (less special education requirements) and 20 years (better employment and less crime) and 60 (healthy eating habits means older citizens require less medical help).
    • Take money away from programs meant to encourage community support and sex education for teens, and perhaps you will be spending more in five years (health care for pregnant women and infants) and in 20 years (when their children reach adulthood; statistics show children born to teen mothers are more likely to unemployed and to be teen parents themselves).

    When a family is low on income, it makes sense for it to cut spending (but not at the expense of its weakest members). When a government is low on income? That’s when it should be spending the most, to support those weak members of the society and to invest its citizens with wealth to spread back to the government.

    The best way to “create wealth” in an economy is to make sure all members of the economy feel safe enough to take risks, from buying homes to spending for education to starting new businesses. This can’t be done by pulling the safety net away.

    The government simply has a higher order of responsibility than a nuclear family, not just to pay its bills but to maintain an ordered and fair economy. With unusually high unemployment, the new norm in many families is disorder, distress and chaos. Washington has a choice: make its citizens feel safe with jobs, social services, health care, and other spending, or face growing resentment and panic among Americans.

    Note: Historically, GRS doesn’t do politics. Gilbert feels strongly about this issue, and is willing to take the heat. As always, it’s fine to disagree with her and your fellow readers, but please do so respectfully. Keep the conversation civil and everything will be cool.

    Addendum: Thanks for a civil, stimulating conversation so far, everyone. And no worries: This article is an exception to the rule, not an indication of wholesale changes to the site. Finally, here’s a recent post from my friend Adam Baker about what we can learn from the debt ceiling debacle. It takes the opposite view from Gilbert’s article.

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