If all nations are in debt and all citizens are to be forced into lifelong austerity to pay off “their” creditors then the most important question in the world becomes:
Identifying the creditors and asking why they have precedence over the lives of people who did not create this problem.
Think clearly about this for a moment
“Austerity” means your lives and your children’s lives will be less free for decades. Since all nations are “in debt” then their must at its core a group of private creditors benefiting from this situation.
Government’s everywhere have the moral right as representatives of the people to weigh and balance private citizens rights against those of a small minority of other citizens. . It is moral and right for the governments to identify the core group of private people hiding behind all the debt shell entities who are supposedly “owed” money by these countries citizens.Those citizens likely never voted for the debts anyway.
Austerity for millions is not an acceptable situation for for the ordinary Citizen why should he recognize, take on the ill borrowed, non voted, “debts” of others . Why is it the politicians serve the interests of the “creditors” rather than the people they are purported to represent.
Millions of people should not be forced into a lifelong form of loss of freedom (which is what “Austerity” really means on an individual level for each citizen) as a result of putting false debts unto the backs of their governments.
So folks time to get off your ass and make your Government work for you
The IMF and others impose austerity measures on government to pay down their debt and to increase investor confidence in countries. The result over the longer term is supposed to be increased investor confidence, a more competitive economy for the country and hence economic growth. But is the empirical evidence or even theory supportive of this viewpoint?
First in terms of what one would expect in theory. Austerity would be expected to decrease demand but if there is decreased demand then less production is needed to fill that demand. Therefore other things being equal austerity would tend to decrease production rather than increase it.
Harvard economist Alberto Alesina shows that government debt reduction by expenditure cuts and tax increases does not always have negative effects. However an IMF study of 17 countries that implemented austerity plans in the last 30 years showed that debt reduction plans that were intended to reduce debt and lead to prosperity on the whole did not do so. Some of the positive results in the earlier study were cases where the aim of austerity was sometimes to cool down an overheated economy and this was often successful with growth continuing but at a less heated rate.
The overall findings of the IMF study of austerity policies designed to reduce debt were that consumption expenditure declined and the economy was weaker. This is what one would expect. Greece is a good empirical example of where this is happening with the country actually going into a recession. Some critics question the results but nevertheless the empirical data give at least some support to critics of austerity programs who claim that stimulus rather than austerity is the more sensible policy over the short term to help an economy grow and produce more revenues to then pay down debt. For more see this article.
Given that the IMF’s own study shows that their policies reduce economic growth why would they continue to recommend them. Because these policies do please investors. They weaken labor and lower labor costs. The point is not to grow the economy but to increase the power of capital over labor. The policies do that. Economic growth per se is not the aim but growth in profits. In the longer term after labor is crushed, pension benefits eroded, the safety net mostly gone, then as the theory has it the country will be more competitive, Perhaps investors may return. Of course many workers may have long ago migrated to areas with better prospects. Ireland apparently is already seeing renewed emigration as the boom there has given way to austerity.
Ministers are fond of telling us that we are 80 percent through the dark austerity forest. Soon, maybe within a couple of years, we will enter into the light where all will be well and normal fiscal policy can be resumed. Just one more push and austerity will be no more. Should we put a lot of faith in this? I would recommend caution – extreme caution.
The Government has published a long-term scenario – stretching out to 2019. This builds on the projections up to 2016 in the recent Stability Programme Update. The Government is at pains to state that this is an illustration:
‘Again it must be stressed that this is purely an illustrative scenario.’
They even underlined it. Yet, it is consistent with the Government’s SPU projections and it is certainly consistent with reports of a new plan being developed by the Minister for Finance.
‘The State’s anticipated exit from the bailout this year will not mean a relaxing of austerity targets as Mr Noonan hopes Government will approve a fresh regime with firm timelines similar to the EU-IMF-ECB programme.’
Minister Richard Bruton was also giving a warning
‘Mr Bruton rejected the accusation that the public had expected the end of the bailout term would signal an easing of austerity by saying no “crock of gold” was available to the Government.’
Mr Bruton suggested that this situation would continue for some time.
So it is worthwhile to look at the Government’s ‘purely illustrative scenario’ as there is a very good chance it will morph into the ‘only scenario’ (TINA will become TIOOS – There is Only One Scenario). Let’s look at primary public expenditure – that is, public expenditure excluding interest. This identifies how much money will be spent on public services, social protection and investment. I have used ‘real’ expenditure – that is, expenditure after inflation using the GDP deflator (the economy wide inflation indicator).
As seen, primary expenditure is expected to fall by nearly 9 percent over the next two years. From 2015 on, primary spending still continues to fall – by 2.6 percent in real terms up to 2019 despite the Government pencilling in GDP growth of approximately 12 percent during this same period.
But it gets worse. In many areas public spending will rise automatically due to demographic pressures. For instance, the number of pensioners will increase so that even if pension payments remain frozen, expenditure will rise. We should also allow for a rise in demand on health services with this aging demographic. And in education, we will have to spend more just to accommodate the continuing rise in our student numbers.
In other words, we will have to spend more on pensions, health and education just to stand still. When this is factored in, there will need to be additional cuts in other expenditure – in other public services, social protection programmes and investment projects.
We are heading into a period of semi-permanent austerity. Why, if by 2015 we have reached the Maastricht target and when employment and economic growth will continue to reduce deficit and debt levels? The Government gives two clues. First:
‘Ireland is on track to correct its excessive deficit by 2015. Thereafter, the public finances in Ireland will no longer be subject to the corrective arm of the Stability and Growth Pact (i.e. the Maastricht guidelines) but subject to the requirements of the preventive arm and the Treaty on Stability, Co-ordination and Governance (the ‘fiscal compact’).’
Ah, the Fiscal Treaty; remember those debates – how Government ministers insisted that compliance with the pact would not necessitate further austerity? We climb one hill only to find there are more hills to climb.
Second, the Government seems determined to drive the budget balance down to zero and then into surplus. In other words, we will be taking in more money than we are spending by 2019. Now there’s nothing wrong with a balanced budget at the appropriate time. But the Government’s scenario estimates (and to be clear, this is not a projection) that unemployment will be 11 percent. How could anyone imagine any scenario where you run a budget surplus with double-digit unemployment?
Is a balanced budget necessary to reduce debt per the fiscal treaty? No – this is an issue we will revisit in a subsequent post.
This is the future that some Government Ministers are planning. After destroying our social and economic infrastructure with irrational austerity policies, what is next? Continuing austerity amidst the ruins.
That’s the current scenario – unless we work for something different; different than what has happened in the past, and different than what is being planned for us in the future.
Everyone knows the stereotypes. Germans save for the future, while Spaniards spend everything they earn. So it’s not surprising that Germany has survived the recent crisis in decent shape, while Spain is a mess, with unemployment at roughly 27 percent. If only the Spaniards had been as thrifty as the Germans, this never would have happened, right?
Wrong. The spending patterns of Spanish households did not cause the euro crisis, but were a response to the imbalances created by excess savings in Germany. Furthermore, these excess savings were not caused by the thriftiness of German households, but by policies that forced up German savings rates to levels that Europe could not absorb without creating serious imbalances.
National savings and household savings are often assumed to be the same thing, but are actually very different. The household savings rate is the share of household income — mainly wages, investment income, and social transfers like welfare payments and pensions — that households do not spend on consumption.
The national savings rate, on the other hand, includes not just household savings, but also the savings of governments and businesses. It is defined simply as a country’s GDP minus its total consumption. While the household savings rate is determined primarily by the cultural and demographic preferences of ordinary households, the national savings rate is not. Indeed in some cases, such as China and Germany, the household share of all the goods and services a country produces, which is primarily a function of policies and economic institutions, is the main factor affecting the national savings rate.
National savings, in other words, have very little to do with household preferences and a lot to do with policy. Take China, which has by far the highest national savings rate in the world at roughly 50 percent. This is in part because Chinese households, like those of many poor countries lacking a robust social safety net, save a high proportion of their income.
But while China’s savings rate is extraordinary, Chinese household savings rates are merely on the high side, and on par with other East Asian nations. Chinese households, it turns out, are not nearly as thrifty as their exceptionally high national savings rate implies. Why, then, is China’s savings rate unprecedented? The main reason is the very low household income share of GDP. Chinese households retain a lower share of all the goods and services the country produces – around 50 percent — than households in any other country in the world.
This is a consequence of policies Beijing put into place over the past two decades that goose GDP growth by constraining growth in household income. These include low wage growth, an undervalued currency, and extremely low interest rates, all of which reduce household income while subsidizing growth. As a result, the household share of China’s total production of goods and services has been falling for 30 years, from 60-70 percent in the 1980s to 50 percent today. Consequently, as households earn a declining share of what China produces, they also consume a declining share. China’s high savings rate, in other words, has little to do with Chinese thrift, and much more to do with policies that reduced the share of Chinese household income relative to GDP. This is also true in Germany.
In the 1990s, Germany saved too little. It ran current account deficits for much of the decade, which means it imported capital to fund domestic investment. A country’s current account deficit is the difference between how much it invests and how much it saves, and Germans in the 1990s did not save enough to fund local investment.
It also called on the Government to do more to front-load its budgetary adjustment in order to lessen the uncertainty that has plagued the economy. There should be no “procrastination”, the bank’s economists said yesterday.
In its latest economic forecast, contained in the bulletin, the bank’s economists predicted that gross domestic product would grow by 0.5 per cent, lower than the 0.7 per cent forecast three months ago.
The bank also said that gross national product, which excludes the impact of multinationals on the economy, will shrink by 0.4 per cent, slightly less than the 0.3 per cent contraction predicted in the last quarterly bulletin.
The Central Bank attributed the revision to a “less favourable outlook” for external demand.
“This reflects a more protracted than expected slowdown in virtually all of Ireland’s main trading partners, which seems likely to extend into the first half of 2013,” the report said.
A similar revision was applied to forecasts for next year, with the pick-up in GDP growth expected to reach 1.7 per cent and GNP to expand by a modest 0.7 per cent. That compares with growth of 1.9 per cent and 0.9 per cent respectively in the last bulletin.
The bank said the growth was dependent on some recovery in external demand and stabilisation of the domestic economy.
Although domestic demand is set to shrink further this year, the pace of decline is expected to slow and next year is expected to see a stabilisation. “Consumer demand remains weak, weighed down by declining disposable incomes and a high level of precautionary saving,” the report said.
“However, there are signs of incipient recovery in consumer sentiment which should contribute to a gradual stabilisation in consumption expenditure over the next year, although a further modest decline is projected for 2013 as a whole.”
The decline in investment is also likely to moderate “significantly” in 2012, and may grow next year. The bank said it would be next year before any employment growth starts to emerge.
Repeating a call made previously, the report on the state of the economy said that “without increasing the overall scale of fiscal correction, there is a case for getting the adjustment over more quickly”. “This would shorten the already lengthy period of uncertainty which has been bad in itself and has doubtless slowed investment and other spending plans,” it concluded.
At a briefing yesterday the bank’s economists would not be drawn on how much of the adjustment scheduled for subsequent years should be brought forward to Budget 2013.
The bank also repeated its earlier warnings that the economy had not regained the competitiveness lost during the bubble era. It said pay remained high, adding to costs and prices in the economy, “and no doubt discouraging expansion and investment projects by exporting firms”.
“While the difficulties of addressing some of these issues are acknowledged, a lowering of the cost base, both public and private, would make a significant contribution to improving competitiveness and productivity in a fundamental way,” the report stated.
Siptu reacted angrily to the bank’s call for a further cut in labour costs. “The problem with our economy is not that wages or spending is too high, said union president Jack O’Connor. “It is that consumer demand continues to fall through the floorboards precisely as a result of the pursuit of this nonsensical approach which reflects an ongoing attempt to resolve the problems created by those at the top of society through crucifying people on middle and low incomes.”