The Myths of Austerity

If you spend some time on blogs and message boards you see a lot of different reactions to the current discussion in Washington about our debt and deficits.  Inevitably, someone talks about the debt crisis in Europe and the PIIGS countries in particular.  In these discussions, I have seen a few alarming flaws in logic regarding the word austerity that is typical of the reason why we have a difficult time discussing this topic in our country.

Pundits, politicians, experts and everyday people argue whether or not we have a debt problem in this country, and if we do, what is the best way to address it.  Is it increased taxes, decreased spending, or a combination of the two?  This article is not to address those issues.  But what it is important to address are fundamental logic flaws about the concept of austerity in Europe that many people in this country have.  To do so, I will focus on Greece in particular as an example of the worst of the problem.

Greece is in an economic crisis because their debt to GDP ratio became so high that their ability to ever pay back their debt was put in question.  As a result, their bond rates increased making it more difficult for Greece to pay back debt.  In addition, the global market crash in the late 2000s affected Greece’s GDP, making it even more difficult to get their debt under control.  Because the country is part of the EU they do not have the same flexibility with their money that the U.S. does.  But, the fundamental problem for Greece was that their debt to GDP ratio simply became too high.

Now this is where austerity comes in.  Austerity was essentially forced on Greece as a condition to secure loans.  In other words, other countries said we do not want to give you more money until you demonstrate that you are going to take measures to get your debt under control.  So austerity was a result of out of control debt, not the cause of it.  I can’t count how many times recently I have heard people try to state that austerity was the cause of Greece’s problems.  Now, the other problem I see in this country is that many people are trying to equate Congressman Ryan’s recent budget proposal with austerity.  There are several logic flaws with this also.  First, if you try to look at what any U.S. budget proposal is, it is not really spending cuts, it is mainly slowing the rate of spending increases.  In other words, if I gain 3 pounds a year and one year I only gain 2 pounds, I didn’t cut any weight.  I just got heavier a little more slowly that year.  Second, the austerity measures in Greece are a combination of spending cuts, tax increases and other measures such as the privatization of some industries.  So to only equate austerity with spending cuts is not logically valid. In fact, austerity in Europe more closely resembles a balanced approach to deficit reduction, just on steroids.  There is a good link below that covers the austerity measures in more detail.

So what does all this mean?  When discussing our options for the deficit and debt, it is important to not only look to what other countries are doing but to fully understand what they are doing in context.  Austerity did not cause Greece’s debt crisis, over-spending on social programs, and a decrease in revenue due to a lowered GDP and problems with their tax code caused their debt crisis.  Their ability to handle debt differs from the U.S. because they are a member of the Eurozone and not in control of their own currency.  However, what made their debt a crisis was that they let it reach a level that made creditors doubt the country’s ability to pay it back.  Austerity was an attempt to fix the debt crisis and was required as a condition to get access to more money.  Finally, austerity for Greece involves large cuts in spending and large increases in taxes, large compared to what the U.S. is discussing.

 

http://www.bbc.co.uk/news/business-13940431