Austerity the Boogeyman

Anyone who is using the term ‘austerity’ to describe the proposed budgets in Congress is irresponsible and dangerous, and here is why.  A debt that is already large and continuing to get larger is not good for this country.  I’ve already written about how non-discretionary spending will become an increasingly larger portion of our spending in Budget, how the debt hurts our foreign policy in It’s the Debt Stupid, how solving the debt problem will become more and more difficult over time in The Biggest Loser, and how nothing in the Ryan or Murray budgets comes close to being described as ‘austerity’ in Myths of Austerity so I don’t want to revisit those ideas in this post.  

So why is using the word austerity irresponsible and dangerous?  First, it is simply not accurate.  Neither budget cuts spending.  They reduce the rate of growth of spending.  If an alcoholic drinks 8 beers every night, plans on drinking 10 tomorrow but only drinks 9 when tomorrow comes, did he cut down on drinking?

But more importantly, the word austerity scares people and makes them think that we are about to take draconian measures.  People equate austerity with chaos and rioting in the street so using the word makes it less likely that people will be willing to consider any deficit reduction measures.  

Here’s the problem.  Imagine the debt is a cavity on your tooth.  In Ryan’s plan the cavity keeps getting worse for 10 years and then stabilizes.  In Murray’s plan the cavity will keep getting worse forever.  Either way, the cavity is continuing to decay for a while.  Now imagine your friend or a loved one tries to scare you about seeing a dentist to get a filling.  Being scared, you do nothing until eventually the tooth gets so bad you need a root canal or get the tooth pulled completely.  By scaring you about handling the problem at an earlier stage, the problem got worse and required more drastic measures.  The same analogy from the Biggest Loser post could be used here as well.  Imagine that you have an overweight friend.  Their excess weight is causing health problems but they just continue to put on more weight.  Would you scare them by talking about how horrible exercise is or how brutal eating right is going to be, or would you explain to them the health risks of obesity and look for sensible ways to address the problem?  If you scare them now into doing nothing, it will only get worse.

Scaring people with the word ‘austerity’ will have the same effect on doing something about the deficit and debt.  Make people aware of the facts and let them make a decision on deficit reduction, but don’t use the boogeyman of austerity to scare people away from the facts.  When you see the word ‘austerity’ trying to describe any attempt to reduce the deficit, call the writer out as irresponsible and false.  I think the American people know that we can not continue to add to our debt year after year with no plan in sight to reverse that trend.

What the Biggest Loser can Teach us About the Debt!

If you have seen an episode or even heard of the Biggest Loser TV show, you know what the show is about.  If not, the basic premise is that people who are extremely overweight go on a reality show where they live away from their families and compete to lose weight under the demanding routines of their physical trainers.  Their entire lives become focused around proper nutrition and punishing workouts in a last-ditch attempt to reverse their unhealthy lifestyles.  So what can this show teach us about the nation’s current debt situation?

The contestants on the show are clearly obese and at risk for a host of health problems.  If you think about the path that got people to that point, you have to wonder at what point did they realize they had a problem?  At what point did their weight and health become a crisis?  When they were 30, 50, 100, or even 200 pounds overweight and increasing every year, where were the alarm bells?  How did they get to 300, 400 or even 500 pounds without themselves, a loved one, or a friend doing something about it?

Our nation’s debt is following the same pattern as we speak.  Experts and politicians argue whether we are in a debt ‘crisis’ or not and struggle to even define what constitutes a debt crisis.  Here is what we do know.  We are almost $17 trillion in debt and increasing that every year.  Even the Ryan budget, which is regarded as extreme by those on the left, only gets us to a balanced budget in 10 years.  In other words, in 10 years we only get to the point where we stop putting on weight but we have not lost a pound in that 10 years and have continued to pack on the weight, only more slowly.  Maybe we are not at a debt crisis now, but what does it take for the country to recognize that the trend is not good and that if nothing is done, we will just keep adding to the problem?

Because the contestants on the show have become extremely obese, their problems are compounded.  First, they require major lifestyle changes to improve their health.  They try to change their eating habits drastically and endure tough workouts.  These workouts are made more difficult by the extra weight that affects their joints and  hearts, and by the fact that their bodies are typically not ready for physical activity due to years of sedentary lifestyles.

Likewise, the worse the debt becomes, the harder it will be to reverse the problem.  The interest alone on the debt will be like that extra weight threatening the body’s health.  The shear amount of debt to pay off will force future generations to take more drastic measures.  Compare that to the minor and gradual lifestyle changes that can be taken when a person is only 15 or 20 pounds overweight and can simply cut out that extra dessert, reduce portions slightly and get out for a daily walk.  A crushing level of debt will require a radical change in diet and punishing physical activity to get it under control.

A couple of decades ago we were probably at our ‘ideal weight’ when it comes to the debt.  Four or five years ago we were showing telltale signs of being overweight.  In the last four to five years we have been packing on the pounds at a very rapid pace.  If we are not in a crisis yet, why wait until we get there?  Why wait until we are so heavy that it is tough to move and we have so much weight to lose.  Why not push away from the table now, start exercising and reducing the waste in our diet so that we can make some positive changes before we need Jillian and Bob yelling in our faces.  Now some will argue that the debt is different than weight because we can simply print more money.  That is true, but that is like converting your weight from pounds to kilograms because it sounds better, or going on a quick fad diet to drop a few pounds.  You haven’t changed the fundamental problem.  Printing money eventually just lowers the value of all the money in circulation so while we address the immediate debt, we cause inflation.  And while we may have dropped a few pounds or paid off some debt temporarily, if we don’t change our lifestyle we will just keep adding it back on.

Before every contestant on the show reached the point of being morbidly obese, there had to be a point where all the bad signs were there and they chose to ignore them.  Do we need to do the same as a nation?  Let’s put down that piece of cake and go for a walk while we still can.

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

It’s the Debt, Stupid

With the sequester in the news right now, the discussion about the nation’s debt and deficits rages on.  There are some who say that the debt is not out of control and we should not worry about our increased debt.  Others feel that we must do something about our rising debt but disagree how to attack the problem.  The two political sides differ on whether increased taxes, decreased spending or some combination of the two are the correct approach.  

For those wondering whether excessive debt is a problem, the saying goes “Those Who Fail to Learn From History are Doomed to Repeat It”.  A look back at the Suez Canal crisis of 1956 is telling.

Without going into all of the details of the Suez Canal crisis, which can be explored in more detail here: http://www.economist.com/node/7218678, the event took place in 1956 at a time when global politics were changing.  Britain, France and the other countries of Western Europe were declining in influence as the U.S. and Soviet Union were emerging as the world’s only superpowers. 

When Egypt nationalized the Suez Canal, Britain risked losing vital maritime access to India.  At the risk of overly simplifying the situation, Britain, France and Israel put forces on the ground in Egypt.  The U.S. and Soviets opposed their actions but with Britain and France holding United Nations vetoes, there was not much the U.N. could do.  However, when President Eisenhower influenced the IMF to refuse loans to Britain, the British economy could not handle the economic pressure and they were forced to end their military actions.  

“America struck at Britain’s fragile economy. It refused to allow the IMF to give emergency loans to Britain unless it called off the invasion. Faced by imminent financial collapse, as the British Treasury saw it, on November 7th Eden surrendered to American demands and stopped the operation, with his troops stranded half way down the canal. The French were furious, but obliged to agree; their troops were under British command.”

Britain obviously had a substantial amount of debt from the aftermath of World War II (which they just paid off to the U.S. in 2007 , by the way).  Their reliance on other nations for loans made them vulnerable in foreign policy.  Not only did this vulnerability force them to withdraw from Egypt, it signaled the change in the balance of power from “Old Europe” to the United States that has stood to the present day.

What makes this story important now?  The U.S. now owes over $16 trillion.  Some of that debt is to countries that don’t necessarily share our interests in the world.  Imagine a potential conflict between China and Taiwan or China and Japan.  What if China tried to flex it’s muscle and claim additional territory in the Pacific or deny access to certain waterways?  What if we tried to intervene and China used our debt as leverage?  Could that mark our decline as a superpower because we could not manage our own financial situation?

Our world influence depends on our moral example, our military might, and our economic might.  Rising debt diminishes all three sources of power and risks making the U.S. less relevant on the world stage.   

 

A highly illogical argument.

Robert Reich (Sequestration Nation, and Remembering Robert Kennedy).

The article above, which you can view at the link is a prime example of an argument that does not hold up to logic.  Regardless of whether you agree with the principles, the arguments are just not sound.  The following are quotes from the article, followed by commentary:

“The austerity economics on which we’ve embarked is a cruel hoax”

• How is reducing the growth rate of spending by a small amount considered ‘austerity’?

“The trickle-down-economics, on which Republicans base their refusal even discuss closing tax loopholes for the wealthy, is a proven failure — proven because it’s been tried before, by Ronald Reagan and George W. Bush”

 

• Both parties have discussed closing tax loopholes.  The Republicans have not refused to cut them completely, they just feel that they should be closed in addition to spending cuts, not in lieu of.  Also, to compare what happened to the economy under President Reagan is not a valid argument.  That was three decades ago and things change.  A better comparison would be to look at economies now.  How are economies with high debt to GDP ratios doing now in Europe?  How are states in the US with high or low taxes doing?  Which states have lower unemployment?

“Lower-income Americans are already suffering disproportionately from high unemployment.”

 

• Not to make light of anyone’s unemployment, but this is a circular argument.  Lower income Americans have lower income because they are more unemployed.  This is the equivalent of saying “Better singers are disproportionately winning music awards”.

“Meanwhile, America has become far more unequal than it was in 1967. Then, the richest 1 percent got 9 percent of the nation’s total income and paid a top marginal tax of 78 percent (and an effective rate, after deductions and credits, of 54 percent).”

 

• Income inequality is also a function of the changing economy.  Fifty or more years ago, income was much more limited in scope by physics.  You could only produce so many things and ship them to so many people.  Now a singer can write one hit and make millions.  Internet entrepreneurs like the founder of Facebook can make billions from an idea.  We are no longer limited as much by physical constraints.  See some of Malcolm Gladwell’s concepts on this idea.

“If Robert Kennedy were alive today he’d condemn the Tea Party Republicans (and the Koch Brother billionaires who fund them) for violating the basic ideal of social justice that’s the moral foundation of this nation.”

 

• Where in the founding documents of this nation is social justice a principle?  It is about Life, Liberty and the PURSUIT of Happiness, not the guarantee of happiness..