Is Austerity the Solution?

According to the United States Department of Labor Survey, the United States recently added less than predicted private sector jobs. However, the unemployment rate declined and large numbers of American citizens left the workforce, making declines in unemployment not too accurate.

In order to improve the state of the economy, many politicians, including ones in the USA are embracing austerity. For example, while the USA and governments all over the world are favoring stimulus but now are starting to discuss and embrace austerity more to help reduce gov deficits.

That said, people against austerity in the United States say that budget cut supporters are doing exactly what Herbert Hoover did – before the country launched into the Great Depression in the 1930s.  They argue that cuts to the deficit at present will only result in economic stagnation – since at present, the economic output is really low, unemployment is high and consumer spending is low.  Instead, most economists against austerity argue that it is better to stimulate the economy now and pay back the deficit when the economy is booming once again.

They understand the US has a large deficit but argue since both a deficit cut and a stimulus have unknown outcomes, it may be better to implement policies to cause the least amount of damage if implementing a stimulus turns out to be a wrong choice. They state if a stimulus turns out to be unnecessary, the deficit would be increased by a fractional amount.  However, if the stimulus was necessary and it was not implemented, then the economy could decline, even a recession. In turn, long-term deficit reductions would be quite difficult.

On the other hand, austerity proponents are concerned about the growing gov deficit. They believe by reducing the deficit, consumer confidence will grow and in turn consumer spending will increase. They believe higher deficits cause the general public to feel more risk adverse and more insecure in general. They argue that these consumers will be afraid of tax increases, inflation, loan defaults and general economic problems that can result from an over-inflated deficit. They also state the US national debt is one of the top concerns of Americans.  Thus, if the American government worsens the public debt, both consumers and businesses will feel uncertain – and generate an uncertain American public in turn.  Further, many individuals believe that a stimulus will not even help the US economy as well.

That said, still others believe that the arguments for and against austerity are oversimplified ones.  The argument against austerity does not take into account the fact that there are many companies across the United States that are currently hoarding their money – instead of investing it.  These businesses are not investing money due more to fiscal and regulatory reasons than due to poor consumer demand.  The austerity supporters argue that if the US government addressed these businesses’ concerns, then these organizations would be more likely to invest this money.

Further, many other people states that the arguments for austerity are oversimplified as well.  For instance, austerity supporters use examples of how various countries such as Canada cutting deficits decades ago and achieving excellent economic results however its currency and interest rates weakened which in turn affected traders trading the commodity futures markets. Today, this option is not available as interest rates are at record lows and all currencies from wealthier nations cannot depreciate all at once.  As another example, Ireland imposed strong austerity and experienced growth decades ago but growth was dependent on a drastic change from a trade deficit to a trade surplus – and not all countries can implement this strategy at the same time.  Thus, some say pro-austerity arguments are based more on speculation than data.

With respect to how austerity is actually working for countries, Ireland is one such country that has implemented austerity measures. Baltic States, Estonia and Latvia also implemented deficit cutting measures and those countries are in poor economic shape. In addition, Greece was once forced to implement austerity measures resulting in big protests on the streets. In turn, the social unrest had a negative impact on both the country’s bond markets and the Euro – and directly affects forex traders as well.

Some nations and its citizens are more willing to accept austerity measures and their markets have reflected this situation. The Brits are more accepting of government announcements that the gov plans to reduce spending which years ago resulted in its GDP, bond markets and its currency improving. That said, despite government support for austerity in general there is also worry if austerity cuts will go too far and or governments will have political will to continue with reforms.

Overall, while austerity appears to be gaining momentum in the USA and internationally, austerity remains a real controversial subject among economists at this time.

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