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Austerity, The Danger in Following the European Roadmap

November 26, 2010

As countries and international governmental organizations (the G20[1], for example) try to recover from the worldwide economic recession, many are calling for austerity measures as a driving force.  While no one can challenge the need for governmental frugality, reducing spending, as the primary means to pay long-term debt, puts a country on the road to economic disaster as well as civil unrest[2].  The situations over the last year in Greece and Ireland come to mind.

Austerity is a fancy term used by politicians and governmental economists meaning to reduce spending and increase fees to pay long-term debt.  We hear the term in news coverage of Europe, more than in the United States.  Unfortunately, here, the idea is gaining traction.  It is the equivalent of thinking you can pay off your home loan buy reducing your electric bill.  While shrinking spending helps and can prevent increasing debt, it generally does not have the heft to make a dent in overall debt load reduction.

While austerity may not seem a bad idea, at face value, a government implements austerity measures when its debt obligation is unsustainable and it has no viable option to increase direct taxes, in other words, the government is near economic collapse.  This is exactly the position Greece found itself in late last year and where Ireland is today.

One of the primary functions of any government is to provide its citizens with services beyond the reach of the individual, a country’s infrastructure, for instance.  Each road we drive and each bridge we cross are examples of how we use our infrastructure daily.  Of course, governments have other obligations to their citizens too; national defense is an obvious one.  The need to maintain our infrastructure and have a solid national defense is easy to understand.  Other programs are not so straightforward.  The social programs we, here in the United States, have are somewhat murky as politicians routinely use them as a political football and it is these social programs, for the most part, people in America have in mind when they talk about undertaking austerity measures.

It is perfectly understandable why people view social programs with an eye towards cutting; after all, they make up about 36% of our national budget.[3] It is common to hear them referred to as “entitlement programs.”  Social programs include Social Security, Medicare, Medicaid, and unemployment benefits.  Other areas of focus, for the austerity crowd, include the Departments of Education, Health and Human Services, as well as others.  Basically, any department or program that deals with the social welfare of the public.

The problem, as citizens in Europe are finding out, is a cut in government services does not improve the economic outlook; it diminishes it.  While government debt is real and very tangible, a nation’s economy is based on more.  A nation’s economy responds to not-so-tangible things like faith that things will improve, or at least remain positive.  A reduction in social services has a chilling effect on its citizen’s outlook.  In turn, that leads to reluctance, on the part of citizens, to spend what little money they have, ending in less economic activity.  Think of it as a downward spiral, the less the government spends on essential services, the more citizens take up the slack.  The more citizens take up the slack, the less money they spend on discretionary items.  The less spent on discretionary items means a drop in sales overall, further reducing the tax base causing the government to make deeper cuts in services and starting the cycle over.  All the while, the overwhelming debt that started the whole mess remains.

In the end, other steps must take place to return an economy to strength.  Reducing the debt is paramount.  The trick is to reassure citizens, and foreign investors that sound policies are in place to reduce debt over time.  Citizens require special reassurance that money taken from them to provide for something like Social Security is not wasted.  We all know the stories about drug addicts using their money from various social programs to purchase drugs or that the ATMs at gambling casinos were accepting unemployment cards intended to pay for essentials.  These issues must be addressed when they happen, but a particular abuse does not diminish the need for a program overall.

Without question, cuts need to occur in every area where we find waste, but a program of austerity is not the answer, especially an austerity program that focuses solely on social programs.  Moreover, we must reevaluate every program and department and define what level of service we, the citizens, expect for our tax dollar.  In the end, we need a government that not only pays its debts but also meets its obligations to the citizens it serves.

Just as the captain of a super-tanker cannot stop her massive ship on a dime, our massive debt will not reduce overnight.  We need policies for long-term sustainability regardless of the cost to current political objectives.  Only then will we successfully navigate the troubled economic waters we face.  Only then will we avoid the troubles Greek citizens are in, Irish citizens are about to entertain and the rest of Europe seems unwilling to recognize.


[1] “G-20 Major Economies.” Wikipedia, the Free Encyclopedia. Web. 26 Nov. 2010. <http://en.wikipedia.org/wiki/G-20_major_economies>.

[2] Evans-Pritchard, Ambrose. “Europe’s Austerity Anger Grows – Telegraph.” Telegraph.co.uk – Telegraph Online, Daily Telegraph and Sunday Telegraph – Telegraph. 29 Sept. 2010. Web. 26 Nov. 2010. <http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8033238/Europes-austerity-anger-grows.html>.

[3] “Budget of the United States Government: Main Page.” GPO Access Home Page. Web. 26 Nov. 2010. <http://www.gpoaccess.gov/usbudget/>.

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2 comments

  1. ух ты, Я согласен с вами


    • First time I’ve received a comment in another language. I had to look it up. It means something like “Wow, I agree with you.”



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