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Increased Frugality

by on August 22, 2020

Three and a half years into a Trump presidency, most Americans don’t support him. Whether he’ll be reelected or not is a different matter. The Democrats have chosen Joe Biden to run against Trump, and there are at least two other major candidates running (Howie Hawkins and Jo Jorgensen).

Not withstanding where other candidates or former candidates stand (see PoliticalCompass),

let’s talk about Biden for a minute. Just a couple days ago the Democratic Party Virtual Convention finished its four days of platitudes. For those listening around the Convention, just before it you might have heard a top aid to Biden, former Senator Ted Kaufman, confirm that ‘When you see what Trump’s done to the deficit…forget about Covid-19, all the deficits that he built with the incredible tax cuts. So we’re going to be limited’ providing money to alleviate any problem.

What Kaufman said was code-word for austerity. Politically, austerity is “a set of economic policies a government implements to control public sector debt.” Austerity is a common, but very unpleasant and unnecessary, option used “particularly when a nation is in jeopardy of defaulting on its bonds.” The United States is nowhere near that point, despite the fact that it’s predicted our debt will exceed our economy this year (predicted in April with the caveat that it could be even worse should legislation change our spending).

As Investopedia says, “austerity refers to strict economic policies that a government imposes to control growing public debt, defined by increased frugality.” There are three main ways to pursue austerity: “revenue generation (higher taxes) to fund spending, raising taxes while cutting nonessential government functions, and lower taxes, and lower government spending.” Importantly, and I think that no policy-maker ever decided to investigate the matter before jumping into the fray, Investopedia says that “outcomes from austerity measures can be more damaging than if they hadn’t been used.”

Following the 2008-’09 financial crisis some countries were forced (by the IMF and European Central Bank) to adhere to austerity. The four countries that became famous for it were PIGS (Portugal, Ireland, Greece, and Spain), The Guardian says that it wasn’t until 2015, when Portugal chose a socialist government, that “austerity has eased, consumer and business confidence has recovered and GDP growth” – very important for economists – has stayed above 2%. Portugal is still in deep debt, but more costly is the fact that they lost an exodus of the young generation that will probably never move back.

Ireland didn’t recover – that is, they aren’t bankrupt – until 2013, and they had suffered the biggest blow to their economy since the Irish Potato Famine. Meanwhile, The Guardian said in 2018, “homelessness remains a major problem across the country” and more than eight percent “of the population live in consistent poverty.”

Greece almost went bankrupt three times between 2008 and 2015, until the right-wing government left office and the “radical left” government received another bailout. In its ten-year check-in with the PIGS countries, The Guardian says that after years “eye-watering austerity,” in Greece, “in which taxes have risen, welfare subsidies have been cut, pensions reduced and thousands of public sector workers made redundant, the government is poised to agree the final tranche of loans from the EU.”

Spain avoided economic collapse, but because some areas recovered quicker and better than others, there has been political strife that led to the arrest or exile of several leaders.

Austerity is not limited to the PIGS countries. The Guardian also reported recently of austerity in Britain and the plight of octogenarians that are forced to care for their disabled children because the government has decided it won’t.

The list goes on, on course. No country wants to go bankrupt. To avoid going bankrupt, countries resort to austerity measures that destroy the social net. When countries resort to austerity, taxes change, unending poverty becomes common, housing becomes an issue, welfare subsidies and pensions disappear, and the whole social net and the whole of society is fragmented.

The United States doesn’t need to turn to austerity measures. Despite huge income inequality and an economy impacted by COVID-19 the United States is not on the verge of an economic situation that call for austerity.

Let’s return to Biden. Some people interpreted the remarks on austerity – made by a surrogate, but in no way misrepresenting Biden’s views and plans – as a remark that Social Security will need to be cut. Austerity automatically negatively impacts the working class “main street”.

There is an increasingly long string of tweets on Twitter about “austerity”. While Twitter isn’t a new source it, like the rest of the social internet, is a good barometer of what people think. To look to the future, along with a lot of other people including David Sirota (Jacobin, supra), if Biden wins this election and fails to make transformative change a more wicked demagogue will likely win in 2024, making the Trump years look progressive and cuddly. Or, as Sirata put it, “if Democrats win this election and 2020 is a repeat of 2009, then 2024 is going to be a repeat of 2016, only with a much smarter version of Trump winning the presidency.”

To look to the past, as Sirota does looking at 2009, is important. The idea of austerity didn’t magically appear in the 21st Century. To give a short, essential, background John Maynard Keynes “advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression” in the 1930’s (He might have been influenced by Frank Ramsey). These policies were well for a few decades; in fact, the policies never worked badly, but were replaced and subsumed by a different school of economic thought.

The Chicago School of Economics is a loose term for the ideas that replaced or subsumed Keynesian economics. In the 1950s and ’60s economists who taught at the University of Chicago; Milton Friedman may be the most notable of the scholars. In fact, says Investopedia, “What Keynes wrought, Friedman undid, and supporters of the free market are deeply in debt to this Chicago school academic for his effort.” Collectively, Chicago School economists became economic advisors to many governments where they urged policies for hard money and small government. Friedman was an advisor to Reagan and influenced Thatcher. I am not aware of anywhere that says the Chicago School advocates for austerity. Merely “hard money and small government”.

The hard money and small government that is the basis of Chicago school thinking is the same thing as austerity. It translates to the government not being able to provide for people – housing, opportunity, welfare subsidies, and a basic social net by choice of force. No one will force the United States to enter and endure austerity. Will the next president choose to lead Americans to austerity? If he does, what will that mean for the future?

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