By Marshall Auerback
Governments are increasingly getting bullied into adopting austerity measures, apparently thinking it will help their economies grow. A number of us who oppose this approach suspect that the austerity measures now being demanded (and implemented) will undermine growth, and when growth finally returns it will be tepid as a result of other factors unrelated to the austerity. In the meantime, there will be massive casualties among the poor and disadvantaged. Ireland is exhibit A.
In April 2009, the Irish government forecasted a decline in Gross Domestic Product (GDP) of 7.7 percent in 2009, and a contraction of 2.9 percent next year, before returning to growth of 2.7 percent in 2011. It had originally projected GDP to shrink by 6.75 percent. There is no sign of growth on the horizon.
“Fiscal adjustment” (as the weasels euphemistically call it now) does not generate growth. It comes WITH growth. The raison d’etre of fiscal policy is to support growth when private spending is undermining it, and to constrain growth when private spending is supporting it. With high unemployment, high public deficits are inevitable. The only choice is between an active deficit, incurred by putting people to work or otherwise serving national needs — such as providing a decent retirement and health care to the aged — and a passive deficit, incurred because tax revenues necessarily fail to cover public spending at high unemployment. Cutting public spending or raising taxes, now or in the future, by any amount, cannot reduce a deficit due to high unemployment. The only fiscal effect is to convert an active deficit into a passive one — with disastrous economic and social effects. Ireland’s experience, captured in a recent New York Times article, vividly demonstrates this point:
As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.
Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.
“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ “
Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.
Read the full article here.