Download Austerity Does Not Work!

AUSTERITY DOES
NOT WORK!
© 2014, Institute for Economic Futures
A LOOK AT THE EVIDENCE
THE CRISIS
• In 2007, financial markets all over the world collapsed, dragging the real
economy with it.
• Behind the collapse was a huge bubble where asset prices had been
reached unsustainable proportions.
• The asset bubble had been financed by borrowing, which made the crisis
into a debt crisis.
• Other factors:
• Increasing inequality forced normal people to borrow.
• Low government revenue and bank bailouts forced governments to borrow.
• For many countries, interest costs were pushed up to unsustainable levels.
THE EVIDENCE IS IN:
AUSTERITY DOES NOT WORK!
• Countries owed more money then they could cope with.
• The solution they came up with was austerity. Cut expenses in order to be able to
pay down the debt!
• This was done at a terrible cost to the economy:
•
•
•
•
Increased unemployment.
Contraction in the economy.
Increase of poverty.
And no end in sight.
• What did these sacrifices accomplish? An INCREASE in debt!
• The Evidence is in. And it is conclusive. AUSTERITY DOES NOT WORK!
• As a result of the austerities, the debts of the indebted countries have increased, not
reduced.
WHAT IS AUSTERITY
• Cut in total government non-interest spending!
•
•
•
•
Cut in investments
Cut in welfare spending
Reduction of pensions
Lay off of government workers
• Sometimes accompanied by sale of government assets
WHY AUSTERITY?
• Government debt reached proportions that are unsustainable
• Basically two reasons:
• Fiscal crisis: The government has over time run large budget deficits to finance
stimulus programs, bad investments, or government corruption.
• Italy, Greece, Portugal, Romania
• Banking crisis: The government forced borrow money to bail out banks.
• Spain, Ireland, Iceland, Cyprus,
• A fiscal crisis can turn into a banking crisis, if the government gets
overextended (Greece).
• A banking crisis can turn into a fiscal crisis if collapse of banking sector
requires stimulus to restart economy.
MEASURES TAKEN
• Reduce government spending
•
•
•
•
Cut in investments
Cut in welfare spending
Reduction of pensions
Lay off of government workers
• Sale of government assets
AIM OF AUSTERITY MEASURES
• Reduce fiscal deficits
• Balance budgets
• Reduce government debt as portion of GDP
• This is supposed to put the economy back to recovery
EFFECT OF MEASURES
• Unemployment up
• Growth reduced
• Poverty increased
• Inequality increased
• DEBT AS PERCENTAGE OF GDP INCREASED
GREECE
Greek Government
Debt
Source:
Eurostat
160.0
200
70.0
180
60.0
140.0
50.0
120.0
40.0
100.0
30.0
80.0
80
20.0
60.0
60
10.0
40.0
40
0.0
20.0
160
140
120
100
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
% of GDP
Greece GDP (2000 = 100)
Unenployment Greece
20
0
2006 2007 2008 2009 2010 2011 2012 2013
All
Under 25
Source:
Eurostat
0.0
CYPRUS
70
160.0
45.0
40.0
140.0
35.0
30.0
120.0
50
25.0
20.0
100.0
40
30
15.0
40.0
2012
2011
2010
2009
2008
2006
2007
Under 25
2013
All
2005
2004
0.0
2003
0
60.0
5.0
2002
10
10.0
2001
20
80.0
2000
% of GDP
60
Cyprus GDP (2000 = 100)
Unemployment Cyprus
20.0
Source:
Eurostat
0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source:
Cyprus Government
Eurostat
Debt
ITALY
% of GDP
140
Unenmployment Italy
Eurostat
Italy GDP (2000 = 100)
45.0
112.0
120
40.0
110.0
100
30.0
25.0
106.0
80
20.0
104.0
35.0
108.0
15.0
60
40
102.0
10.0
5.0
100.0
0.0
98.0
96.0
20
0
All
Under 25
Source:
Eurostat
94.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Italian Government DebtSource:
SPAIN
Spain GDP (2000 = 100)
Unemployment Spain
140.0
60.0
120.0
50.0
100.0
40.0
80.0
30.0
60.0
20.0
10.0
40.0
0.0
20.0
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Source:
Eurostat
2004
Under 25
2003
All
2002
0.0
2001
100
90
80
70
60
50
40
30
20
10
0
Source:
Eurostat
2000
% of GDP
Spanish Government
Debt
PORTUGAL
Source:
Eurostat
45.0
140
40.0
120
35.0
100
Portugal GDP (2000 =
100)
Unemployment Portugal
112.0
110.0
108.0
30.0
25.0
106.0
80
20.0
104.0
60
15.0
102.0
10.0
100.0
5.0
98.0
0.0
96.0
40
20
94.0
0
All
Under 25
Source:
Eurostat
92.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
% of GDP
Portugese
Government Debt
IRELAND
140
% of GDP
120
Source:
Eurostat
Unemployment Ireland
35.0
Ireland GDP (2000 = 100)
160.0
140.0
30.0
120.0
25.0
100
20.0
100.0
80
15.0
80.0
60
10.0
60.0
40
5.0
40.0
20
0.0
20.0
0
All
Under 25
Source:
Eurostat
0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Irish Government
Debt
FRANCE
Source:
Eurostat
90
80
70
60
50
40
30
20
10
0
France GDP (2000 = 100)
Unemployment France
120.0
30.0
25.0
115.0
20.0
110.0
15.0
105.0
10.0
100.0
5.0
0.0
95.0
All
Under 25
Source:
Eurostat
90.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% of GDP
France Government
Debt
UK
140.0
25.0
120.0
20.0
100.0
15.0
80.0
10.0
60.0
40.0
5.0
20.0
0.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source:
All
Under 25
Eurostat
0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
100
90
80
70
60
50
40
30
20
10
0
UK GDP (2000 = 100)
Unemployment UK
Eurostat
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
% of GDP
UK Government DebtSource:
UK – PROOF THAT AUSTERITY WORKS?
• As we saw, the UK economy is starting to turn around. Growth is resuming and
unemployment is coming down.
• This has been taken as proof that austerity is working!
• But is it? In reality, the economy turned around only after austerity measures
abandoned!
• The economy improved after government deficits started to increase!
• If deficit increases and government spending contribute to growth it can no longer
be called austerity!
• Government rhetoric still austerity, but the actions are the reverse.
• “If I keep hitting myself in the head with a baseball bat, and then I stop, I will start to
feel better; this doesn’t mean that hitting yourself in the head with a baseball bat is
a good thing!” – Paul Kruger
Change in Government gross debt
2007-2013 as % of GDP
120
100
80
60
40
20
0
Greece
Portugal
Italy
Ireland
Belgium
Cyprus
France
Spain
United Kingdom
EU
Austria
Hungary
Germany
Croatia
Slovenia
Malta
Netherlands
Finland
Poland
Slovakia
Czech Republic
Denmark
Lithuania
Sweden
Latvia
Romania
Luxembourg
Bulgaria
Estonia
Ireland
Greece
Portugal
Spain
Cyprus
Slovenia
United Kingdom
Croatia
Latvia
Italy
France
Netherlands
Romania
Slovakia
Lithuania
Finland
Czech Republic
Denmark
Belgium
Austria
Luxembourg
Germany
Hungary
Malta
Bulgaria
Sweden
DEBT SITUATION IN THE EU
Government gross debt as % of GDP
200
180
160
140
120
100
80
60
40
20
0
-5.0
15.0
10.0
5.0
0.0
% of workforce
Greece
Spain
Cyprus
Ireland
Lithuania
Portugal
Croatia
Bulgaria
Italy
Latvia
Slovenia
Estonia
EU Total
Denmark
Netherlands
Slovakia
Hungary
France
United Kingdom
Sweden
Czech Republic
Luxembourg
Finland
Belgium
Poland
Romania
Austria
Malta
Germany
% of workforce
Change in Unemployment
25.0
20.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
Spain
Greece
Cyprus
Croatia
Italy
Ireland
Portugal
Bulgaria
Lithuania
Slovakia
Latvia
Slovenia
Hungary
Estonia
Czech Republic
EU Total
United Kingdom
Poland
Denmark
France
Belgium
Sweden
Romania
Netherlands
Finland
Luxembourg
Austria
Malta
Germany
CHANGE IN UNEMPLOYMENT EU
Change in Unemployment under 25
CHANGE IN GDP EU
GROWTH IN THE EU 2007 - 2013
25%
20%
15%
% change from 2007
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
ROMANIA
30
25
20
15
10
5
30.0
160.0
25.0
140.0
20.0
120.0
15.0
100.0
10.0
80.0
5.0
60.0
40.0
0.0
0
Source:
Eurostat
All
Under 25
Source:
Eurostat
20.0
0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
35
Romania GDP (2000 =
100)
Unenmployment Romania
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
40
Romanian Government
Debt as % of GDP
SUMMARY
• Austerity measures were introduced at a tremendous cost to the general
population, in order to get government debt under control.
• In spite of the enormous suffering, the stated objective of reducing debt did
not happen.
• In the UK, which has been held up as an example of that austerity does
work, the economy only improved after austerity measures were suspended!
• Quack medicine! Aggravates the sickness while having lots of negative side
effects.
WHY AUSTERITY DOES NOT WORK
UNDERSTANDING THE ECONOMY
• Different competing views on how economy works
•
•
•
•
•
Classical Economics
Monetarists
Keynesians
“Other Cannon”
Marxist
• Different views gives different understanding
RECESSION:
THE TRIGGER OF AUSTERITY
• While government deficit spending, overextension of banks may go on for
many years, they only become an issue when a recession strikes.
• Recession often triggered by the burst of speculative bubbles.
• During a recession
• Productive resources in the form of people, machinery and raw materials are
idle.
• The financial system, which is necessary for a modern economy to function,
freezes up.
CAUSES OF RECESSION AND
CRISIS
• Monetarist view: Temporary, random shocks.
• Keynesian view: Fall in aggregate demand.
• Marxist view: Fall in the rate of profit.
MONETARIST VIEW
• As long as money supply is kept stable, inflation and output will be stable as well.
(MV=Py)
• Recessions and unemployment occur due to temporary, random shocks, that affect
markets. During this time the demand for money increase, and result in a drop in
output.
• Monetarists recommend in such situation and strong increase in the supply of
money.
• Although they believe monetary policy is more effective than fiscal policy, they
have never called for a reduction in government spending at the start of a
recession!
• Milton Friedman recommended dramatic expansion of Japanese money supply to
get out of stagnation. The thought of austerity never occurred to him.
KEYNESIAN VIEW
• Demand drives the economy.
• When aggregate demand drops, the economy is thrown into recession.
• This can happen when:
• Purchasing power drops for common people.
• The government cuts back on spending.
• Investment slows down.
• The government’s role in a crisis:
• Spend more to stimulate the economy. This will have a multiplier effect to revive
the economy.
MARXIST VIEW
• Marx considers that the periodic crises of capitalism is triggered the by falling rate of
profits.
• Due to competition between companies, there is a constant pressure on profits, the so
called tendency of profits to fall.
• When profits have been reduced to unsustainable limits, a recession takes places, that
forces many companies into bankruptcy with the wholesale destruction of productive
resources and inventories.
• This reduces competition and profits are restored.
• This is an inevitable outcome of the capitalist mode of production, and cannot be done
away with except in socialised, planned economy.
• As to the present crisis, Marxists disagree:
• Some consider it a classical example of the periodic crisis of capitalism (e.g. Mick Brooks,
Capitalist Crisis: Theory and Practice, (London, 2012))
• Some consider it a new phenomena of financial : structural accounts of the crisis 2007-9) crisis
not analysed by Marx (e.g. Costas Lapavitsas, Financialisation and capitalist accumulation
• Austerity programs during recession is from a Marxist view seen as having the workers bail
out the capitalists, and is hence not supported.
THE TENDENCY OF THE RATE OF
PROFIT TO FALL
• Labour theory of value: All value comes from Human Labour. They alone
produce surplus value.
• Machines do not add any value.
• Due to competition, better and faster machines are always developed.
• Industries more capital intensive (Marx: Increase in Organic Composition of
Capital)
• Fewer workers needed to produce same things.
• As value only comes from human labour, and the exploitation of workers is
more or less constant between industries, the surplus value per product
reduces, and hence the profits decline.
MARX AND FINANCE CAPITAL
• Marx also analysed what he calls finance capital, but does not consider it the cause of
crisis.
• Capital formation:
• Production: M-C-M’
• Finance: M-M’
• Finance capital causes assets bubbles.
• When expectations of future earnings increase, then the value of the underlying assets
increases, e.g., the value of stocks go up.
• When it becomes clear that the value of future earnings are unrealistic or false, the value of
the asset goes down. If the assets were highly overvalued, then the bubble bursts.
• Marx calls these over valued assets “Fictitious Capital.”
• According to Marx, Fictitious Capital can be a contributing cause, but not the main
cause, of crisis.
• In general, Marx had an astonishingly clear understanding of the financial system that
seems well before his time. While the system has got more sophisticated, in general it still
works the way Marx described.
DIFFERENT THEORIES SAME CONCLUSION:
AUSTERITY MAKES THINGS WORSE
• Neither Monetarist, Keynesians nor Marxists theories recommend austerity
measures to fight recession!
• Indeed, no economic school of thought has even made an argument that
austerity measures will revive the economy.
• The supporters of austerity this time invented a theory that went like this:
• Cutting the government deficits would increase expectations of future growth,
and would increase demand today!
• This went against all existing economy theories, and, as we have seen, did not
work!
THE DIFFERENCE BETWEEN
STATES AND FAMILIES
• Families
• Cutting expenses has no effect on income
• The family is too small to effect the whole economy
• Governments
•
•
•
•
•
Government spending in Western Countries 20%-30% of GDP
US If government cut spending 5%, it immediately cuts 1-1.5% of GDP!
This has a ripple off effect on individuals and companies that will earn less.
As they earn less, they pay less in taxes.
Government revenue shrinks, which necessitates even higher cuts.
DEBT/AUSTERITY SPIRAL
WHO LENDS OUT THE MONEY?
• In the economy, we have public wealth and private wealth.
• We cannot borrow from the future! Whatever money is borrowed is
borrowed from someone who has it now.
• If the government borrows money, who does it borrow from?
• From the private sector!
COUNTRIES ARE RICH BUT STATES
ARE POOR
• Public debt, about one time national income, equals national wealth. Net
public wealth: ZERO.
• Private wealth, which equals total national wealth, equals 4 to 6 times
national income.
• Therefore, most countries are not broke, they are rich.
• It is the states that are poor.
• Had the states
Private and public capital in Europe
800%
Germany
Public and private capital (% national income)
700%
France
600%
500%
United Kingdom
Private capital
400%
300%
200%
Public capital
100%
0%
-100%
-200%
1870
1890
1910
1930
1950
1970
1990
2010
WHY ARE STATES POOR?
• Since 1970’s, a long set of policies have been geared to transfer wealth from
the low and middle income groups to the rich.
• In addition, all public assets were also transferred to the rich.
• Policies include:
•
•
•
•
Regressive income tax.
Reduction in taxation for speculation.
Reduction in wages at fixed prices which increased profits.
Bailing out the rich.
• This was financed by
• Increased borrowing.
• Depletion of government assets.
• Cut in education, welfare, and other public services.
INEQUALITY HIGH AND
INCREASING
• Private assets are roughly 5-6 times National Income, so the countries are not
really poor. It is only that private people own most of it.
• Out of this, the richest 1% own 35%, or two times the national income, and
the next 9% richest own another 35%.
• The poorest half of the population own only 5%.
• If we took half of the wealth of the richest 1% it would pay back all public
debt, and they would still have more than three times more wealth than the
bottom 50% combined!
Structure of Inequality:
Share of Total Wealth
Poorest 50%
5%
Medium wealth
25%
Richest 1%
35%
Next richest 9%
35%
Structure of Inequality:
Relative Wealth of Various Groups
Poorest 50%
Medium wealth
Next 9%
Richest 1%
50%
Share of top decile in total income (incl. capital gains)
Share of top decile in national income
INCOME INEQUALITY IN THE UNITED STATES, 1910 -2010
45%
40%
35%
30%
25%
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Sources and series: see piketty.pse.ens.fr/capital21c.
INEQUALITY OF INCOME USA
2010
WEALTH INEQUALITY IN THE U.S., 1810 -2010
Share of top decile or percentile in total wealth
100%
Top 10% wealth chare
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1810
1830
1850
1870
1890
1910
1930
1950
1970
1990
.
Sources and series: see piketty.pse.ens.fr/capital21c.
INEQUALITY OF WEALTH USA
2010
WEALTH INEQUALITY IN SWEDEN, 1810-2010
100%
Top 10% wealth share
Share of top decie or percentile in total wealth
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1810
1830
1850
1870
1890
1910
1930
1950
1970
1990
2010
Sources and series: see piketty.pse.ens.fr/capital21c.
INEQUALITY OF WEALTH SWEDEN
INEQUALITY WILL CONTINUE TO RISE
• Unless steps are taken to change policies,
inequality will keep on rising.
• Even with the reintroduction of a
progressive income tax it will take hundreds
of years to remove inequalities in wealth.
INEQUALITY AND THE ECONOMY
• The poor and the middle class consume their income. This money goes back
to the economy.
• The rich invest their money. While some of the investments are productive,
most are speculative and do not benefit the real economy.
• The greater the divide between rich and poor, the more resources are
wasted in hoarding, financial services and speculation.
• Also:
• Inequality leads to increased borrowing by common people.
• When the bubble bursts, they are forced to try to repay their debts, thus lowering
demand.
• This makes a direct link between inequality and recession.
SPECULATION AND INVESTMENTS
• Productive investments create wealth:
• Create something new
• Examples
• Building factory
• Writing software
• Growing food
• Speculation redistributes wealth:
• Buy something in the hope that the price will go up
• Examples
• Buying stocks
• Buying real estate
• Speculate in derivative products (e.g., CDS, CDO, DCD, trackers, futures contracts,
options)
• Financial services redistribute wealth
• Does not create anything new
• Extracts a commission to facility loans and speculation
SIZE OF SPECULATIVE ECONOMY
• Global GDP: USD 75 trillion
• Global annual world trade: 19 trillion
• Global annual foreign exchange turnover: USD 1,900 trillion
• Global market capitalisation: USD 63.4 trillion
• Notional value of outstanding derivatives: USD 1,200 trillion
SPECULATION AND
FINANCIAL SERVICES
• Speculators are like gamblers in the casino – they sometime win and
sometime lose.
• Financial firms and banks are like the bank of the casino – they always win
regardless of who else wins or loses.
• Financial services and banks drain wealth from the real economy.
• 40% of corporate profits in the United States are siphoned off by financial
service firms.
CONCLUSIONS
• No backing for austerity programs by any economic school.
• The real problem is that the state has too little resources compared to the
private sector.
• In the private sector, inequality is extreme and rising.
• Due to inequality, consumption by the poor is curtailed and wasteful
speculation among the rich is rife.
• Austerity is not the solution. Any solution must entail a transfer of resources
from areas that waste them to those who will use them productively.
• In other words, resources has to be moved from the rich, who use them for
speculation, to the common people and the state, who employs them
productively.