What is Austerity?
The 2008 financial crisis shook the world’s financial institutions. The world economy did not just weaken at its knees – It collapsed entirely.
The Great Recession was a period when countries around the world witnessed the worst GDP’s, unemployment rates and financial conditions since the aftermath of the second world war.
In such a time, many governments took up austerity as the only way to support their economies in free fall.
Now, another recession looms because of the ongoing trade war between the US and China, the globally spread wealth inequality, and a middle class crushed under the cost of just surviving.
In such times, it is important to take a look back at the recession of 2008 and see whether Austerity was the right way to go.
Did it improve the financial situation of countries that embraced it?
Let’s dive into the nitty-gritty details of austerity measures and see for ourselves if they work as well as they are advertised to be.
WHAT IS AUSTERITY?
If you were to check the Merriam-Webster dictionary for the definition of the word “austerity”, you would find the following: “enforced or extreme economy”.
As foreboding as it is, I admit that it would be entirely unfair to use a dictionary definition to define a socio-economic policy. So let’s try this again.
What is austerity?
Austerity refers to the measures taken by a country when it experiences difficult economic conditions. It’s when a government tries to reduce its budget deficit by using a combination of spending cuts and taxes.
In simpler words, when the government is spending more than it’s making, it enters what is known as a ‘debt crisis’, which means that it can no longer pay its debt.
This can imply the complete economic ruin of a country which is why governments try to find a quick fix and run towards austerity measures.
And what are austere measures? It’s when a government takes its scissors out and tries to balance the economic scale by cutting everything.
Pensions? Educational reforms? Jobs? Payroll?
Cut. Cut. Cut.
Anything that is perceived as “surplus” by the government is kissed goodbye and higher taxes are welcomed in with flowers.
Austerity is justified on the fact that it makes logical sense. What do you do when you don’t have money? You stop spending money on what you don’t deem important anymore.
That’s exactly how governments implement austerity.
To come out from their debt, they suspend ‘unnecessary’ projects and policies that utilize national funds and try to earn more through means of higher taxes.
The economy goes through an oscillation, which is referred to as an ‘economic cycle’.
Without delving too much into the jargon, the cycle consists of two primary periods- growth and recession.
Depending on factors such as interest rates, consumer spending, and GDP, the economic cycle decides which stage it is currently at.
In times of austerity, these factors are all ignored, and the government shifts its primary focus on trying to the structural deficit.
It ignores the natural graph of things and imposes on to the economy, a forced projection, through means of higher taxes and greater cuts, at the expense of higher unemployment rates and lower quality of living.
On paper, austerity seems only logical. However, austerity can veil many sinister aspects of the economy and often ends up punishing the public for the crimes and greed of a few individuals and entities.
That is why the UK, a country who adopted austere measures after the great recession, has always had to deal with a strong push back against the austerity drive.
Austerity measures are often associated with higher unemployment and lower economic growth. Workers in the public sector are laid off in huge numbers, projects in the public sector are abandoned, and tax cuts are given to the private sector to help them rebound.
In the wake of these policies, poverty rates can soar.
Homelessness, unemployment and a general drop in quality of life are evident.
A clear example of this has been the outcome of the UK’s 10 years in austerity.
By the end of 2018, despite being the 5th largest economy in the world, 14 million people were living in poverty in the UK.
There are two sides to this coin.
However, to understand both sides and make a stand in favor of either one, we must first look back at the austerity drives in recent history and understand their effects on the economy, the people and the government.
IMPACT OF AUSTERITY POLITICS ON SOCIETY AND ECONOMY
Over the last decade, the austerity measures taken by the UK and other European government have left an impact on the fabric of society.
The budgets for policing, housing and welfare have been categorically slashed while the government tries to reduce the fiscal deficit.
However, this relentless drive to cut down costs has left an impact on the social and economic health of the middle and lower class citizens of the countries.
According to the November report by Philip Alston, the United Nations special rapporteur for extreme poverty and human rights, the British government’s policies of austerity are directly linked to a rise in poverty in the United Kingdom.
Alston said that the government’s efforts to reduce spending were “entrenching high levels of poverty and inflicting unnecessary misery in one of the richest countries in the world.”
Since 2010, the Conservative government has announced more than 30 billion pounds, or nearly $40 billion, in cuts to welfare payments, housing subsidies, and social services, and the British leadership is in “a state of denial” about the devastation its policies have wrought, the United Nations said.
The use of foodbanks almost doubled between 2013 and 2017. Around 800,000 children were lifted out of poverty because of the efforts of both conservative and Labour parties between 1998 and 2012.
However, after the Parliament passed the Welfare Reform Act in 2012, about 600,000 children have fallen below the poverty line again.
During the same period, Trussel Trust, the country’s largest network of food banks, reported a three-fold increase in the number of children receiving their help.
This misery is not limited to those who are jobless. Two-thirds of the children in poverty have at least one parent who works, according to the Institute for Fiscal Studies. Crimes rates have surged to their 10 years high in England and Wales.
Police leaders blame cutbacks to the police forces that have seen a reduction of 20,000 officers in the police force.
However, analysts believe that the rise in crime is a direct effect of austerity cuts to social services and youth programs.
The austerity cuts to the police force have also forced them to take on the responsibility for several social pathologies that would otherwise fall on the shoulders of agencies; that have been eliminated or had their budgets cut because of austerity.
That has put even more pressure on the already stretched out police force.
The Trussel Charity also found that the use of food banks had increased in the areas where the new ‘Universal Credit System’ had been introduced as compared to the areas where it had not been implemented yet.
The Universal Credit System was meant to simplify the claims process and merged six separate benefits into just one.
The universal credit system’s implementation has been a source of controversy itself. It forced families reliant on these benefits into waiting for five weeks before the first payment arrived, pushing many into debt.
Furthermore, the system was supposed to be fully implemented two years ago. However, the deadline has been extended until 2023 now.
A SHORT HISTORY OF AUSTERITY
To experience a complete timeline of Austerity and to trace the word from its origins back in 348 BC to its current implementation in 2019, it would be a rather long and comprehensive journey.
While the insightful author Mark Blythe does a fantastic job of doing so in his recent book named “Austerity: The History of a Dangerous Idea”, this article will take you on a much shorter journey.
Admittedly, we’ll be missing a few destinations in our little field trip but at least we’ll be back home for lunch. So, buckle up kids and don’t use flash.
We don’t want to disturb our historic skeletons.
Let’s start at the very beginning. While Austerity can be regarded as a relatively modern 20th-century socio-economic policy, its origins can be traced back to Aristotle.
The historian Florian Shui argued that it was in 348 BC that Aristotle managed to birth the concept of Austerity as an idealistic conception, even if he did not explicitly coin the term.
Aristotle was a man who belonged to great wealth, yet he argued against the ills of excess and on multiple occasions, advocated for “abstinence”.
He believed that if one wanted to lead a good life, they would have to abandon the pursuit of greater wealth.
The art of economic stability, according to the famous philosopher, lay within the art of managing finances within means, to achieve an economic equilibrium.
Now while this may seem a little daunting at first glance, a closer look at this ideology, allows us to see the concept of Austerity, taking its first breath.
While wrapped in extensive jargon, what Aristotle says is fairly simple: to be financially stable, don’t spend what you don’t have. A baseline for austerity measures.
As Austerity measures have been justified on the onus of being logical, austerity has often been justified in this capacity by using the arguments of early liberal economic thinkers to provide the controversial economic policy with the credibility of being based in historic worldly rationale.
While an ocean of historic information exists, let’s only visit a couple of our most influential austerity drivers, for as beautiful as the ocean is, we lack the time to drown in its knowledge.
John Locke, famously known as the “Father of Liberalism”, has been credited for laying the conceptual foundations of Austerity, in his theory of private property.
Without delving too deep in the extensive jargon that is used by Locke, the arguments that he lays in favor of Austerity are fairly simple.
Locke argues that the citizens of a country have a moral weight to support and trust their government and to pay taxes.
David Hume, in his arguments about the virtue of merchants, further emphasizes this point, providing legitimacy to market economics and emphasizing the disastrous role of debt that exists within a nation.
So, let’s break this down: These classical philosophers believed that the sole role of the government was in limiting debt and providing nation defense- at any other social cost, thereby holstering the way for the concept of austerity to take a stronghold in future world economics.
In the 19th century, the views of opposing debt were further cemented into what formed “classical economics”, a theoretical bible to the doctrine of austerity.
It was argued here that while employment was the most favorable face a dice should lie on, in times of economic difficulty, emphasis must be laid on removing debt, even if that comes riding on the back of social welfare.
The next couple hundred years formed further developments in the theoretical discussions of the doctrine of Austerity.
By the 20th century, Austerity had been codified as a doctrine of neoliberalism, a tool that had already been used by a large number of countries, throughout the world, even before it wore a permanent nametag on its collar.
The Great Depression
While the works of famous personalities are important to appreciate the value of Austerity, let’s take a look at one of the most drastic implementations of Austerity.
During the early 1900s, the great depression first reared the head of Austerity in its entirety. During this interwar period, countries such as Germany, France, Japan, and Britain all struggled to stay afloat economically, as the world suffered from the worst economic downturn since the age of the industrial revolution.
With empty banks, a stock market crash, the only tool that these countries could see to use was that of Austerity.
Desperate to revitalize the world economy, these countries began drastic austere measures, cutting down on everything to eradicate their debt.
Warren G, of the United States, said, “We are going to cut the garment to fit the cloth”. And cut, they did. Pensions? Cut. Jobs? Cut. Social Services? Cut. Education? Cut. Cut everything.
In Germany, the Social democrats allowed the hike of unemployment to soar to 30%, which also eventually paved the way for fascist ideologies to erupt within the nation. Britain witnessed a rise in joblessness from 10.4% to 22.1% during the short span of 1929-1932.
In Japan, household incomes were reduced to half their original values. These measures caused havoc within the people of the world- arguably leading to the war times that came next.
The Great Recession
The last stop on our tour is the Great Recession, a demon from our recent past. Austerity is thus not a historic relic, but an active one.
In the times of the Great Recession in the early 2000s, the world saw the next biggest financial crisis after the great depression.
A devastating financial drop that led to the drowning of the banking, real estate, and financial markets.
Many European countries adopted austerity measures and reduced their debt.
Similar to before, these countries decided to implement shrinking their expenditure to come out of their financial slump.
With countries such as Greece reducing its budget deficit from 10.4% of GDP to 9.6 % in one year.
The Eurozone countries were able to drastically reduce their debt; however, the rates of unemployment grew in inverse. In countries like Spain, Greece, and the UK, unemployment reached record levels by March of 2013, going up to 12.1%.
AUSTERITY AND WELFARE STATES
To understand the connection between welfare states and austere ones is nothing short of drawing a comparison between the comic book superhero and villain.
Yes, it is unfair to reduce politics to this simplicity, but it is also difficult to deny how welfare states and austere states have the relationship of Dr. Jekyll and Mr. Hyde.
Welfare states, the Dr. Jekyll of our scenario, are defined as nations who adopt a form of government that is an economy ensuring the social and economic progress of its citizens, based on the ideology of equal distribution of wealth and equal opportunity.
It is a system that promises to take care of its citizens from “the cradle to the grave”, promising a decent quality of life.
Countries such as Germany and the UK advertise themselves as proponents of the concept of being social welfare nations.
However, after the wake of the 21st-century great recession, the austerity measures deployed by these social welfare countries have proved to be a direct assault on the principles that these countries theoretically exist on, posing as Dr. Jekyll but acting as Mr. Hyde instead.
Dr. Jekyll: Social welfare promises healthy living environments for its citizens.
Mr. Hyde: Austerity in comparison, poses a direct threat to these stances by reducing expenditure, reducing tax revenue sources and increasing unemployment. All of which weaken the utopic socio-economic paradigm that is promised by social welfare.
Lower Income Societal Segments
Dr. Jekyll: A social welfare state promises the people with lower incomes an economic environment where their rights are protected, and their wellbeing is entrusted within the concepts of equal opportunity.
Mr. Hyde: Austerity, on the other hand, robs these groups of these benefits and rather takes advantage of these segments of society. Austerity measures focus on limiting expenditures in the social realms that have an impact on the poor, for they consider them to be “leeches” and undeserving of any social power, simply because they lack political power.
Instead, these groups are targeted for their existence and the inhumane treatments are justified on the stance that people are responsible for their own social and economic health- a gift that cannot be endowed by the government.
While many can engage in an ethical and moralistic debate regarding this viewpoint, the fact of the matter is that we’re not viewing these changes from a solely theoretical point of view. Countries, in the past 20 years have adopted measures of austerity, and the people have suffered.
An avid case study of this argument is the plethora of countries in the European continent. A notable shift has been viewed from redistributing wealth to imposing austerity budget cuts.
These have been used by countries such as Greece, Italy, Spain, and the UK.
To ensure stability within financial arenas of the world, these countries have sacrificed the quality of life of the people who reside within their nations, robbing them off of basic health care, state benefits, education, public services and even the provision of jobs.
After World War 2, Britain responded to the financial crisis it had incurred by forming a structure that resembled that of a welfare state.
After the financial crisis of 2008, however, Britain took a complete 180 and fashioned its society into a replica of an austerity-driven economy.
Currently, reports show that by 2020, Britain will make cuts to their social welfare programs by a massive 36 billion dollars a year.
This translates as the loss of 1200 US dollars per working person, per year.
Measures of austerity in the UK have deprived millions of health care, spending on police forces had dropped by 17 percent, spending on infrastructure has dropped to a 1/4th of its original value.
The rift between austerity and social welfare is a draconian one.
As Barry Kushner said “Austerity has nothing to do with economics.
It’s only about getting people out from welfare protection and abandoning the plight of vulnerable people”
THE MOST COMMON MEASURES OF AN AUSTERE STATE
To understand the implementation of austerity, it is important to revisit the purpose of austerity itself.
Austerity is a political-economic term that is used to cut down on budget deficits incurred by a country using tax reforms and spending cuts.
It is a tool that is deployed by nations that are overwhelmed by debt so that the bridge between revenue and spending is met.
Two basic routes allow the practical implementation of austerity are taxes and growth reforms.
Taxes are raised to fund national finances and raise revenues. It is based on what is referred to as the Angela Merkel model which illustrates the need for raising taxes while reducing government expenditures that are considered less essential.
An example of this is the reform in Greece that raised increased value-added taxes to 23% in 2010, introduced new taxes on private property and promoted a 10% tariff on imported goods.
Austerity tax measures target the wealthier segments of society and raise taxes on value-added goods. Furthermore, privately owned businesses are also taxed to reap benefits for the state.
To promote growth, there is an emphasis that is laid down on cutting spending.
This is implemented differently in different nations adopting austerity measures; however, the backbone ideology remains the same, working on a social level.
These are done by lowering minimum wage, reducing government employment, increasing working hours and removing any due protections that are granted against wrongful terminations.
Furthermore, government programs that support the public such as pensions, health care, and other socio-economic benefits are all halted by the governments to reduce spending.
Restrictions are placed on traveling and critical commodities are rationed. Interest promoting government securities are also slashed to reduce interest obligations that the government has to meet.
Government-owned businesses are also privatized, so that the nation may raise revenue to fight off the threat of debt.
Furthermore, health care benefits are revoked by the country. There is also cutback in other social segments of society such a defense, education, infrastructure, social services, and foreign aid.
In countries where these measures have been implemented, the steps taken have been drastic.
After the Eurozone crisis in 2011, Greece implemented extensive austerity policies in the domestic market.
All non-essential government projects were canceled, government employment was reduced by 150,000, public wages were lowered by a whopping 17 percent, pension benefits were cut by 40 percent, property taxes were raised to 2-16 euros per square meter and all subsidies were canceled. Nearly 35 billion Euro worth of government assets were privatized.
However, the stimulus for such drastic measures provides a weak impetus for these to be carried out. The sacrifice that is made for a better national fiscal budget comes from the working class and the citizens of the nation, who are bled dry by the economic strains that are placed on them. Austerity measures have been regarded as “punitive, mean-spirited and often callous” by the United Nations and rightfully so.
Not only do these measures produce worse results in the shifting of economic recession but they force the people of the country to live in poverty, deprived of basic essential and living commodities. In the UK, it is estimated that child poverty can rise by a rate of 40% until 2022. Austerity is a wrecking machine weakening the fabric of the society that it feeds off.
MYTH BUSTERS: AUSTERITY
As New York Times columnist Paul Krugman wrote, “much of what people believe in rests on prejudices, not analysis”.
This is a powerful insight into the current dynamics of the politics of austerity.
As the majority of the world’s population wrestles with economic depression, there has become a norm to adopt fiscal austerity as the solution.
However, even a child would notice the logical fallacy in this approach.
Essentially, all these massive economies have put their head together and said in a tribute to Homer Simpson, “Hey, we hate being poor so let’s immediately get even poorer. Fight poverty with more poverty”.
However, the truth is never so simple. Let’s try and walk through a few of the arguments that proponents of austerity present and consider their value.
Argument 1: Cutbacks in social programs can put the band-aid on deficit problems
The biggest argument that favors austerity is that deep cutbacks in social programs can help fix deficit problems and provide a boost to the economy. However, in reality, this ideological approach is far from pragmatic.
Since 2010, various governments have adopted this idea to stabilize bond markets, to repay bond obligations and halt economic degeneration to “calm the markets”.
The US and countries in Europe have all jumped on the bandwagon, bleeding slogans of the dire need to cut public expenditure. Even the IMF has propagated for this approach and has continued to advise countries to slash budgets in poor economic weathers.
However, in reality, these implementations have worsened the conditions of the country that they promised to improve. Countries such as the UK, Portugal, and Greece have cut their budgets to holster the bond markets.
However, what has happened in actuality is that these countries have observed higher interest rates on their bonds instead.
With higher unemployment, shrunken national economies, slower revenue, growth prospects have further fallen.
Greece has seen a harder return at revitalizing its economy, with its GDP ratio rising from 130 percent in 2009 to 160% in 2011, after two years of implementing austerity measures.
According to the IMF, cutting budges has shown to historically worsen recession and increase economic deficits.
These measures have been shown such poor results that the worsening conditions in the eurozone have motivated countries such as India and China to steer away from fiscal austerity, allowing them to move to economies which offer higher national spending, lower interest rates and promoting the private sector.
Argument 2: Nations don’t grow out of debt.
The argument is conducted in the following fashion:
Austerity proponents: “Why should the government be spending money that it does not have? You must stay within your budget.”
Austerity opponents: “Public deficit spending is not like the financial structure of an industry or a household”.
To draw a parallel between industrial expenditure and that of a sovereign nation is entirely futile as it makes the point of monetary policies completely futile.
Governments do not pay back creditors by breaking up spending and balancing losses by selling their assets.
They do so by creating finances from central banks and using this money to purchase bonds to stabilize deficits by paying interests.
The philosophy of deficit financing has been undertaken by Japan and has yielded sustainable and positive results.
It is, therefore, naïve to reduce governments to the financial budgeting of a middle-class family household.
Austerity has been advertised as a messiah to the economic recession. A savior of the countries caught in the whirlpool of debt and poverty.
It has been defended on the principles of being a logical solution to the issues of budget deficits, based off of the simple logic served to a child, “if you spend less, you’ll save more”.
However, evidence to implemented austerity measures has been nothing less of a tribute to an Orwellian society- terrifying, stifling, inhumane. And the effects of austerity have failed to produce substantial positive economic results, evidence has pointed to a worsening of economic conditions and GDP deficits.
The realism of austerity is simple: it lies on the utopic understanding of economies and does brutal injustice to the people living in austere environments.
The past two centuries have provided substantial evidence for the failure of this ideology with countries such as Greece, living so close to the poverty line that recovery seems distant, if not impossible. Austerity does not reduce debt; it makes it bigger. It does not save nations from poverty; it paves the way for social and economic demise.
As Mark Blyth states in his book, “Austerity doesn’t work. Period”.
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