The Case for Austerity
The word "austerity," beginning with the Greek government's debt crisis two years ago, has been used by the financial media in one sense, and only one sense: reductions in spending by national governments. The word is not used with respect to the economy as a whole.
More than this: the word has been used to explain the contracting economies of Europe. The reductions in government spending are said to have caused the contracting economies. This explanation is based on textbook Keynesianism.
Keynesians call for increased government spending. This is the heart of Keynesianism. Keynesianism rests on a mantra: "Government spending overcomes recessions." All else is peripheral: monetary inflation, graduated taxation, and free trade. These peripheral issues will always be sacrificed to the supreme economic premise: "Government spending overcomes recessions."
This is where every analysis of Keynesianism should begin. Any economic doctrine, any economic policy, any proposed solution to the present crisis should be assessed in terms of the mantra. Anything that does not begin and end with the mantra is not Keynesianism. Anything that does, is.
It is a mark of the supreme triumph of any ideology when the self-professed critics of the ideology adopt both its conclusions and its rhetoric, and do so unknowingly. This means that the promoters of the ideology have set the terms of public discourse. It is very difficult to replace an ideology or worldview, once its promoters have established the terms of discourse.
It can be done, of course. But to do this, the promoters of a rival outlook must expose both the errors of the existing system and the implicit agreement of its supposed critics. This wins no friends among the hapless troops who think they are scoring significant victories by arguing against peripheral aspects of the enemy ideology, while accepting its central presuppositions and main policy prescriptions lock, stock, and barrel. They have been taken in hook, line, and sinker.
PHARAOH AND THE FROGS
A recent example of a well-meaning but conceptually confused anti-Keynesian was published in Forbes. It had a powerful headline: "Keynesianism Is the New Black Death." It suggested that the great tragedy of Europe today is "austerity."
As I have already said, the financial media universally define austerity as cuts in government spending. I have never seen the word used in any other way over the last two years. Any author who uses the word in any other way owes it to his readers to explain this new usage. The Forbes article offered no such distinction or alternative definition. I therefore take it at its word: austerity.
If austerity is the great evil, then the implication is inescapable: that which restores government spending and therefore overcomes austerity is positive.
This reminds me of the Pharaoh who decided not to let the Israelites journey for a week to sacrifice to God. Moses and Aaron then attempted to persuade him by way of a series of plagues. One of them was frogs. The land filled up with frogs. Everywhere anyone walked, he stepped on frogs.
The court magicians had to do something about this. They responded by a public display of the power of their magic that matched what Moses and Aaron could do. "And the magicians did so with their enchantments, and brought up frogs upon the land of Egypt" (Exodus 8:7).
Somehow, I imagine Pharaoh screaming at them: "No, no, you blockheads: not more frogs! Fewer frogs!" But the text does not record this.
The solution to the frogs of European recession is not increased government spending. Rather, it is the opposite: reduced government spending. In short, the solution is greater austerity.
The Austrian economists also have a mantra: "Reduced taxation increases liberty." Liberty is necessary for economic growth.
If a contemporary government cannot reduce taxes without going bankrupt, then it must cut spending if it chooses not to go bankrupt.
Europe's national governments are all going bankrupt. Japan's is, too. So is America's. The solution is to cut taxes and cut spending even more.
"Not more government spending. Less government spending!"
"Not larger government deficits. Reduced government deficits!"
"Not higher taxes. Lower taxes!"
"Not more fiat money. Reduced fiat money!"
In short: "Let my people go!"
With this in mind, let us examine an article that argues that austerity is the great threat to Europe's prosperity.
A DEATH SPIRAL?
The article begins with a survey of European politics. It points out that voters are tossing out politicians in nation after nation. Sarkozy was number eight over the last year. Why is this happening? Here is the proposed answer:
Let us not be naive. The West has been run at the top by Keynesian elites, or politicians holding Keynesian ideas, ever since 1930 – six years before Keynes offered his unreadable justification of politicians' policies: "The General Theory of Employment, Interest, and Money.".
The Keynesian central bank pushed Europe's economies into a boom, 2001 to 2007. The voters loved it. Interest rates were low. There was lots of money to buy houses. The economies of the south – "Club Med" – were booming. So was the honorary member of Club Med: Ireland. Ireland's property values quadrupled. It was all going to last forever. The elites – especially the economists – issued no warnings, except for Austrian economists, who were dismissed, as always, as dinosaurs.
Then came the bust phase. What the European Central Bank did before 2007 – inflate – it has done more aggressively ever since 2008. Governments ran even larger deficits. They all implemented Keynesian stimuli. This did not work. Europe is falling back into a recession.
In the spring of 2010, investors in northern Europe caught on to the fact that Club Med residents could not compete economically. They kept running deficits with the North. Those easy-going populations were living on money borrowed from the North. So were their governments. They had no intention of ever paying back these loans.
Any why not? This is what Keynesianism teaches. Government loans will not be paid off. Ever. Government debt will grow. So will prosperity.
Two years ago, Greece's Socialist Party found out just how far in the debt hole the government was. Interest rates then started to rise in PIIGS nations. PIIGS governments were trapped. They could not run ever-larger deficits, because the cost of loans were rising.
That was when the reality of Keynesianism hit: deficits do matter. Money is not free. Debts must be rolled over at market interest rates. The horror!
That was when governments in the South started cutting back on spending. Not much, you understand. The deficits are still unprecedented: above 6% of GDP.
Keynesians labeled this "austerity."
It is not austerity. It is deficit spending on a massive scale. Austerity is where national governments run surpluses and use excess revenues to pay down the national debt.
There has not been austerity in Europe since approximately 1914.
The gold coin standard enforced austerity, 1815 to 1914. That was its chief function and its great service to mankind. It kept the West's governments austere. This enabled the private sector to dine at an ever-expanding feast.
Keynesians hate the gold coin standard. That is because they believe that high government spending is the basis of high consumer spending, and consumer spending – not private thrift – is the foundation of prosperity.
The public, which prefers consumer spending to the austerity of thrift, cheers on the politics of Keynesianism. Deficits without end, borrowing without pain, growth without ceasing: Keynesians promise, and voters believe.
But the day of reckoning arrived in 2010. The free money got expensive. The party did not stop, but some of the guests were sent home, to join young adults, who have sat and watched TV, because there are no jobs.
The public feels betrayed. Voters believed in the Keynesian dream, which was articulated by the original Keynesian, who said, "If thou be the son of God, command that these stones be turned into bread" (Matthew 4:3). When the target of this challenge refused to rise to the bait, the Keynesian went looking for other takers. In the second half of the twentieth century, he found them. Lots of them. Millions of them. Politicians promised to accomplish the feat. Voters applauded.
But times have changed, the article tells us.
The reason why there are no economic chefs promoting growth is simple: somebody has to bankroll the growth of government spending. Who will that be? Who wants to trust PIIGS?
The louder the voters scream about austerity, the fewer the number of lenders, meaning lenders at rates under 10%.
The article eventually gets to the point.
Excuse me? What does an avowed socialist politician have to do with Keynesianism? Keynesianism is what Paul Krugman proclaims, which is greater deficit spending, plus sufficient central bank money expansion to finance this expansion.
Which Keynesian economist or politician has come out forthrightly for spending cuts, i.e., austerity? Austrian economists have. Ron Paul has. This is why Austrians and Ron Paul have been marginalized by the Keynesian media as cranks.
Traditional Keynesianism calls for increased spending, more borrowing, and – if private lenders demand high rates of interest – monetary expansion by the central bank to purchase government debt. The article wisely rejects monetization. But it does not call for a gold coin standard. Rather, it defends the euro.
The Keynesian political hierarchy imposed the euro on the voters in 1999. The elite's spokesmen have decried the departure of Greece from the eurozone. The unelected Greek technocrats, like technocrats all over Europe, were either former Goldman Sachs employees or wanna-be's. They are now being tossed out by the voters. The voters are populists and socialists. They are fellow travelers of Keynesians only in the boom phase of the Keynesian welfare state. When the bills come due, they revert to locally issued fiat money, taxation of the rich, trade unionism, and increased government spending.
Keynesianism is in a death spiral. So is populist socialism. So is fiat money fascism. They are all in death spirals because they all reject this premise: "Lower taxes increase liberty."
Liberty will prevail. This is an eschatological affirmation. One of the ways that it will prevail is through the bankruptcy of the Keynesian social order: high taxation, high regulation, high deficit spending, and high inflation.
Let's put government on a diet. Let's have austerity where it belongs: government spending.
That is what Europe's voters do not want. That is what they are going to get.
"Not less austerity. More austerity!"