Monday, June 06, 2011

Austerity not a medicine for all occasions

One of the key lessons of the great depression is that austerity is not a medicine for all occasions. However, over the subsequent excesses we seem to have lost out on this learning.

Austerity is not a solution for US
There is hardly any doubt about ability of US to compete. In fact, if the fat corporate balance sheets are to go by, US companies are in their best shape among past 5 years. Yet, the unemployment numbers are languishing which makes US a pump needing priming. Such priming will be achieved through a jobs program to create next-gen infrastructure that will allow US manpower to compete in knowledge era. Austerity, in this case, will impair future competitiveness. However, the kind of priming as envisioned in the Fed's quantitative easing program is nothing but wasteful. These programs do not have well established working channels to reach fruition. 

Greece and wasting water priming the pump
We don't waste water priming the pump so long as the pump works and there is water at the end of the well. In case of Greece, both parts seem to be a problem. In such case, austerity is a better alternative till the economic engine is repaired. Further, Greek government must set in place tax reforms allowing fair and easy collection of taxes. Once such necessary conditions are in place, then Greece will need a spending program to kick start growth in a sustainable manner.

Implications for markets and democracy
The problem with misunderstanding related to austerity is two-fold. The problem with austerity is that it will wreck havoc with asset prices in general impairing genuine investment leading to future problems. The second problem is the people's confidence in the system is shaken leading to anarchy and threat to general system of law and order. In short, the cost of misunderstanding austerity will be massive.


My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.