Image Source: Pexels

A word nobody has mentioned for a long time is "austerity." The term that would take us down the path to sustainable spending has seemingly been tossed into the dustbin of history.

Today, the concept of government restraining spending is considered a bad idea. Those who oppose austerity often cling to the idea that a major reduction in government spending will change future expectations about taxes and future government spending. These are factors that encourage private consumption and propel forward overall economic expansion.

Since 2017, when an article by James McCormack titled, "The Quiet Demise of Austerity," was published on Project Syndicate, the idea of austerity has become toxic. Government spending has gone over the moon. It would be a reach to blame it all on governments' response to the COVID-19 pandemic. Still, the fact is that since then America's national debt has soared from roughly 21 billion to over 34 billion dollars. In short, austerity seems to have been forgotten just when it is needed most.

In his article, McCormack pointed out that debates about the potential advantages of using stimulus to boost short-term economic growth, or about the threat of government debt reaching such a level as to inhibit medium-term growth, have gone silent. It is as if the whole world has capitulated to the idea that we can spend our way out of the debt. Other arguments center on the idea that it really doesn't matter and that we will deal with the issue when we have to.

There is no doubt that economic growth tends to mask a multitude of problems. In economics, austerity refers to cutting spending often by lowering and reducing the number of benefits and public services. Austerity policies are often used by governments to try to reduce their deficit spending. Spending cutbacks are sometimes coupled with increases in taxes in an effort to demonstrate long-term fiscal solvency to creditors.

It is easy to point at measures taken to reduce runaway or wasted spending and blame them for creating a reduced spending spiral, but that is unfair. Please note that while it is important to control rising budgets and how much is spent, where it is spent is just as important. 

In the article I cited, McCormack wrote: "Objections to austerity were understandable after the 2008 financial crisis when growth was languishing below 2% and sizeable negative output gaps suggested that overall employment would be slow to recover. But now the merits of austerity seem to have been forgotten just when it is needed once again."

It is true that government spending financed by deficits does support economic growth when consumers and businesses are unable to do so. When the private sector is unable or unwilling to consume at a level that increases GDP and employment sufficiently, Keynesian economists claim governments should spend more, and not less. This tends to be a slippery slope that is difficult to exit.

Adding to this problem is that the government sector tends to be the least productive part of the economy. Larger government often leads to more regulation which strangles productivity in the private sector. What we are witnessing today is spending more and more in order to achieve economic growth. 

Austerity has been given a bad reputation -- blaming it for the problems we face is akin to blaming the medicine taken after someone becomes sick for the illness. Austerity measures have been associated with public protest and claims of a significant decline in the standard of living.

The argument by contemporary Keynesian economists that budget deficits are appropriate when an economy is in recession bolsters this movement. They claim it reduces unemployment and helps spur GDP growth, and that in an economy one person's spending is another person's income. If everyone tries to reduce their spending, the economy can fall into what economists call the paradox of thrift, which results in a reduced spending spiral and a fall in the GDP.

Austerity measures are typically taken in extreme situations where there is a threat that a government cannot honor its debt liabilities. Such a situation may arise if a government has borrowed in foreign currencies that they have no right to issue, or if they have been legally forbidden from issuing their own currency. In these cases, banks and investors may lose trust in a government's ability and/or willingness to pay its obligations, and either refuse to roll over existing debts or demand extremely high interest rates.

Often the typical goal of austerity is to reduce the annual budget deficit without sacrificing growth. Part of the goal of these policies is generally to reduce the overall debt burden as the economy grows. Unfortunately, most efforts by central governments to prop up asset prices, bail out insolvent banks, or "stimulate" the economy and deficit spending make stable growth less likely.

People often look for someone or something to blame for the troubles we bring upon ourselves. This is especially true when austerity is introduced as a way to bring out-of-control government spending back in check. Austerity has negative connotations because it is often painful. Still, blaming austerity for the blowback from governments living beyond its means is more than unfair. 

Common logic would dictate that governments operate with responsible reigns on spending. If a government spends and runs its business in an austere way, the issue of when to start cutting or tightening should never surface.

Simply put, such cuts are very unpopular and painful to the people and the voters, as social spending programs get targeted for cuts and taxes are raised. Also, retirement ages may be raised and government pensions reduced. Even port and airport fees, train and bus fares, and a slew of other costs usually increase.

The problem we face today is that the wild spending post-COVID never stopped. Every dollar wasted on political pork, fraud, and poorly considered infrastructure makes the country's fiscal situation even worse. Those opposing austerity argue that, in periods of recession and high unemployment, austerity policies are counter-productive because reduced government spending can increase unemployment. Also, reduced government spending reduces GDP, which means the debt-to-GDP ratio does not improve.

It is not just about the deficits of today, but the promises you make. These promises and how they affect the financial landscape must be factored in. The bill for overspending does eventually come back to haunt you. That is why we would be far better off if the concept of austerity was replaced or renamed "sustainable spending." I suspect that by the time cutting spending is once again in vogue, we will be in real trouble.

More By This Author: