November 10, 2008
"Austerity" and "Stimulus" tend to go hand-in-hand during times of economic difficulty. They are the ketchup and mustard of bad recession policy -- despite being almost diametrically opposite actions. I put "austerity" in quotes again because there is a whole sort of narrative or set of behaviors that go along with the idea.
November 3, 2008: "Stimulus"
"Austerity" usually means tax hikes and spending cuts. We're seeing it at the state level in a big way, with California now adding a "temporary" (yeah, right) 1.5% sales tax surcharge, bringing Los Angeles to 10.25% apparently. New York wants to raise property taxes by 7%. At the Federal level, tax hikes and spending increases seem the order of the day.
Governments today are rife with waste. A big problem today is at the state and municipal levels, where policemen, firement, teachers etc. have been gradually ratcheting up their salaries and benefits to absurd levels. I'm hearing stories of policemen getting $150K+, and retirement at 20 years (could be mid-40s) with 90% pay. And full-boat medical of course. Unfortunately, the only way to get out of these kinds of committments is through bankruptcy, which is messy. Messy but perhaps necessary unless these giveaways are crammed down through some other means, like inflation or some separate negotiation. Eventually the call comes down to trim the school budget. Do they toss overboard some useless administrators at $175K a head (maybe more including all benefits)? Of course not. Instead, they eliminate the budget for pencils. Then, for want of $275 of pencils, the education system grinds to a halt. Then the parents get together and have a Bake Sale to raise $275 for pencils. Everyone then, with grim pride, congratulates themselves on coming together and making sacrifices to get through the crisis -- for the kids, of course. After all, if you call it "austerity" is has to look like austerity. (Baby Boomers are very into the way things look.) The proverbial tightened belt. Unfortunately, all the images associated with "austerity" are negative. You could call it "refocusing" or something like that -- refocusing tax revenue on meaningful things instead of various forms of waste -- and maybe people would then expect some sort of better, less wasteful outcome, that could well be better than what we had before, and cost less too.
The same thing can happen at every government level. On the Federal level, for example, some small but effective and worthwhile program, like wetlands restoration, or food bank support, or scholarships for inner-city kids, gets eliminated (with all sorts of negative consequences), saving $17 million, while the military and the banks continue to get every penny they ask for. The politicians know that the public is incapable of distinguishing between $17 million and $850 billion, although one is 50,000 times larger than the other. The disappearance of the food-bank support budget looks like austerity, while you could cut the defense budget by 50%, and toss a few coins to the food bank budget (which probably needs it during a recession), and the overall result would be something like the opposite of austerity. A little more plenty.
The point is, "austerity" has a tendency to produce meaningless, small displays of penny-pinching, while doing little to address the real problems. This is a matter of politics of course, and we live in a time when politicians seem totally incapable of anything but stuffing their pockets and defending their turf. It was not always this way, in history, though this is probably the norm. It seems empires spend a lot more time declining than they do rising.
The other aspect of "austerity" is of course tax hikes, which are always painted as a sort of moral imperative. The government propoganda machine works overtime on this one, since it makes fleecing the flock so much easier. There is no moral imperative to finance government waste and policemen's cushy retirements in a recession, when people really need the money for their own use instead. I've said enough about raising taxes in a recession that more detail really isn't necessary here. Since the spending cuts are typically not very effective (meaning that they don't actually reduce spending much), that puts more pressure on politicians to hike taxes.
A recession is as good a time as any to eliminate the ever-present government waste. If you're going to cut spending, do it in size, and do it in a way that makes sense on a "micro" level as well as a "macro" one. In other words, eliminate stuff that should have been eliminated even in the boom times, but wasn't for political reasons. I'm certain that the State of California could eliminate 20% of its spending with no particular ill effects.
So, spending cuts and tax cuts, or, at very least, spending cuts and no tax hikes.
The result of "austerity", either the spending cuts or the tax hikes, tends to be an even weaker economy. The effects of the spending cuts are normally rather short-lived, while the effects of the tax hikes persist until taxes are lowered again.
The weaker economy leads to calls for "stimulus." "Stimulus" -- it's always the same word, never "economic re-energization" or something like that -- usually means abject waste in big-dollar scale. Can you sense how a big tax reform could be "economic re-energization," but, for subtle rhetorical reasons, seems completely inappropriate for "stimulus"? It should be obvious that "stimulus" is the complete opposite of "austerity," at least as far as spending is concerned. People then end up with no pencils in the schools, while workmen busily construct bridges to nowhere in the countryside. And higher taxes, of course. "Stimulus" tends to be followed by tax hikes -- a pattern that John Stuart Mill complained about over 175 years ago.
December 17, 2006: John Stuart Mill on Public Works Spending
Thus, while "austerity" and "stimulus" are basically contradictory, they seem to have tax hikes in common. Then, while "austerity" and "stimulus" are either cancelling each other out or leading to tax hikes, governments reach for currency devaluation to help bail them out of the mess. Thus, we end up with a result contradictory to my basic principle of good economic management:
Low Taxes, Stable Money
If you're going to cut government spending, and this is usually a good idea, then do it right: get in there and reduce the budget by a good 30% or so. Concentrate the slashing on the real waste -- everybody on the inside knows exactly what it is -- rather than the small but important little items that tend to get sacrificed like virgins tossed in the volcano, as politicians aim to put on a show to the public about how serious they are getting about penny-pinching while protecting their own pig troughs. I would pair it with some tax cuts, which tend to be much more re-energizing than the various "stimulus" suggestions proposed. And, if you are going to spend some big bucks, do it on something important and useful and meaningful (I always suggest a decent rail system here), rather than on total waste. It seems the Chinese government is going more towards this direction, with a combination of tax cuts and big spending projects. I would prefer they tend more towards the tax cuts (or tax reform) and less towards the spending, but it is not a bad approach overall.
September 14, 2008: Depression Economics
At least China will end up with a decent rail system at the end of this mess. For some reason, it doesn't bother Americans that China should have a decent rail system, but the United States does not. China, people -- China! But then, Romans probably thought they were da bomb too all the way up until they were shining the shoes of barbarians in the streets of Rome.
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Obama: Thank Goodness. Obama brings with him the Democratic Party, with all of its various problems and bad habits. Nevertheless, he is about the best possible solution that could be produced with the political system we have today. Keep your eye out for Lincolnesque elements.
Newsweek: Obama and the Echoes of Lincoln
Los Angeles Times: Obama's Lincoln Moment
Of course, Lincoln also fought a Civil War, devalued the currency, imposed the United States' first income tax, and did a number of other things which were rather messy, in a historical sense. Southerners hate Northerners' incessant idolization of Lincoln.