Sunday, July 1, 2012

Should conservatives support austerity?

Austerity is a hot topic in Europe right now. Most everyone seems to hate it, at the same time as everyone agrees that the budget somehow will have to be balanced – just without the cuts, please. For conservatives, the choice has always seemed clear: What the leftists call austerity, we call financial common sense. Is there maybe time to re-evaluate this stance? While I have long been, and still am, a supporter of balanced budgets, I have through my time in Ireland come to realize that fiscal conservatism is about so much more than numbers. I’ve seen friends lose their jobs, friends lose their grants and friends being forced to emigrate. I’ve seen people my age begging on the streets – normal, Irish kids who could have been my classmates, had it not been for the economic misfortune that has befallen the country. I still support balancing the budget, and I believe spending cuts to be an essential part of doing so. However, I believe conservatives need to be more careful when approaching the topic of austerity.
There are a couple of things we need to remember:
First, conservatism is not all about balanced budgets. Yes, it’s important, but conservatism is an all-around ideology which sees everything in its context and focuses on the effects for the society as a whole. While socialism only focuses on the working class (what is good for the working class is good, end of story), and libertarianism only on “the individual” (whatever that means is quite unclear), conservatives looks at the whole of society; we study the past and we plan for the future. And, we are big fans of the family.
The question that I would like every conservative to think about is: What if there is a trade-off? What if we have to choose between families and balancing the budget?
Now, most conservatives are going to jump at this question, stating that this is simply impossible. Surely, balancing the budget cannot be incompatible with family-friendly policy? Budget deficits hurt families after all, for example by raising interest rates.
However, the reality, as usual, is much more complex than that. 70 000 Irish people emigrated last year, leaving thousands of shattered families behind. The economic crisis, with unemployment destroying marriages and cutbacks leaving kids without a decent education, has certainly ravaged families.
How can conservatives, who claim to support the family, support this? The standard answer of course is that without austerity, things are bound to get a lot worse for families – if a state bankruptcy leaves the country without working ATMs for example.
wrote a post last year about what I called “Fiscal crash diets”, which means a country is trying to balance the budget (lose weight) so fast that they end up losing muscle mass (real, important government investments) rather than fat (government waste).
Ireland is a prime example of this: Despite massive budget cuts for the past four years, there are still public servants making more than 200 000 euro (ca 250 000 dollars) a year. Ireland is an example of a country that has made cuts to muscles and organs, but has barely managed to lose an ounce of fat despite four years of “dieting”.
Isn’t it better to balance the budget in 10 years, and make sure that the cuts are made to actual government waste, than to balance it in 5 years and accidentally cut necessary government expenditures and investments? Any reasonable conservative would agree. Sometimes, identifying government waste is hard and takes time.
Also, it’s very important to separate government waste from things that aren’t wasteful in themselves, but that we may not be able to afford right now due to unfortunate economic circumstances. It’s no wonder students get mad when the government (essentially) tells them that giving them subsidized tuition fees is a waste that has to be eliminated. Governments like the ones in Ireland and Greece may no longer be able to afford subsidizing higher education the way it has, but that’s not the same thing as saying said subsidies are inherently wasteful.
An inherently wasteful thing is something that doesn’t contribute anything to the economy or society’s well-being overall: Such as taxing poor people, only to send the money back in the form of welfare (that the poor have to rely on only because they had to pay said taxes in the first place). This is an administrational exercise that is entirely wasteful, always and everywhere.
Subsidized tuition fees – while they have their own set of pros and cons – can sometimes contribute to economic activity by opening up college to kids from disadvantaged families, and these kids will then (ideally) get jobs where they will contribute more to the economy and pay more taxes as well (ie, they become lawyers and doctors instead of waiters and janitors). Of course, it doesn’t always pan out that way – but the point is, subsidizing higher education is not necessarily a waste. You can’t always afford to do it, but let’s not confuse it for real government waste. To call things waste even though they’re not waste just leads to an unnecessary alienation (in the case of tuition fees, conservatives would alienate themselves from students by calling tuition
Remember that conservatism has three legs: Fiscal conservatism, social conservatism and foreign policy conservatism.
All I am saying is this: Let’s make sure that our fiscal conservatism is compatible with our social and foreign policy conservatism. If we demand the budget be balanced tomorrow, some of the cuts are bound to hit families more than necessary, and let’s not even talk about the defense spending – if you were to immediately balance the budgets in the European countries that are now in crisis, the defense budgets of those countries would be wiped out.
Conservatives tend to ignore that the three legs of conservatism sometimes can conflict with each other: If choosing between a strong defense and budget cuts, which do you choose? Reagan choose defense (which probably was right, at least at the time). But if someone says that cutting defense spending is okay in order to balance the budget, is that person not a conservative? Of course he still is; you have to look at things on a case by case basis.
Why Germany should bail out Europe
The next issue, and this is one that has been almost completely ignored by conservatives (and just about everyone else), is that at the end of the day this was Germany’s fault. I know this is a bold statement, but I believe Germany has a duty to help Ireland and the other countries because of this. And; I believe they should do it without charging interest.
After all, the extreme low-interest policy conducted by the ECB in the early 2000′s wasn’t there to help Ireland’s economy – Ireland’s economy was doing just fine. The low-interest policy was there to help Germany, who’s economy had stagnated. Germany’s economy didn’t boom with all the others; it was really their economy that was out of sync with the rest of the world, not Ireland’s. ECB had a german-centered policy (due to the fact that Germany has a huge influence over the ECB through the Bundesbank) and this overheated  the economies of the countries in the periphery, like Ireland.
Yes, these countries could have done all kinds of cut backs and tax hikes to avoid their economies becoming overheated; but Germany must have known that this was politically impossible. They knew exactly what they were doing, and they did it anyway.
Conservatives are against bailouts, so maybe we shouldn’t think of Germany bailing out Ireland as a bailout; maybe it’s time we start calling it a fine? Given the economic crimes done by the German-controlled ECB, I think a fine might be very appropriate. And as conservatives, we believe in law & order, right?
Germany are not the good guys. There is nothing conservative about what they did when they made the ECB slash interest rates to nothing, which led to a flow of cheap credit which fuelled Ireland’s property bubble.
This is not to say that Ireland shouldn’t have to balance the budget, which of course they have to. But when it comes to assigning blame, a very large part of it must be assigned to Germany. And so, there is nothing wrong – as a matter of fact – it is only fair that Germany has to help the countries that were hurt by their ruthless, selfish monetary policy.
This will do for today. In summary: Conservatives should support austerity, but always go on a case-by-case basis. Not every cutback is good.

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6 comments:

Lionhead said...

John G, the scope of what you've written needs to be expanded as you've overlooked some important issues. First let's look at Germany's position as they face fiscal collapse for financing the PIIGS countries that include Ireland:

http://www.zerohedge.com/news/germany-cries-europe-coming-our-money-greece-promptly-obliges

Yes, they are guilty of what you've described, but like a crack dealer of low interest rates, the addict is demanding free crack after getting addicted to it & demanding concessions or they will blow up the crack dealer.

You mention "conservatism has three legs: Fiscal conservatism, social conservatism and foreign policy conservatism." Unfortunately, you left out sound money, small Gov't, cutting spending on unnecessary programs, including needless wars, and freedom from corruption by various cartels of bankers, the Federal Reserve System, and crony capitalists receiving Gov't subsidies of all stripes & flavors.

You summarize, "Conservatives should support austerity, but always go on a case-by-case basis. Not every cutback is good." You you're advancing into the "Progressive Zone" which is a slippery slope to tread.

Instead, let's all support GROWTH. Achievable by the sound allocation of capital, reduced Gov't regulations, shrinking Gov't bureaucracy & eliminating Gov't departments, followed by the best of all, getting Gov't out of the Private sector by providing citizens with mortgages, health insurance, and the takeover of automobile companies. I recommend you study the European situation using the prism of Austrian economics. You'll likely come away with a different point of view by weaning yourself free of Keynesian principles. Live Free!

leighrow said...

Lionhead for president-Great points:)

dougfoot said...

What are the "correct" choices to make when facing fiscal calamities?
Looking at how many households facing such things would do (like the loss of a job). They would go about dealing with surviving:
1) They would go over their budgets and determine what was necesary. The list would include the things we need to sustain life. All else would be put on hold until times got better or stopped completely. Yes there would be complaining, bt you do what you have to.
2) They would pay down debt instead of incurring more of it.
3) They would go about finding means to increase their income, be it through selling off assets or other means to generate revenue.

How does this translate to government? When tax revenues don't meet the demand placed on government, there are two sides of this equasion to look at: incomes and outlays.
Government doesn't generate a revenue stream of its own, it can only survive by taking from the private sector. Contrary to popular beleif borrowing and inflating our currency is not generating income.
Too many big government types always look at the income side of the equasion saying that we as a people don't pay enough to the government. The reality is, even if the government took 100% from everyone, it couldn't fund the demands of government for very long. Once those monies ran out, then what? There would be nothing left to take.
So the answer resides in the other half of the equasion. That means returning to a constitutional budget. Funding those things outlined in our founding documents, stopping the borrowing and cutting back severely on all unnecessary agencies and programs.
Returning to a time when the responsibilities to take care of ourselves and families belonged to the indivual is the key to returning to fiscal sanity.

Lionhead said...

Thanks leighrow, although I'm sure I'd be 'unelectable' by today's standards. ;)

Here's another great quote on having free markets vs. controlled markets re the allocation of capital. This is the essence of where both Euro-Land & the USA are in trouble, failing to restart growth in their economies.

"Planned economies have a track record of failure, in my view because they do not have this democratic dimension. The state may claim to be “scientific”, but as Hayek conclusively illustrated, the lack of any real feedback mechanism has always led planned economies into hideous misallocations of resources, the most egregious example being the collectivization of agriculture in both Maoist China and Soviet Russia that led to mass starvation and millions of deaths. The market’s resource allocation system is a complex, multi-dimensional process that blends together the skills, knowledge, and ideas of society, and for which there is no substitute. Socialism might claim to represent the wider interests of society, but in adopting a system based on economic planning, the wider interests and desires of society and the democratic market process are ignored."

http://azizonomics.com/2012/07/01/the-origin-of-money/

Restarting growth entails the novel idea of 'hands off' the free markets. Let the multitude of forces determine who wins & looses in the competitive market place.

Marxism/Socialism/Communism/Fascism never work over time. Liquidation of the bad debts, forgiveness of other debt & having vulture capitalists buy the remnants of dying companies will ultimately restore growth.

Bailouts, Zombie Banks, Gov't subsidies in housing, healthcare, railroads, car companies, post office, academia, et al, are not going to work to restore growth. Neither is austerity that depress consumer confidence & spending. Unfortunately, leaders in Brussels & Washington have chosen a tack the will only face increasing headwinds until it collapses.

Live Free!

John said...

Lionhead,

I am not in any way a keynesian, which you would know if you've read my previous posts. I'm an intellectual conservative and I analyze everything on a case by case basis. I don't have a dogmatic stance against either government spending, intervention or inflation.

While I like the Austrian framework and I believe austrian business cycles do exist, I don't believe the austrian explanation is sufficient for all business cycles and I don't like the dogmatism that Austrians so often display.

I'm not saying lowering interest rates is necessarily a good idea, but Germany has a duty to help the rest of Europe somehow, given that they screwed things up in the first place.

I have a degree in economics (going for a masters in the fall), so you don't have to lecture me on government and growth. I know the government doesn't produce things (in most economies...), but that doesn't mean raising taxes can never be the right thing to do. The pain of cutbacks can be so severe and so devastating to a society (look at Greece which is descending towards anarchy) that tax hikes are to be preferred.

If you want to read my thoughts on keynesianism, check out this post on the other site I contribute to: http://caffeinatedthoughts.com/2012/05/behavioral-economic-case-keynesianism/

Lionhead said...

John, I understand your position & your views are not solidly formed. Unfortunately, the educational system you're in is going to insist you become a Keynesian. I hope you pursue your interest in Austrian economics, Mises, Hayek, Rothbard. You might also look at the Federal Reserve Boom & Bust cycles caused by their monetary policies. Look over the century long charts to compare to past business cycles & panics.

So, I'll pose this question to you, since you are a pragmatist. JP Morgan receives a 14 billion dollar subsidy from the US Gov't. This is fact:

http://www.zerohedge.com/contributed/2012-07-01/77-jp-morgan%E2%80%99s-net-income-comes-government-subsidies

Now, austerity is a triple whammy on the citizens of any nation. Taxes, financial repression through a zero interest rate policy, a never ending road into Hayek's debt serfdom.

Would you allow the Gov't subsidy to JP Morgan to continue & impose austerity to the citizens of the US? Let's broaden that to Europe where the ECB is subsidizing their member banks because they're insolvent. Is it fair to allow bank subsides to continue & impose austerity in the PIIGS countries.

The people of Ireland left their country to come to the US due to financial repression by Great Britain. What you're proposing is the same by bringing austerity back to the Irish. From what I've read, they're resisting that as would I. I'm sure that's not your desire, but with the economic Keynesian ideas you've been taught, you already accept it. I do not.

You might want to visit the Ludwig von Mises Institute to counterbalance the distortions of Keynesian policies.

http://mises.org/

BTW, Keynes never advocated the extremes we are suffering through today. I would never think he would condone current monetary policies, as he saw them not as a solution, but a short term fix to be removed.

Live Free!