Tuesday, August 16, 2011

The problem with austerity

Writing in the Herald, economist and former UK MP Bryan Gould highlights the fundamental problem with our economy at the moment: too much austerity:

Governments [in financial trouble] can choose to focus on cutting spending, or they can try to increase revenue. These further economic shocks show that, in focusing exclusively on cutting spending, they have made the wrong choice.

The problem is that the level of debt is a function of the level of economic activity; the higher the level of economic activity, the more buoyant the government's tax revenue.

A government that has trouble balancing its books in a recession, and seeks to deal with that issue exclusively by cutting its spending, necessarily reduces the level of economic activity and - by depressing its tax revenue - makes the debt problem more difficult to resolve.

And this is exactly what's happening here. National's response to the recession wasn't stimulus - that was all spin - but cuts. And now, having cancelled programmes and laid off thousands of highly-paid public servants (meaning less money in the economy), they're wondering why they don't have any money. What makes it worse is that National did exactly the same thing in the early 90's last time they were in government - deepened a recession with harsh austerity - but they seem not to have learned from their mistake. Or they don't think it was a mistake at all. After all, the wealthy did pretty well out of it, just as they're doing well now...