Thursday, March 14, 2013

Austerity doesn't work

Writing in The Guardian, Aditya Chakrabortty reminds us of the historical verdict on austerity: it almost never works:

[Y]ou would have to be one of the austerity jihadists to believe that you could cut your way out of a slump. The entire modern history of expansionary fiscal contraction, as coalition ministers used to call it, is that it almost never works.

Instead, severe austerity tends to turn recessions into depressions, consign millions to the dole or under-employment and lead to frightening political turbulence.

The most famous episode of austerity was during the interwar years, as Germany, Britain, France and Japan all fought to stay on the Gold Standard even amid the Great Depression. The deflationary impact of keeping their currencies pegged to gold, along with the austerity policies they followed to do so, was disastrous.

In Britain, unemployment jumped from 10.4% in 1929 to 22.1% by early 1932, even while government debt surged. In Germany, the Social Democrats stupidly clung to the orthodoxy of austerity, pushing joblessness up to to 30% by 1932, and opening the door to the Nazis.

Despite that, history is repeating itself all over Europe. The pursuit of austerity in Eastern Europe has caused governments to fall in Bulgaria and Slovenia. In Spain, it has pushed unemployment to 26%, causing political turmoil. In Greece, it has created political space for open fascism. Meanwhile, in New Zealand, our government remains wedded to the ideology of cuts, resulting in record unemployment, prolonged hardship, and economic stagnation.

Austerity doesn't work. Its time our government abandoned this ideology and tried something that does.