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Χρειαζόμαστε
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DIR By: FringeElements
Date: November 29, 2012, 11:15 pm
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Άρθρο
δημοσιευμένο
στα mises daily
HTML http://mises.org/daily/6289/The-Myth-of-Austerity<br
/>από τον Philipp Bagus,
τον γενναίο
του
Ινστιτούτου
Mises ευρωφάγο!
The Myth of Austerity
Many politicians and commentators such as Paul Krugman claim
that Europe's problem is austerity, i.e., there is insufficient
government spending. The common argument goes like this: Due to
a reduction of government spending, there is insufficient demand
in the economy leading to unemployment. The unemployment makes
things even worse as aggregate demand falls even more, causing a
fall in government revenues and an increase in government
deficits. European governments pressured by Germany (which did
not learn from the supposedly fateful policies of Chancellor
Heinrich Brüning) then reduce government spending even further,
lowering demand by laying off public employees and cutting back
on government transfers. This reduces demand even more in a
never ending downward spiral of misery. What can be done to
break out of the spiral? The answer given by commentators is
simply to end austerity, boost government spending and aggregate
demand. Paul Krugman even argues in favor for a preparation
against an alien invasion, which would induce government to
spend more. So the story goes. But is it true?
First of all, is there really austerity in the eurozone? One
would think that a person is austere when she saves, i.e., if
she spends less than she earns. Well, there exists not one
country in the eurozone that is austere. They all spend more
than they receive in revenues.
In fact, government deficits are extremely high, at
unsustainable levels, as can been seen in the following chart
that portrays government deficits in percentage of GDP. Note
that the figures for 2012 are what governments wish for.
HTML http://images.mises.org/6289/Figure1.png
The absolute figures of government deficits in billion euros are
even more impressive.
HTML http://images.mises.org/6289/Figure2.png
A good picture of "austerity" is also to compare government
expenditures and revenues (relation of public expenditures and
revenues in percentage).
HTML http://images.mises.org/6289/Figure3.png
Imagine that a person you know spends 12 percent more in 2008
than her income, spends 31 percent more than her income the next
year, spends 25 percent more than her income in 2010, and 26
percent more than her income in 2011. Would you regard this
person as austere? And would you regard this behavior as
sustainable? This is what the Spanish government has done. It
shows itself incapable of changing this course. Perversely, this
"austerity" is then made responsible for a shrinking Spanish
economy and high unemployment.
Unfortunately, austerity is the necessary condition for recovery
in Spain, the eurozone, and elsewhere. The reduction of
government spending makes real resources available for the
private sector that formerly had been absorbed by the state.
Reducing government spending makes profitable new private
investment projects and saves old ones from bankruptcy.
Take the following example. Tom wants to open a restaurant. He
makes the following calculations. He estimates the restaurant's
revenues at $10,000 per month. The expected costs are the
following: $4,000 for rent; $1,000 for utilities; $2,000 for
food; and $4,000 for wages. With expected revenues of $10,000
and costs of $11,000 Tom will not start his business.
Let's now assume that the government is more austere, i.e., it
reduces government spending. Let's assume that the government
closes a consumer-protection agency and sells the agency's
building on the market. As a consequence, there is a tendency
for housing prices and rents to fall. The same is true for
wages. The laid-off bureaucrats search for new jobs, exerting
downward pressure on wage rates. Further, the agency does not
consume utilities anymore, leading toward a tendency of cheaper
utilities. Tom may now rent space for his restaurant in the
former agency for $3,000 as rents are coming down. His expected
utility bill falls to $500, and hiring some of the former
bureaucrats as dish washers and waiters reduces his wage
expenditures to $3,000. Now with expected revenue at $10,000 and
costs at $8,500 the expected profits amounts to $1,500 and Tom
can start his business.
As the government has reduced spending it can even reduce tax
rates, which may increase Tom's after-tax profits. Thanks to
austerity the government could also reduce its deficit. The
money formerly used to finance the government deficit can now be
lent to Tom for an initial investment to make the former
agency's rooms suitable for a restaurant. Indeed, one of the
main problems in countries such as Spain these days is that the
real savings of the people are soaked up and channeled to the
government via the banking system. Loans are practically
unavailable for private companies, because banks use their funds
to buy government bonds in order to finance the public deficit.
In the end, the question amounts to the following: Who shall
determine what is produced and how? The government that uses
resources for its own purposes (such as a "consumer-protection"
agency, welfare programs, or wars), or entrepreneurs in a
competitive process and as agents of consumers, trying to
satisfy consumer wants with ever better and cheaper products
(like Tom, who uses part of the resources formerly used in the
government agency for his restaurant).
If you think the second option is better, austerity is the way
to go. More austerity and less government spending mean fewer
resources for the public sector (fewer "agencies") and more
resources for the private sector, which uses them to satisfy
consumer wants (more restaurants). Austerity is the solution to
the problems in Europe and in the United States, as it fosters
sustainable growth and reduces government deficits.
Lower GDP?
But does austerity not at least temporarily reduce GDP and lead
to a downward spiral of economic activity?
Unfortunately, GDP is a quite misleading figure. GDP is defined
as the market value of all final goods and services produced in
a country in a given period.
There are two minor reasons why a lower GDP may not always be a
bad sign.
The first reason relates to the treatment of government
expenditures. Let us imagine a government bureaucrat who
licenses businesses. When he denies a license for an investment
project that never comes into being, how much wealth is
destroyed? Is it the expected revenues of the project or its
expected profits? What if the bureaucrat has unknowingly
prevented an innovation that could save the economy billions of
dollars per year? It is hard to say how much wealth destruction
is caused by the bureaucrat. We could just arbitrarily take his
salary of $50,000 per year and subtract it from private
production. GDP would be lower.
Now hold your breath. In practice, the opposite is done.
Government expenditures count positively in GDP. The wealth
destroying activity of the bureaucrat raises GDP by $50,000.
This implies that if the government licensing agency is closed
and the bureaucrat is laid off, then the immediate effect of
this austerity is a fall in GDP by $50,000. Yet, this fall in
GDP is a good sign for private production and the satisfaction
of consumer wants.
Second, if the structure of production is distorted after an
artificial boom, the restructuring also entails a temporary fall
in GDP. Indeed, one could only maintain GDP if production
remained unchanged. If Spain or the United States had continued
to use their boom structure of production, they would have
continued to build the amount of housing they did in 2007. The
restructuring requires a shrinking of the housing sector, i.e.,
a reduced use of factors of production in this sector. Factors
of production must be transferred to those sectors where they
are most urgently demanded by consumers. The restructuring is
not instantaneous but organized by entrepreneurs in a
competitive process that is burdensome and takes time. In this
transition period, when jobs are destroyed in the overblown
sectors, GDP tends to fall. This fall in GDP is just a sign that
the necessary restructuring is underway. The alternative would
be to produce the amount of housing of 2007. If GDP did not fall
sharply, it would mean that the wealth-destroying boom was
continuing as it did in the years 2005–2007.
Conclusion
Public austerity is a necessary condition for private
flourishing and a rapid recovery. The problem of Europe (and the
United States) is not too much but too little austerity — or its
complete absence. A fall of GDP can be an indicator that the
necessary and healthy restructuring of the economy is underway.
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