Austerity or Fauxsterity?

This article was first published in the second-quarter 2015 edition of Personal Finance magazine.

What comes to mind when you hear the word “austerity”? Probably “frugality”, “belt-tightening” and “cutbacks”. Foregoing the frills, comforts, and luxuries. Cutting expenses and living within your means.

It’s pretty simple really. We all get it. We’ve all been there. In the ebb and flow of life, there are the good times and the not-so-good times. The fat years and the thin years. But, as with so many things, these very simple concepts can become horribly distorted and twisted when applied to that darkest of arts: macroeconomics.

If you’ve followed the news recently, you would have noticed that austerity has become one of the most controversial and divisive political and economic issues of our time. After gorging themselves on debt for decades, nations are facing a day of reckoning. The party’s over and the tab is due. No one likes a hangover, but it’s as much a part of getting drunk as the drinking itself, and every bit as avoidable. Oh sure, you can pour yourself another cocktail or 10 and delay the inevitable, but we all know that that only leads to emptier pockets and a worse headache.

But there are always new suckers for that cruel and unusual self-inflicted pain. New Greek Prime Minister Alexis Tsipras exclaimed triumphantly on the eve of his party’s election victory in January 2015 that “Greece leaves behind catastrophic austerity; it leaves behind fear and authoritarianism; it leaves behind five years of humiliation and anguish”.

Nobel-winning economist Paul Krugman has lambasted British fiscal austerity, claiming in 2012 that it was “deeply destructive to pursue austerity” in the United Kingdom. In February 2015, Krugman said that, although European nations “did, in fact, need to tighten their belts”, the “austerity they were actually forced to impose was incredibly savage”.

So, the governments of the major economies of the world have implemented profoundly austere fiscal policies. But have they really?

While Krugman was deriding David Cameron’s supposedly draconian “austerity”, Britain was borrowing money hand over fist, running a budget deficit of six percent of gross domestic product (GDP) – about twice the pace of pre-crisis borrowing. In fact, since 2008, the British government has lived so spectacularly beyond its means that the national debt has exploded from £770 billion to nearly £1.7 trillion, an increase of nearly £1 trillion (R20 trillion), soaring from 52 percent of GDP in 2008 to nearly 100 percent of GDP today.

Under Greece’s supposed “catastrophic austerity”, annual government spending rose from 50 percent of GDP in 2008 to an even more bloated 60 percent of GDP today, and the total national debt from 113 percent of GDP to 180 percent. These bloated Byzantine bureaucrats in Athens now spend more money than they did before 2008.

In 2013, former South African finance minister Pravin Gordhan announced “austere” cutbacks, which the press corps called a “severe slashing of state waste”. Few reporters bothered to note that these were not cuts at all, but almost imperceptible reductions in planned expenditure GROWTH, barely registering on the radar as the government racked up another R150 billion or so in debt in the year that followed. To illustrate how ridiculous it is to call this austerity: consider someone in R30 000 of credit card debt. Instead of paying any of it off, they decide to borrow R3 000 more, but then change their mind and only borrow R2 940 more. How austere!

I’m not just cherry-picking British, Greek or South African data to skew my results. Since 2007, total global government debt has rocketed by a staggering US$25 trillion, a compound annual increase of over nine percent. In the previous seven years, government debt increased by only $11 trillion at a compound annual rate of six percent. Put very simply, there was more fiscal prudence from 2000 to 2007 than from 2007 to 2014.

I could go on and on, picking apart government debt data for a host of large economies and showing how governments have been anything but “austere”. It suffices to say that governments on the whole are more bloated, indebted and suffocating of private sector dynamism than they were before 2008. Under this weight of higher taxation and more regulation, the private sector has also racked up more debt since 2007 – a cool US$32 trillion more. This debt has been funded by gargantuan money-printing by central banks and commercial banks, which, of course, expect it all to be paid back someday. Perhaps it is this debt mania, and not some imagined “austerity”, that is the real source of so much “humiliation and anguish”?

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