Thursday, 4 November 2010
Austerity Measures and Politics (Jon Kofas, Greece)
Austerity measures are designed to engender monetary stability and fight monetary inflation by reducing public spending and invariably consumption. The same measures can and have been used to inject fiscal discipline into what could be an out of control spending regime that allows for the public sector to absorb capital away from the private sector, thereby choking off private initiative. The IMF made “austerity measures” famous or infamous, depending on one’s viewpoint, during the 1950s in Latin America (Chile was the first test case) and throughout the rest of the “underdeveloped world” later when IMF, backed by the World Bank that only offered development loans on condition IMF austerity came first, demanded currency devaluation, budgetary cuts combined with reductions in credit regime, cuts in public sector jobs, wages and benefits, along with lower taxes for foreign investment, hikes in indirect taxes and public services such as utilities. The immediate impact of austerity is a stronger currency that helps fight monetary inflation and strengthens finance capital and the export sector that becomes the basis for stimulating growth. At the same time, there is a drop in GDP growth, deteriorating terms of trade, higher unemployment, lower living standards, temporary spike in price inflation accompanied by slow growth, especially on the part of small businesses that lack the financial strength to withstand the austerity cycle that could last several years.Do austerity measures accomplish their publicly stated goal of restoring monetary stability and achieving external equilibrium? Absolutely, on a short-term basis, but at an enormous social cost. Austerity measures are invariably for countries that are not part of reserve currency regimes–Greece in 2010 was an unprecedented case. Central banks, which coordinate monetary policy with the IMF, have some power to either control monetary inflation or stimulate growth through a liberal monetary policy that allows more money and easy credit at the cost of monetary inflation that is invariably followed by price inflation. There have been cases, of course in advanced capitalist countries, where low growth is accompanied by inflation (the stagflation phenomenon) that dates to the Nixon era. In such cases, it takes some years for central bank monetary policy to work itself through the system. Even then, there are exceptions, as we have seen in Japan where central bank intervention has not been sufficient to stimulate export growth or alter the dynamic in an economy so interdependent with the rest of the world, or to combat other undervalued currencies like the Chinese yuan with which it is competing regionally. In short, for G-20 economies, monetary coordination which implies fiscal and trade coordination, works better than central bank intervention. This is exactly what the G-20 tried to achieve last month in Seoul, South Korea. The opposite course of austerity is for the government to stimulate growth by printing money as governments have been doing in the past couple of years, thereby precipitating very high gold and precious metals prices. Because the financial system needed saving by the public sector, governments printed too much money and that will mean a spike in commodity prices once the recession ends and shortages become apparent. Currently, borrowing is very cheap and that is one reason that US corporations are borrowing while sitting on more than $1 trillion of cash instead of investing it. Fed buying fixed-income assets has ephemerally boosted stock markets throughout the world, just as Japan’s did when they made similar moves. But such a stimulus only lasts a day or two, unless it is accompanied by other stimulative measures. Fed buying bonds will not reduce unemployment, it will not stop foreclosures, and it will not stimulate an economy that is approximately $14.5 trillion. Although I am delighted that the Fed made the obvious political move to buy bonds a day after the Democrats suffered a defeat in the House, this act by itself is not a long-term solution. On the other hand, IMF-style austerity for the US is completely out of the question, for it will precipitate global economic crisis deeper by choking off growth at home. The Bretton Woods system never intended for austerity measures to be imposed on the US, but on debtor countries; which of course the US is but is it also the world’s largest economy with the most widely circulated reserve currency. So, we come to the essence of the question: what is the solution for economic growth under the market system today? The answer depends on the political and social criteria that one espouses much more than it does on any economic principles. In my view, cyclical crises in the market system are inevitable, no matter what central banks do with monetary policy to mitigate their impact, no matter what government does with fiscal policy to lessen the pain on the majority of the people.