Austerity
a). The current deficit panic and the debt, which are associated with recession has created an alarming situation in most of the countries, and threatened the economies of countries. They are however, a staple of the politics of several countries. In order to cope with the problem of fiscal deficit, and debt, the governments of many countries are adopting austerity measures. The republicans are demanding cuts and the Democrats are demanding cuts, and an increase in the tax. But, as a matter of fact, the budget cuts are not the right thing to do at such moments. In this regard, if the austerity is considered in the perspective if morality, then saving paves the way to the investment, the investment in turn paves the way to the growth. On the other hand, spending paves the way to the consumption, the consumption paves the way to the debt, particularly when the government is involved.
The international debt crisis has, however, aggravated the protests against the austerity measures, particularly those measures that are imposed on the developing world. The main purpose of implementation of the austerity measures is to check the debt, but when it come to decreasing the debt to GDP ratio, the austerity is found to be self-defeating, especially in the case of the programs associated with fiscal consolidation, which increases the debt to GDP ratio and dampen the growth. Furthermore, austerity measures pave the way to high unemployment, and reduce the job security. Even in the case, when the monetary easing make availability of more money, the austerity measures will not spur purchasing. In this morality play, saving leads to investment, and investment leads to growth. Spending, in contrast, leads to consumption, and consumption leads to debt, especially when the government is involved.
b). As a matter of fact, austerity measures are favorable at the time of boom, and not in the slump. This is because, in a recession, the demand is not sufficient in order to employ all the people who are willing to do work. So, cutting the spending of public sector, when the demand of the private sector is not adequate is a good way for increasing recession, and making the budget deficit worse. Further, increase in the taxes in a weak, when the economy has just recovered from the recession will, however, further reduce the insufficient demand of the private sector, and the nation fall again into the recession with elevated level of budget deficit.
The years 2008 and 2009 are characterized by the expansionary fiscal and monetary policies, particularly in the United States, the Great Depression is, however, accompanied by the policies that have paved the way to intensification of the slump, the interest rates increase in an attempt to keep hold of the gold reserves, and the spending cuts in an effort to balance the budgets. However, in the United States the Federal Reserve has reduced the interest rates, and also entered the market for buying everything from the commercial papers to the long term debt of government. Further, the administration of Obama has pushed through about 800 billion dollars of the tax cut and increase in spending (Krugman).
Further, the rise and the fall of the expansionary austerity is dangerous in a way that in the advanced countries the large spending cuts are followed by the expansions instead of the contractions, this is because, they consider that planned fiscal austerity measures have played a significant role in building the confidence in private sector, but as a matter of fact this has offset the government expenditure to a larger extent.
Furthermore, the disastrous effects of austerity can be analyzed from the fact that after the year 2010, the debtors countries of Europe have lose their control. At that time, Greece has imposed the spending cuts and increase tax to about 15% of the GDP, Portugal and Ireland has increased tax to about 6%, these cuts were, however, sustained and kept on increasing every year. The variables such as development level, urbanization level, and the size of territory that are based on the accepted measures such as per capita GNP, percentage of individuals living in the urban areas, and the percentage of individuals employed are used to describe the variations in the austerity measures. Furthermore, the debt, the degree of the IMP pressure, and the over-urbanization are also noteworthy factors in case of the austerity measures.
Moreover, it is claimed that the austerity programs also include the shock treatments that are aimed at the market mechanisms for stimulating the production of exports, and increase in the government’s foreign exchange reserves. Hence, the devaluation of the currency makes the exports of the Third World more competitive in the international trade; decrease the public spending helps in controlling the inflation, and saving money for the repayment of debt. The privatization, however, generates productive ventures, and also helps in the reduction of the public payrolls; provide assistance in the elimination of the protectionism, and several other restraints on the foreign investment, cuts in the subsidies of the basic necessities and food, for helping in getting the right price, for providing benefits to the domestic producers.
But, in reality these programs symbolizes distributional implications. The working class and the poor of the urban areas are affected by the combination of the reduction of real wage, wage cut, and increase in price that stem from the devaluation of the currency, and the elimination of the public service. It also leads to lower share of labor in the national income, and increased inequality. Further, an increase in the domestic price may provide advantage to the producers of rural areas depending on their dependence of imports and size. But, the middle classes are mostly affected, particularly the public employees who have to face jobs elimination.
The consumer prices, however, rise, and the sales volume of the shopkeepers has to face diminishing demand of the product (Walton, and Ragin). Furthermore, the debt re-scheduling conditions advised by the IMF generally involve the implementation of the market oriented policies that are aimed at stabilization of economy at the domestic level. The major objective of the economic stabilization programs is to ensure the discipline in the Third world countries where increased demand, price distortions and reckless government spending are considered as the cause of the debt problem.
Moreover, the political implications of the austerity programs are however, intricate and rich. Majority of the population is facing hardships because of the works of stabilization, so strong governments are required for the effective implementation of the policies in order to reinforce the bureaucratic-authoritarian state, but the austerity measures are not stable as they rely on the results for sustaining themselves, and lead to the revolt and elite factionalism.
In a nutshell, the austerity measures are not a good idea when recession is prevailing in the economy, as it can pave the way to another recession. Politically, austerity paves the way to the upheaval and factionalism within the powerful elites. Such measures can be taken when economic conditions are good, but when economic conditions are not satisfactory they can create havoc.
References
Krugman, Paul. "How the Case for Austerity Has Crumbled." The New York Review of Books: 1-14. Print.
Ragin, Charles. "Global and National Sources of Political Protest: Third World Responses to the Debt Crisis." American Sociological Review 55: 876-890. Print.
