Austerity

Austerity is a good idea for personal economics because your income comes from your job and is independent of your outgoings, so lowering your outgoings will always result in saving more money. This simple identity is probably why the idea of austerity sounds right and resonates so effectively among ordinary people.

But the idea that “my country’s economy would be great if it wasn’t spending all this money” is not the same thing; it is more akin to a CEO saying “we’d be making much more money if we didn’t employ all these people”. Well, maybe you can wiggle it a bit, but if you sack everyone you’re probably not going to make much money at all. If you’re not spending money, you’re not going to make money, and you’re still probably going to have some expenses. You can’t simply stop spending money and expect the rest of your accounts to continue unchanged.

You don’t need to be an economist to see that austerity doesn’t work. It just doesn’t pass a common sense check.

Austerity is a means of transferring wealth from the poor to the rich. Poor people are hit heavily by austerity, rich people not so much. It’s a tool to increase inequality, and this is fundamentally terrible for the health of an economy, because it sucks demand out of your economy by making sure that people have less money to spend. Inequality isn’t just morally wrong, it’s economically dangerous.

The following graph demonstrates this quite clearly. The UK’s economic recovery was mirroring the USA’s until 2010 (the black vertical line is Q2 2010), at which point the Tories enacted austerity, and it’s struggled ever since. This is a completely logical, completely predictable outcome.

uk-vs-us-real-gdp-in-current-downturn

Note that Labour also wanted austerity, which might help explain why they underperformed. People probably would vote for an anti-austerity party.

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