The Age of Austerity

It wouldn’t make for a good song by the 5th Dimension, but the “Age of Aquarius” is giving way to the “Age of austerity.”  This is a dramatic shift.   The last time we faced such a dilemma was when the great recession of 1980 hit, and President Carter gave a much maligned, but now prophetic speech on the dangers facing the US at that time due to consumerism, oil dependence and an emphasis on material self interest rather than community values.   Carter was ignored.   The solar panels he installed on the White House were taken down.   Ronald Reagan defeated President Carter in the 1980 election with the promise that we can ‘have it all.’   There is no need to cut back, we only need to cut taxes!

Reagan succeeded, thanks to declining oil prices and a massive increase in debt.   Private debt, credit card debt and government debt all took off in the 80s, while the current account went into deficit.   Reagan’s “morning in America” was the start of a country  living beyond its means.

Private and public debt increase dramatically after 1980 - it is now about 400% of GDP

The first question, and one many liberals are asking, is why can’t we do what Reagan did?   Why can’t we just stimulate the economy with more debt until it starts producing jobs and economic growth.? (Conservatives refuse to acknowledge that this is what Reagan did — they want to hold on to the myth that he was fiscally conservative, not the reality.)

There are economists who think that a new stimulus could work.   They recognize we can’t use the kind of hyper-stimulus Reagan employed, but believe that another jolt of spending could get the economy moving, with the debt to GDP declining due to a higher GDP.    This argument relies on speculative and technical economic models which ignore political reality.   Due to almost certain credit downgrades and a devaluation of the dollar should such a route be taken, the risks to the economy are enormous — and could create long term stagnation.   Russian President Putin called the US a “parasite,” noting that we get away with high debt while pushing costs on to other states due to the reserve currency status of the dollar.   Countries aren’t going to let us get away with that; if we add yet more debt we’ll see countries dump dollars and treasury notes.  Again, this would damage the economy severely — and aren’t considered as variables when economists try to make the “more stimulus” argument.

Thats why most analysts who take into account both politics and economics say a decline in growth due to less government spending and higher taxes is preferable to running up a higher debt.   And if we do it right, it doesn’t mean that a recovery will be stymied.

First, though, a bit of cold water.   Remember the heady consumer utopia of the mid-00’s?  You know, low interest rates, home values rising (cheap home equity loans!), easy credit, buy buy buy!?   Those days are gone.   If by recovery you want to go back to the world of 2006, it’s not going to happen.   Recovery now simply means more people getting back to work producing goods and services people value.   The current account has to go into balance, and personal as well as public debt needs to decline.  We also have to come to grips with the fact that the number of people retiring will go up dramatically in coming years — needing social security and medicare, and the sad fact is over half of the people retiring have debt.

That’s why this will feel like the “age of austerity.”   The military will be forced to cut back its global role as the US will realize we cannot afford to try to dominate world affairs.    The dollar’s value will decline, and as foreign goods ultimately get more expensive, American products will rebound.   If government programs can effectively target spending into areas that create production and jobs, recovery can build even without increased government spending.  It will take time, and instead of flipping houses even well to do households will start to pay down debt and build savings.   The uncertainty factor is high, no one wants to be caught out of work and out of money.

As long as the re-balancing takes place with safety nets in place and government action to help facilitate growth (what Obama calls ‘investments in America,’) it won’t feel like the Great Depression.   The government and the federal reserve board have enough policy options to prevent massive unemployment and reliance on soup kitchens.    The tax rates on the wealthy are so low that raising them will not harm investment or stifle growth.  Yet it won’t be the booming bustling economy we’ve been used to.   Prices will likely go up faster than wages.  People will stay in their homes longer, keep cars until they start to wear out (and buy used ones rather than new ones), and live a bit more like we used to before the consumerist binge took off with the ‘something for nothing – borrow and spend’ mentality.

Ultimately, we will not be in good shape until the debt to GDP ratio is back under 60%, and even at that point we’ll still need to continue reducing debt.  I’ll be comfortable only when we hit about 30%.  To reach just 60% will require growth, cuts and tax hikes.  There is no other way.   And if wild cards like global warming or peak oil enter the fray, they’ll create more risk, but also provide opportunities.

The bubble growth that defined so much of the last 30 years was unsustainable.   The wealthiest benefited most, people were deluded into thinking they had more wealth than they did through bubble investments, and the apparent “growth” was built on the finance industry and services that offered little in real value.   It was a kind of “fake economy” which addicted us to the illusion that we could have something for nothing.

Although Americans think we’re immune to the kind of collapse states of Europe experienced in the early 20th Century, the massive gap between rich and poor plus the growing partisan divide and hyperbolic rhetoric, do show risk.  If the wealthy try to pay as little as possible and ignore social responsibility, the poor and middle class may turn on them in class warfare.  The right will then demonize minorities and foreigners, creating a  kind of neo-fascist rhetoric to keep the support of the working poor against intellectuals and “liberal elites.”  (One sees signs of this already in some of the more extreme tea party rhetoric).     If both left and right think that the need for austerity is false, foisted upon them by the ill will and misdeeds of the other side, the country’s bickering will prevent real solutions to fix our broken economic and political systems.

I hope it doesn’t come to that.   Re-balancing our economy will take years, but not decades.   We may not have the hyper consumerism of the 00’s, but we can have the comfortable middle class life styles that had been eroding even as the bubble economy grew.   Things seemed grand, but the reality was life was getting more difficult for the middle class and poor.    We can do it.   But the first step is to recognize the crisis is real, we’re entering a new era whether we like it or not, and we can’t just blame the other side for the problems.     There is no quick fix.

But given the consequences of hyper-consumerism on the environment, community, peoples’ psychological states and the political system, these changes could turn out to ultimately lead to a better place than where we’ve been.

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  1. #1 by Black Flag® on August 3, 2011 - 02:46

    Scott

    The last time we faced such a dilemma was when the great recession of 1980 hit, and President Carter gave a much maligned, but now prophetic speech on the dangers facing the US at that time due to consumerism, oil dependence and an emphasis on material self interest rather than community values. Carter was ignored.

    Because he was an idiot.

    The Recession was not due to people spending their own money, nor using energy to make their lives livable or living for their own desires.

    The Recession was due to Nixon -unable to pay for Vietnam with gold – closing the gold window.

    The Keynesian irrationality has certainly set its roots inside you.

    There is no need to cut back, we only need to cut taxes!

    This is not true.

    He ran – and won – on a platform of cutting back government.

    What he did – and you should appreciate this – is subvert his principles for pragmatism and did exactly opposite of what he promised.

    But that should be a highlight for you, Scott – aren’t you the one who promotes pragmatic action?

    The first question, and one many liberals are asking, is why can’t we do what Reagan did? Why can’t we just stimulate the economy with more debt until it starts producing jobs and economic growth.? (Conservatives refuse to acknowledge that this is what Reagan did — they want to hold on to the myth that he was fiscally conservative, not the reality.)

    You can, but as Mises and Hayek pointed out, is very cycle of the boom/crackup

    – every new round of “stimulation” to reverse the crack up has less and less effect, with the opposite effect on the crack up, they get deeper and worse.

    Yes, another stimulus would work – slightly. But the consequence in the future for it would be massive.

    And if we do it right, it doesn’t mean that a recovery will be stymied.

    “We” aren’t doing anything.

    The politicians are doing what they do best – delay the Reckoning up to a point it will threaten the viability of the entire nation.

    First, though, a bit of cold water. Remember the heady consumer utopia of the mid-00′s? You know, low interest rates, home values rising (cheap home equity loans!), low interest rates, easy credit, buy buy buy!? Those days are gone.

    They were illusionary wealth, built on fiat government currency and artificial government-mandated interest rates – all in the belief that government has the ability to distort all economic outcomes to a “good” with no cost.

    The dollars value will decline, and as foreign goods ultimately get more expensive, American products will rebound.

    Agreed. No one will buy US good, except Americans – and that is well enough.

    If government programs can effectively target spending into areas that create production and jobs, recovery can build even without increased government spending.

    You are a comedian!!

    After all the evidence, you still hold the immutable believe that government -somehow- is all-knowing in spending other peoples money into “production” better than those that produce wealth

    Your breed is dying – those that believe in government spending and action as a supreme good over those that actually earn the wealth.

    This economic disaster that is racing toward Americans may probably put an end to such a deluded belief and -hopefully- toss Political “Scientists” on to the street looking for real jobs other than preach illusions.

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