Tightening one’s belt, battening down the hatches or, simply, austerity. Whatever euphemism is used, this is a process of widespread economic cuts to governement expenditure designed to ‘balance the budget’ and reduce debt. In his book Austerity: The Great Failure, Professor Florian Schui argues that, despite sustained public support, the policy of spending cuts adopted by many governments have harmed rather than healed struggling economies. In this extract, Schui traces the roots of austerity back to their Aristolian beginnings and argues that the flaws in its modern implementation measures are nothing new.
The austerity policies that have been rolled out in many Western countries have brought all the pain of economic stagnation but hardly any of the proposed benefits of debt reduction, renewed growth and prosperity. Nonetheless, support for such measures has remained strong among economists, politicians and substantial parts of the public. How can we explain this steadfastness in the face of economic failure? A way to make sense of this paradox is to place the current debates in historical perspective and look at the deep and ancient roots of arguments for austerity.
For all their topicality, today’s controversies over austerity are not new. The notion that individuals, states and societies benefit from limiting their consumption is almost as old as humanity. The term austerity itself goes back to the ancient Greeks, and the question of how much consumption is too much or, indeed, too little was already on the minds of some of the foremost thinkers of antiquity. Since that time, it has remained a focus of political and economic arguments in all ages of Western civilisation, attracting the attention of a rather mixed group of thinkers that included the authors of the Bible, medieval ascetics, enlightened philosophers and modern economists. By reading the current debate as the latest replay of the centuries-old controversy about consumption we can more fully understand the arguments presented by both sides. Today, the term austerity is often used to denote public spending cuts in general. This captures an important manifestation of austerity policies but it misses their main rationale. Austerity policies are proposed to restore balance in government finances and regain economic dynamism and competitiveness. The former objective is pursued mainly by cutting back on government expenditure that funds individual and collective forms of consumption: for example, pensions, health care and education. Where taxes are increased this often leads to a reduction in private incomes and consumption. The second objective, stimulating growth, is mainly sought by lowering the cost of labour, that is, reducing wages and hence individual consumption. Renewed economic dynamism is also expected to result from the reduction of government expenditure and debt: a smaller state is believed to leave more space for private initiative and inspire confidence among private investors and consumers. Austerity policies have many facets but ultimately they are about abstinence from consumption.
Clearly, not all public spending cuts put into place under the label of austerity fall on consumption expenditure. Government spending for investments such as the building of bridges, roads and airports is sometimes reduced, but normally it is protected from cuts or even increased. Expenditure for consumption usually bears the brunt of cuts. This is chiefly because by far the greatest part of government expenditure is for forms of consumption. Any meaningful reduction of government expenditure must therefore mainly reduce these parts of the budget. Moreover, consumption expenditure is also often seen as more dispensable. It is generally accepted that cutting back on infrastructure will damage the prospects of economic recovery and long-term development.
In a similar, while not all reforms intended to regain economic competitiveness focus on lowering the cost of labour, this is always an essential element. The deregulation of labour markets is mostly geared towards removing laws and institutions that protect workers’ rights and union rights and salaries. Labour usually finds itself in a weaker bargaining position in liberalised labour markets. Falling or stagnating wages are often an important result of deregulation. This makes it possible for companies to produce at a lower cost and become more competitive. The inevitable flip-side of this development is that many wage earners lose income and often have to cut back on consumption.
The current controversy about austerity policies is therefore ultimately about the question of whether or not rewards can be expected for abstaining from consumption. In this sense today’s exchanges fit into a centuries-old tradition of consumption critique. Indeed, much of the historical commentary on this topic seems oddly familiar when we read it today. To be sure, much has changed since Aristotle, Aquinas and Voltaire pondered similar questions. Political systems were radically different and so were the ways in which societies and individuals satisfied their material needs: it was normal for Aristotle that a substantial portion of society – mainly women and slaves – should be excluded from political power as it was for Aquinas that virtually all men and women of his time worked in agriculture and eked out a rather miserable living, without much hope of improvement. And even the much more familiar contexts in which Keynes or Hayek wrote were still different from ours in important respects. Placing the arguments of the past in their own context is therefore crucial to understanding them.
When we review past exchanges about consumption we are bound to encounter unfamiliar vantage points. For the question of how much consumption is right can be approached from many different angles. It is as much a moral, religious or political and even an aesthetic question as it is an economic one. Often the angle from which an author decides to approach the question already predetermines how he or she will answer it.
Today’s debates offer a good example of such differences in perspective. The proponents of austerity are often cast as hardnosed economic experts who advocate unpleasant but unnecessary measures. The quintessential ‘austerian’ is the technocrat: the economics professor who turns prime minister in the hour of his country’s greatest need, or the experts of the European Commission, the European Central Bank, the International Monetary Fund (IMF), and others who land in a nation’s capital to save it from the brink of financial collapse. The considerable power which these experts wield rests primarily on their claim to superior knowledge and understanding of economic matters. Typically they are unelected officials, but large proportions of the public support them because they feel safe in the hands of men and women who are well versed in the logic of capitalism and whose vision of the future is not blurred by sentimentalities.
Opponents of austerity, on the other hand, are often perceived as well-meaning but ultimately naïve. Many in the public may share their concerns with the social consequences of austerity, but alternative views on austerity, it is often believed, do not sufficiently take in to account the inexorable logic of our economic system.
Critical observes have pointed out that reality is often more complicated. The economic performance of countries where austerity measures have been applied most vigorously has often been weaker than in others that were less zealous in reducing public expenditure and reforming the labour market. It is becoming increasingly clear that instead of making the crisis shorter and less severe, austerity has made it longer and deeper than necessary. Critics do not claim that austerity policies will prevent a return of growth for ever. For reasons that are still only partly understood, market economies operate in cycles of upswings and downturns. As a result, periods of renewed growth will occur with austerity has led to a downturn that was longer and deeper than necessary and will lead to upturns that are weaker and shorter than they might have been.
The overwhelming evidence that austerity policies do not deliver the desired results has led the IMF to critically rethink its initial analysis. However, this kind of soul-searching has remained the exception. Paradoxically, the failure of austerity to produce any tangible benefits in a reasonable time frame has not led to policy changes. Even where spending cuts have not produced the desired effects of budgetary consolidation and renewed economic growth, political leaders and large parts of the public have stuck to their guns. At first sight this may seem baffling. Weak economic performance should quickly discredit arguments in favour of austerity, and the economic experts who propose them should be the first to acknowledge this.