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Austerity in Economy: Danger of the Idea

Introduction

Austerity measures simply refer to the reduction of government spending in order to regulate public debt, especially when the country is at a risk of going bankrupt. In other words, austerity measures are stringent measures enforced by the state to bring public expenditure in line with the revenue (Manuel, 2014). The Great Recession of 2007/2008 left many economies with less revenue and subjected others to untenable levels of spending. As a result, several European economies turned to austerity measures to control the level of spending and reduce budgetary distress. Their budgetary deficit had risen very sharply. For example, the US fiscal deficit increased to nearly 10 percent of the Gross Domestic Product (GDP) in 2009 (Bonciu, 2014, p. 20).

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In Europe, austerity measures became very important since EU member states had ran out options on how to tackle the growing debt burden. In addition, as the debt burden increased, the lenders started to put pressure on the governments to aggressively put to an end the unnecessary expenditure. Even though austerity measures were aimed at alleviating budgetary concerns, their effectiveness still remains a subject of debate up to date (UNCTAD, 2011, p. 2).

The proponents believe that it helps to avert huge deficits that can choke an economy, hence reduce government revenue. However, critics argue that sound macroeconomic policy is the only way of averting excessive consumption in an economy, for example, public sector spending. Public sector spending improves the rate of employment and, therefore, increases government revenue (Pignal & Spiegel, p. 16). Austerity measure is a contentious subject both from the economic and political point of view. The budget cuts normally target pensions for public servants, state-sponsored health care, unemployment compensation schemes, and state programs targeting the poor and the financially vulnerable among others. Most countries resort to austerity measures when the sovereign bond rating is downgraded since borrowing becomes more expensive. As a matter of fact, nearly all EU member states have introduced these measures or are in the process of imposing them (UNCTAD, 2011, p. 3).

According to Blyth (2013, p. 288), austerity is a stupid idea and a dangerous policy. He is seconded by Pollin (2010, p. 2) who refers to austerity as a dead ideology. Hence, the purpose of this essay is to establish whether they are right or wrong. This will be achieved through the exploration of different theories and concepts and key arguments between theorists and different theoretical positions. In addition, the essay will involve a case study analysis to test the above supposition.

Is Austerity a dangerous idea?

Post 2007 crisis has seen many European countries resorting to the stringent austerity measures with the aim of consolidating the debt burden. However, both the economic efficacy of austerity programmes and the Great Recession are still being questioned by global experts and institutions. Moreover, the temporary and lasting effect of the measures on egalitarian processes and social rights have been heavily criticized. The biggest critic of austerity is Mark Blythe. Blyth (2013) has re-examined dozens of chronological events regarding austerity: from the pre-World War II to post-World War II economies; from the international practice of austerity by the International Monetary Fund to the post-2007 crisis; and from the divergent views of the 1930s to the recent cooperation. In each and every case Blyth reviewed, austerity seems to impose sluggishness, an increase in the ratio of fiscal deficit-to-GDP, and general economic adversity. He stresses that austerity, as an economical stand, is hard to defend. He provides a very inspiring condemnation of austerity as an economic policy stand.

The political, economical and moral dimension of austerity is based on the works of John Locke, David Hume and Adam Smith. Locke embodies a revolutionary liberalism that stood against the English powers in the 17th century. Locke and Smith were against any form of interference by the state on economic matters. According to Locke, the debt of the monarch was the responsibility of the king and, therefore, should not be imposed on the general citizen. Liberalists believed that the primary function of the state was limited to the protection of property and life. They feared state debt because it affected the overall wealth and trade in an economy, hence the origin of austerity (Xenos, nd., p. 3).

Similarly, Adam Smith asserts that the government plays a very important role in economic matters, but its function should be limited. Therefore, the government has a moral responsibility to restrict the amount of debt it incurs. In other words, Smith recognizes the important role played by the government in terms of service delivery to the citizens, but wants the state to limit its borrowing. For this reason, frugality should be the principal financial order for any economy (Brennan & Lomasky, 2006, p. 225). David Hume offers a fundamental economic interpretation of liberalism. He spares no punches on the subject of state debt. He cautions against any form of government intervention because it would make the situation even worse. Hume’s political solution is to offer no positive function to the government. Economic matters should be left to the merchants because they facilitate the flow of money. His main concern was the way governments are “crowding out” private investment (Brennan & Lomasky, 2006, p. 225).

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Liberal’s school of thought is the foundational basis of modern austerity. The liberal school of thought is threefold. It embraces economic thinking, political reasoning, and moral thinking. From the economic perspective, the government’s capability to borrow is restricted. From the political point of view, government control is restricted by austerity. Last but not least, from the philosophical and moral point of view, debts should always be paid and defaulters should be held accountable. Therefore, even if austerity measures do not succeed, they have merits in political and moral philosophy (Brennan & Lomasky, 2006, p. 221).

For the above reasons, the critics of austerity measures must not only demonstrate its economic malfunctions, but also criticize it from the political and philosophical point of view. The criticism must also be from an historical point of view. This is what Blyth has done, especially his analysis following the Great Recession of 2007. He accepts that austerity measures also have their conjectural and practical advantages. The significance of austerity measures in restoring social order and promotion of legal framework has been highly acknowledged. For example, in Australia austerity measures have really helped the government to meet its financial obligations and reduce the overall spending. However, the conjectural and practical advantages are surpassed by its failures (Blyth, 2013, p. 151).

Blyth (2013, p. 151) finds fault with austerity measures from the economic policy to political principle of non interference by the state, as well as the moral philosophy of parity and justice. From the economic perspective, austerity measures usually intend to restore growth and investor confidence and minimise deficits. However, Blyth shows that this is just a fallacy owing to the fact that no country can exercise austerity at once. Even though austerity reduces deficit, it restricts consumption, thus shrinks the economy. In other words, it leads to increased deficit (Blyth, 2013, p. 151). For instance, in 2009 the Australian government approved 95 billion dollar economic stimulus package. The economic stimulus package was introduced by the ministry of labour. Approximately 45 billion dollars were spent in the first phase alone (Marston, 2014, p. 10).

Evidence shows that most of the money was spent and the rest bungled through poor implementation strategies. As a result, the country’s deficit increased considerably. To reduce the budget deficit, the government opted to cut down its spending, especially in the social service and public service jobs. However, the budgetary cuts did not help in reducing the debt burden or enhance economic growth. As a matter of fact, since the current regime assumed office, the debit balance is still increasing, the GDP has stagnated, and the rate of joblessness goes up day by day. In addition, the country’s credit rating is not improving. In the last five years, the unemployment rate in Australia approximately 7 percent. This was the worst state of joblessness in the country’s history (Marston, 2014, p. 10).

Austerity also fairs very badly in the political front, especially due to its principle of state minimalism. In the contemporary capitalist economy, debt tends to be cyclical in nature, for example, when the economy is in a crisis, government spending increases, whereas tax revenues decreases, hence the high deficit. The state cannot afford to further curtail its spending because this may lead to all forms of instability and war (Blyth, 2013, p. 239). For example, in Australia, the austerity measures led to high levels of street protest across the country. There were numerous violent onslaughts on the demonstrators. This showed the length to which the state was ready to go to impose the measures. The measures mainly affected the low income groups. The low income earners are considered to be the weakest and most vulnerable members of the society. As a matter of fact, the government’s popularity dwindled due to loss of public confidence and trust (Marston, 2014, p. 11). In a nutshell, austerity is a political suicide.

Austerity can be defended from the moral point of view. Those who borrow funds or take loans should pay back or face consequences. This is very true. However, according to Blyth (2013, p. 5), austerity is a form of “bait and toggle”. In most cases, the financial crisis is always brought about by excess spending by the state. But this is not always the case. For instance, the great recession of 2007 was caused by increased lending and deterioration of credit standards, which led to the growth of sub-prime mortgage loans. Under the sub-prime market, individuals who would not be considered as credit worthy under the normal standards were funded by the US banks. Subsequently, this led to high rates of defaulters. As a result, many financial institutions in the US nearly collapsed were it not for the government’s bailout plan. The bailout plan led to more debt and the debt led to the crisis. The ultimately the crisis led to austerity. Therefore, the moral principle does not hold water in this case (Blyth, 2013, p. 231).

Conclusion

Austerity still remains a subject of debate up to date. The proponents believe that it helps to avert huge deficits that can choke an economy, thus reduce government revenue. However, critics argue that sound macroeconomic policy is the only way of averting excessive consumption in an economy. Liberal’s school of thought is the foundational basis of modern austerity. The liberal school of thought is threefold. It embraces economic thinking, political reasoning, and moral thinking. From the economic perspective, the government’s capability to borrow is restricted. Politically, the principle of state minimalism should apply. Morally, the debt borrowed should be paid back. Therefore, even if austerity measures do not succeed, they have merits in political and moral philosophy. Regardless of the above austerity merits, Blythe argues that its conjectural and practical advantages are surpassed by its failures. This is well illustrated in the Australian case. The Austerity measures did not help in reducing the debt burden or enhance economic growth. In fact, it worsened the economic state of the country. For instance, in the mid 2013, the unemployment rate in the country was nearly 7 percent. This was the worst state of joblessness in the country’s history. The case study also shows that there are other costs to austerity measures that cannot be quantified, for example, loss of public confidence and trust in the government and increased economic and social inequalities. This is because the austerity measures mainly target the poor and the most vulnerable in the society.

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References

Blyth, M 2013, Austerity: The History a Dangerous Idea, Oxford University Press, New York.

Bonciu, F 2014, Austerity and Economics: Why Germany and European Union supported austerity and why Europe is lagging behind in its recovery after the crisis, Institute for World Economy, Romania.

Brennan, G & Lomasky, L 2006, ‘Against reviving republicanism’ Politics, Philosophy and Economics, vol. 5, no. 2, pp. 221-247.

Manuel, D 2014, Definition of Austerity Measures, Web.

Marston, G 2014, Queensland’s Budget Austerity and Its Impact on Social Welfare: Is the Cure Worse than the Disease? Queensland University, Belfast.

Pignal, S & Spiegel, P 2012, ‘EU austerity critic’s view gain credence’. Financial Times, 5 March, p. 16.

Pollin, R 2010, Austerity Is Not a Solution: Why the Deficit Hawks Are Wrong, Political Economy Research Institute, Amherst, Massachusetts.

UNCTAD 2011, Post –Crisis Policy Challenges in the World Economy, Trade and Development Report No. E11.II.D.3, United Nations Publications, New York.

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Xenos, N nd., The Protestant Aesthetic: Austerity Beyond Growth and Guilt, Web.

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