This is a guest post by Ben Lehman.
I’ve seen the phrase “austerity” getting floated a lot in political discussions lately. In all the languages in all of human history, never has there been a word that crammed more bullshit into less space that “austerity,” at least as it applies to the political practice. What is particularly galling is it appeals to people’s sense of value: saving is good! And, indeed, saving is good, if you’re a person. But economies and governments are not people, and not only is saving, for them, a terrible idea, it is actually the road to complete economic collapse.
Austerity is used by the IMF and World Bank as a form of economic warfare. And, let’s be clear here, when I say “warfare” I mean it. It is better to drop a bomb on a country than impose austerity measures. Just like a bomb, austerity measures kill people, destroy infrastructure, and destabilize governments. At least with a bomb you can sell the scrap metal. Most countries which have austerity measures imposed on them never recover and, of those that do, it takes a long-ass time. South Korea is one exception but the second time around, they knew much better than to accept this assault (instead, they were backed up by China and Japan, who knew that it was a no brainer to bail out the economy of a major trading partner.)
All this and we, in the US, are seriously thinking about imposing these on ourselves. It’s as if our government was saying “hey, maybe we should nuke Iowa City” and all the grave, Serious people in the political press were going “well, I mean, if we don’t, what else are we going to do with these shiny nuclear bombs?”
(If you don’t follow the news on TV, in the newspapers, or in blogs you may have missed this, but there’s been a big surge of interest towards “austerity measures” applied domestically. This is related to several things, but the republican House and the PIGS crisis-brewing in Europe are biggies.)
So why is austerity so bad? Time for a lesson in basic economics.
Okay, so imagine that Alice has a pound of coffee beans, and Bob has a pound of chocolate. Each of them is expecting to get a certain amount of joy out of their respective treats. Let’s say that each of them is going to get 100 units of joy. Together, there are 200 joy units in the system. But now, if they get together, they can swap half a pound of coffee beans for half a pound of chocolate. Now, each of them has a half a pound of each, and they can both make mochas, which everyone knows are better than the components separately. A pound of mochas is worth 120 units of joy, so now there are 240 joy units in the system. Alice and Bob are now %20 more joyful than they were pre-trade.
Now, when we say “joy” economists say “value” but it’s the same thing. Whenever good exchange is made (a good exchange being on where both parties benefit), value is created. This happens *every time that there’s an exchange of goods* It’s totally awesome and magic and it fuels the modern world.
When money comes into it, it’s a little more complicated. Money is a medium of exchange, which means that theoretically it’s worth the same to everyone. So when I buy a book for $10, I’m betting that I will get more than $10 worth of joy out of the book. Most of the time, this is true (it’s possible to make bad exchanges but we have various protections against this like reviews, friends recommendations, etc.)
Note that value is created in the exchange. This is what fuels economies. A healthy economy is full of exchanges, the more the better, because in each exchange, more value is created. (Thus: more joy, more alleviation of suffering.)
If there isn’t an exchange, no growth, no joy. If Alice stuffs her coffee beans into a mattress, she’s stuck at 100 units of joy, period.
Now let’s look at how loans come in. Let’s say that Bob, having made his exchange and gotten his pound of mochas, is planning on selling them (to carol, dan, elizabeth, frank, and gertrude). Since they’re worth more separately than together, he can sell them at a mark-up. He’s confidence that he’ll get the money, so he can borrow against that future earnings. If his friend Harriet has some money sitting around that she’s not using, he might borrow it against future earnings, knowing that he can use it to buy more ingredients and pay her back. This is a win-win: Bob adds value, more customers get mochas, and Harriet’s money (which she wasn’t planning on using immediately) increases during the loan.
That’s how economies work. Now let’s look at how economies collapse. Throughout this whole thing, there are bad deals, where one side (or even both) ends up with less than they started. This is pretty much going to happen, although we avoid it as best we can, and particularly if we think someone is going to make us a bad trade, we avoid it by not trusting them. The problem is that trust is what fuels all the exchanges. When Alice gives Bob coffee for chocolate, she trusts that his chocolate isn’t cut with sawdust, and he trusts that her coffee isn’t decaf. If that trust breaks down, they can’t make that trade anymore, which means that they’re stuck with what they have and the economy doesn’t grow. But not only that, if Bob has a loan from Harriet, all of a sudden he can’t make mochas, he can’t sell them, and he can’t make good the loan. Bob declares bankruptcy, which means Harriet doesn’t get her money. In this case, it’s not just that there’s less money than there could be, but money has actually left the system.
Once this starts happening on a grand scale, non-trusting behavior becomes rewarded. If many trades and loans are resulting in losses, then the smart thing to do is hold onto your money and your goods, so that locks down exchange, which means that we can no longer add value to the system. Enter misery and suffering, which makes bankruptcies and bad debts and bad trades more likely, which in turn locks up money even more.
That’s what’s going on right now, in the US. It’s not that businesses don’t have money; in fact, most US businesses are rolling in cash right now. It’s that there’s very little exchange going on: businesses are terrified of getting a bad deal, so they’re not spending the money. No trust means no spending means no exchange means less value means more suffering means more bankruptcies means less trust. It’s a vicious cycle.
One of the only means of interrupting this cycle is spending by the state. Because the state can print money, and also because they can issue bonds and sovereign (essentially trustworthy) debt, they can be the “spender of last resort,” entering the market and making the deals that need to be made. For the state, such spending is doubly valuable: first, it carries whatever value it actually has, but additionally it has the advantage of getting money flowing again. Moving money adds value. Stationary money destroys it.
Austerity measures call for, in this situation, the state to enter a spending lockdown and actually spend less money, which means less trust, less value, more suffering. Austerity means we sit and watch as our economy dwindles to nothing. Austerity means resigning ourselves to economic death.
When this is forced on a country by the international monetary fund (IMF), it’s usually as a means of punishing that country, extracting as much capital as possible from a failing economy, and of weakening that country so it can be the victim of exploitation by the various countries that run the IMF. This is a terrible, horrible thing to do, but at least it’s a fucking strategy. Like, I can understand why someone would do it, the same way I can understand why someone would stab a guy for $50.
When we talk about austerity for our own country it’s just mind-numbingly stupid. There’s no strategy. It’s like killing yourself by gouging through your own eyeballs with a rusted butterknife. There’s just no fucking reason for it.
So why do we have people going on about “austerity?”
(There’s a tangent here about why carrying a certain amount of national debt is a good sign for a country, and that you don’t want to be living in a country without national debt, but I couldn’t fit it in. If people want to hear it, ask in the comments or I’ll post another bit on it.)