Austerity, it's big in Europe.
It's getting big here.
Everyone and the prime minister's
been talking about it.
But what is it?
It's the common sense on how to pay
for the massive increase in public debt caused
by the financial crisis.
Mostly the slashing of government services.
First you take on debt, then you pay it off.
Sounds simple right?
Unfortunately, it's never that simple.
Because austerity confuses virtue with vice.
Let me explain why.
Now that supposedly the worst of the crisis is over
there's debt everywhere, credit cards, mortgages,
government debt.
This is the part you know.
But we need to remember how we got here.
Two years ago the world's financial system exploded.
The crisis blew a $2 trillion hole in financial space time.
And collectively the rich governments of the world
spent, lent, or guaranteed between 5% and 50%
of their country's annual products saving the banks.
Given this, you might think that a period of austerity
is a good idea.
But to see why it's not you have to think about the world
as a series of balance sheets.
I know.
Stay with me.
Whether you're a person, a household, a firm, or a state
you have assets and liabilities, a balance sheet.
Before the crisis in 2008 everyone took on a lot of debt.
Back then it made sense for many of us to take on debt.
For example, the bottom 40% of the US income distribution
hasn't had a real wage increase since 1979.
Really, that's true.
Corporates, especially banks, did the same.
But they did it to make money rather than to pay the bills.
It's called leverage, which is pretty much debt seen
from a different perspective.
Levering up is a little like going
double or nothing in blackjack.
If you've taken on debt from a mortgage
you hope your house will increase in value.
If you think there's a high chance
the value will increase you might go double or nothing
and take on a bigger mortgage.
But like blackjack there's always a risk of losing.
So the banks created mountains of debt.
They levered up 20-30 times.
It was like they pushed in all the blackjack chips,
but each chip was just an IOU.
So when all went wrong governments
felt they had to step in and bail them out,
because they'd become too big to fail.
This is where the balance sheet problem comes in
and why the common sense of austerity is not so simple.
If you levered up in debt and your assets
lose value your house, or your housing derivatives portfolio
if you're a bank.
Your balance sheet as a whole is now under water.
When this happens, whether you're
a corporate treasurer or a single mom,
if you've got cash coming then you
want to pay down the debt to bring your balance
sheet above water, rather than spend money.
Which means no one is spending.
And that's when the government comes in.
If the whole private sector is a deleveraging, paying back debt,
than government automatically levers up to compensate.
Tax revenue falls, so the deficit increases.
Unemployment benefits kick in and public consumption
takes the place of private consumption.
Now make no mistake, the problem is debt.
There is too much of it across the board
and we need to clean those public, and those private,
balance sheets.
But all these pieces are connected.
If the public sector cleans its balance sheet
at the same time as the private sector than the whole economy
crumbles.
It's called a fallacy of composition.
What's good for anyone household, or firm, or even
state is a disaster if we all try it at once.
So why then have most governments of the world
decided to do exactly this?
And all at the same time?
Well remember that $2 trillion hole in space time?
The answer is that someone has to pay for it.
And no one, especially the banks, wants to.
So governments have to either increase taxes, difficult.
Or slash services, easier.
Especially when the policy has the common centering
of virtue about it.
Austerity, the pain after the party.
But here's the kicker, the hangover of austerity
is not going to be felt the same across the income distribution.
Earlier this year the forum for the governments of the world's
most economically developed states, the group of 20,
called for growth friendly fiscal consolidation.
Which, like a unicorn with a bag of magic salt, is a nice idea,
but it's pretty much bull [BLEEP].
Precisely because this consolidation doesn't
hit everyone in the same way.
Remember those folks in the bottom 40%
of the income distribution that didn't really benefit
from the financial boom?
All they got was debt and the illusion of prosperity?
They're the ones that actually use government services.
Those services that are about to be so virtuously consolidated.
Those at the top end of the income distribution,
those who made the mess in the first place, don't.
So where does this common sense virtue of austerity leave us?
It leaves us in a cycle.
Where those at the bottom end of the income distribution
pay for those at the top with the same stagnant and skewed
incomes that know by less in a more unequal and unstable
economy.
There's a term for this, class politics.
And it usually ends badly.
This common sense of austerity, of reducing public debt all
at once through slashing services involves a question
of equity, who pays and who doesn't.
Those who made this mess won't.
Well those who already paid for it through the bailouts
will pay again through austerity.
This is why austerity is not common sense.
It's a nonsense, and a dangerous one at that.