Austerity

The austerity, recently, has become one of the most heatedly disputed notion, and in the politics or the media it is often used, like a curse.

The austerity is a very contradictory idea, it is subject of misunderstandings, political manipulations and deception. As the January 2015 Greek example showed, an anti-austerity program was enough to win elections. In general, austerity can be defined as an economical attitude, restraining or cutting back consumption. Austerity can affect incomes and consumption. In terms of incomes, it means adjusting revenues to performance (productivity and real-incomes), in case of consumption adjusting with financing capacities. In a functioning market economy, austerity is a corrective automatism, it is a way of adjustment. If growth of real incomes exceeds productivity growth, the result would be inflation. Inflation is nothing else than cutting real consumption. If consumption exceeds incomes, it leads to indebtedness, let it be a person, a company or a country. The imbalances and indebtedness leads to devaluation of the currency, and by increasing the prices of import goods, it generates inflation. The exchange rate devaluations, hand in hand with inflation represent welfare losses, or defining them otherwise, they are market induced austerities. In a stricter and narrower sense the austerities are policy measures. There are great varieties of them, and can affect individuals, companies, organisations or states. The individuals (households) can cut consumption of certain goods or services (buy less books, or postpone vacation abroad), can look for cheaper variants of available goods, or instead of going to restaurant cooking at home etc. The companies can optimise or cut costs of their products, can select cheaper servicers or supplier, rationalise with labour force, not to mention the several other possibilities. In case of states, austerity is mainly related to the budget. Fiscal austerity can mean cutting expenditures or increasing taxes. The advantages of policy based austerities are that they can be more targeted, directed, corrective and selective, while the market induced austerities are blind, usually hitting the whole economy and society. It can directly target the main sources of problems (overspending or wasting resources) while saving well operating sectors. Policy austerity creates possibilities and pressures for more direct actions to improve performance and competitiveness. As the devaluation or inflation spread competitiveness and welfare losses to the whole society, the austerity by market automatisms is less painful, and more easily can be accepted by the public. This is the reason, why for example, politicians prefer devaluation against some concrete and more unpopular austerity measures. As policy austerities affect more concrete business or social interests, it is not surprising that they are subject of heated political debates and confrontations. The illusions about the devaluation of currency are particularly general, and they are not only shared by general public but also by media and experts. No doubt, that the exchange rate is an important adjustment mechanism. But contrary to the general believes, in a real sense, the devaluation does not increase competitiveness. Higher competitiveness would assume either reduction in costs or improvement of quality of products. It is not the case. The devaluation transitorily increases the prices of the export products (in domestic currency), but that applies also to import. It improves saleability of products, and can keep producers on the market. But at the same time it is inducing inflation, with a high probability, which leads to cost increases sooner or later. So the short-term “competitiveness” gains are lost. If nothing changes, further devaluations could not be avoided. The devaluation in itself, therefore is not a medicine, but a pain relief. It really can help adjustment, giving a certain sort of breathing time for making steps for real improvement of competitiveness. But these steps can not be saved. Mystification of possibilities of devaluation is often connected with populist attacks against “austerity” measures. The monetarism from the 1970s brought radical and qualitative turn in economic policies. Monetarism is not only a policy, but after the final collapse of gold standard, it is a system of operating of economy. The monetarism is pledged very definitely to free market, but the contrasting the state intervention proposing Keynesianism and the free-marketer monetarism is fairly misleading. Liberalisation and deregulation was considered by monetarism only as a way of abolishment of distorting factors of economic policy efficiencies, while it was in favour of rather strict state intervention in defence of price stability. Keynes saw unemployment as major threat, while the monetarist Friedman inflation. But inflation is equally formidable social disease, in fact affecting not only a part, but all of the society. Inflation can undermine competitiveness, sustainability of economic growth, profit prospects and devalue savings. The monetarism fundamentally changed the possibilities and the ways of austerity. By strictly controlling inflation, it practically eliminated or at least highly limited the free market automatisms of prices and exchange rates, and it meant that they had to be replaced by direct policy based austerity measures. It is not surprising that the vehement criticisms against monetarism and austerity go hand in hand. The austerity debates became particularly heated in relation to the treatment of recent Euro crisis. In the EU, the given monetary union construction expressed the firm intention of the decision-makers to implement EMU and especially the single currency with a low and controllable level of inflation. The single currency, for Germany in particular, was acceptable only if it was not more inflationary than the German national currency (DM) had been before. This in general coincided with the interests of all the other member countries The sharp criticism of austerity policies is far not without foundations for many reasons. The stabilisation policies proposed and pursued are highly restrictive and deflationary. That particularly applies to the Euro crisis policies supported by the “troika” (European Central Bank, Commission and IMF), mainly because of its extremely strict insistence on price stability and balanced budget. In many cases, due to mistaken national policies and consumption beyond the capacities, the corrective austerity measures were unavoidable. How far were some of the austerities excessive, is, however, question of concrete analysis or consideration.? But what was more important, that in most cases, no doubt, that they proved to be extremely deflationary. The some time drastic cuts both in public and private consumption, deprived the countries of growth possibilities, and forced them into a vicious circle. The lack of growth resulted new deficits, further increase of indebtedness, and called for new restrictions. In the crisis countries, the unemployment reached socially intolerable levels, and the scandalous youth unemployment is particularly dangerous both in social and political terms. The countries, like Greece, got into hopeless situation. The austerity measures often prove to be anti-social or socially and politically controversial. With high probability the thirteenth or fourteenth months pensions or salaries were just for buying votes, and they lacked the financial realities behind them. But in many case, real and justifiable social transfers fell victim of austerity measures, and as alternative, for example, the possibilities of taxation of often excessive profits of some sectors (taxing banks) are missed. In taxing, as against the progressive income taxes, the increasing and high VATs are typical austerity measures, which hit mostly the lower income peoples. The governments are more eager and active in cutting social expenditures, than clamping down on extreme tax evasions of certain business circles. It is not exaggeration to tell, that if all tax obligations were duly fulfilled, most of the countries would not have fiscal balance problems. It is clear, that in order to avoid misunderstandings and deception, we should concretely analysis the austerity policies of a country or an organisation, and only then can we decide, what has happened in reality. Was it necessary to make austerity, in what form and ways were they implemented, what was their efficiency and what were the real consequences? Austerity is a normal concomitant of rationally functioning of an economy, and it depends only on their concrete forms and extent, whether, how and by whom they are tolerable and acceptable. As in general, the public is hostile to them, the politicians and governments tend to disguise and manipulate them.

Tags: inflation, profit