How does austerity work

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IAMNOTADOCTOR: Sep 26, 2013

Bwee posted:

Can someone please explain the pro-austerity argument, I understand that it's a "rich get richer" thing but they can't sell it like that

In bullet-points how I understand it, this is not my area of expertise but so far everyone has refused to make an effort post for you.

1.The governments of Greece have structurally for many years spend more money through various programs than it made and fudged the books to hide this. This meant that the government pretended to have to loan 6% of the GDP each year to cover all its costs whereas in fact they had to loan 15%. ( This is also the reason why the troika insists on making the Greek statistics bureau independent, it used to be pretty corrupt.)

2. There are various reasons why this deficit of 15% is so high. For one, tax evasion (by the rich and middle class) was a national hobby, doctors for instance had no trouble to declare on average paying 107% of their total income on debts. Another example often cited is the very low retirement age (55 years) combined with the high amount of public workers. All these result in a lot of government spending and not so much government income.

3. Greece could continue acquiring these loans for low interest rates due to a high trust in Greece as an European union country with a stable currency, and also because the books were cooked.

4. In 2008 the finance world began to doubt whether or not Greece would actually be able to pay back all these loans, as a result all new and future loans would come at a higher interest due to the higher perceived risk.

5. Unfortunately, this meant that paying for the same amount of public spending that the Greek government and its populace was used to would also cost them much much more, further increasing the deficit, the debt to gdp ratio, the percieved risk for lenders and the interest that others would demand to lend greece any money to continue to pay for its programs.

6. The lack of new loans meant that the greek government could not pay its own programs or its creditors. Had no troika intervened then austerity would have had to have had happened: Greece literally did not have any other means to pay for everything. At this point some form of austerity was pretty much guaranteed. If you structurally spend far more then you make and adjustment in spending will have to follow.

7. To save Greece from default the Troika would, among other things such as a reduction of their debt by 53%, lend them money on a very low interest so Greece could continue to pay for its government programs.

8. As you perhaps can imagine, the troika did make the demand that Greece from now on should stop spending 15% more money than it makes and get it closer to 0%, as overspending is what got them into this crisis. There are multiple ways to do this, one is to increases the taxes and make sure that everyone pays their taxes ( a form of austerity). Another is to reduce public spending( for instance, by increasing the retirement age to 67, also austerity). So far makes sense right?

9. The aim of this austerity would be to balance the books, so that the financial markets would once again feel confident that a greek government that spends only 3% more than it makes can actually repay what is lend to them and therefore would offer normal low interest rates and would not need more assistance. ( See Ireland as an example where this happened)

9. A known risk of austerity is that it leads to unemployment: if old people keep working then there are less new jobs for the kids.

10. Another known risk of austerity is that the people will have less money to spend ( because they know have to pay any/more taxes), this results in a decrease in GDP.

11. The result of 10 and 9 is that although the total debt of a country can decrease because of austerity, the ratio of debt/GDP can increase.

12. The alternative to austerity is an increase in government spending: this increase in spending will result in a higher GDP and can therefore result in a lower debt/GDP ratio. The question is however, should you use borrowed money to do this? Keynes himself, the original anti austerity pope, said that government should save money during the good times (you could call this a period of austerity) so it can spend during the bad times where the people themselves refuse to spend. A country that currently does this is much maligned Germany, it has a boom right now and keeps its spending to an austere surplus of 1% so it can pay for future problems.

13. Greece did the opposite of saving during the good times so it would have to rely on the money of the other European countries to spend during the bad times. The other european countries and its citizens are and were not willing to spend the money to keep Greece at or above a 15% deficit, but set a target maximum for 3% of the gdp. Not a completely unreasonable decision. The result is that austerity had to be enforced to make sure that the government could run a 3% deficit.

14. Greece did after much struggle get a mostly balanced budget, but at the cost of higher unemployment numbers and a substantial decrease in GDP.

IAMNOTADOCTOR fucked around with this message at 07:44 on Jul 16, 2015

# ¿ Jul 16, 2015 07:32

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# ¿ May 9, 2024 17:27

IAMNOTADOCTOR: Sep 26, 2013

Hal_2005 posted:

Austerity, a fancy way of saying your country spent too much. And now they can not find new loans which can be used to generate more growth.

When your government spends too much, or your liabilities grow faster than your assets and the asset generating cash flows the leders will no longer support you rolling over your current account deficit. As this contra account balance becomes every more skewed towards an impossible resolution, bond investors be they pension funds or endowments will demand shorter repayment terms and higher bond yields. To meet this, the government can either agree to manage their cash outflows better or: they can seek methods to generate more tax revenue. The most common of which is tax private enterprise and consumption more to 'goal seek' to the solvency ratios require for their target Government Interest rate.

Should a government be particularly inept, or it is impossible to tax your population any more than they can bear (because its likely a bear market), we will see the central bank step in and debase the currency, so that consumption and other independent cash outflows for a country (like personal consumption/lending) have a smaller effect on the country's foreign reserves. Which makes it easier for the government to pay back its creditors, if there is more plenty of foreign currencies for meeting the governments outflows.

I should note, every currency has a "cost" associated with it. Thats what FX is all about.

When you have a currency union, your central bank can no longer devalue the currency to make domestic consumption weaker and temper cash outflows so this forces governments to admit they have a spending problem.

In the case of Greece, Venezuela, and 80% of Asia, domestic retirees and populists are easy to sway and motivate. Particularly when they are told they are being 'overpaid' by foreign counterparties, and domestic politicians have very little interest in admitting they mismanaged the country finances. So we see a reluctance to address those large cash outflow burdens and thus we have the mystical term of "austerity". Which is, as I said above, a fancy way of saying your country spent too much, and your existing population have little interest in adjusting to a way of life that better suits their country's real GDP and real US dollar adjusted wage.

Sooner or later if your country has a current account deficit the piper will need to be paid. You can't debase a currency beyond the lower bound of 0, nor can you underpay the cost of capital by keeping rates at negative yield for more than 10 years before bad things happen. Like Japan and most of the AFPAC trade union.

Note:
Privatization is NOT austerity. You only suggest the spinout of crown corporations when you conclude that government crowns are 1.) a part of the problem which led to a reluctance to build sustainable cash positive industries or 2.) those entities (SOE's) show a willingness to champion reforms in wage, pension and capital reinvestment that will take most of the populist ire away from government's attempts to fix the trade and union laws.

Should austerity not be attempted, and a central bank can no longer defend the currency then we will see bank runs and a flight from the currency. Like Ukraine and Argentina before their govt. revolts. When the bank runs out of reserves to defend their FX, bonds are dumped in masse and yields skyrocket, leading to a liquidity shortange and bank holiday. At this point the IMF and World Bank usually step in, to prevent a failed country forming, however should the risk be too great for even them, the country as a whole needs to abandon their currency regime and the government must abdicate their role as the manager of the trust to the country's real estate laws. A longwinded way of saying: My Government just filed for Chapter 11. At this point, all holders of government treasuries are repudated or written off; what we call a "hair cut", and the Central Bank and newly formed Govt. can issue new debt having no new leins. At the expense of everyone who used the "old" monetary regieme. Which usually means all wage earners, banks, pensions, endowments, and businesses (including universities).

Good post, thank you. I think it is necessary for everyone to keep in mind that austerity in the most recent European scenarios is not primarily meant to increase the GDP, but to prevent a sovereign default.

# ¿ Jul 19, 2015 04:48

IAMNOTADOCTOR: Sep 26, 2013

Quantum Mechanic posted:

Defenders of austerity are not normally so blatant that it's explicitly meant to protect global capital no matter the cost to ordinary people, so thanks for that

Except that GDP is not directly related to "the cost of ordinary people"? Greece (both the government and the ordinary people) have made it clear that they want to stay in the euro, a sovereign default would mean the end of that. Don't blame me for their decision. I'm of the opinion that a structured default and a grexit are the best steps forward for greece at the moment.

Junior G-man posted:

And in both cases it is a spectacular failure.

Remember that Greece already had 2 very big rounds of austerity politics - how did that work out for them, either in terms of GDP or preventing a sovereign default?

I don't get this sorry, Greece still has not had a sovereign default so the answer would be pretty good in terms of sovereign default?

# ¿ Jul 19, 2015 17:08

IAMNOTADOCTOR: Sep 26, 2013

Cerebral Bore posted:

So if you had to pick which one has done more to keep Greece from defaulting, would you say that it's austerity or the rest of the Eurozone and the IMF lending them hella cash?

The EU and IMF lending cash was contingent on austerity. So there's not really a choice to make between those two?

# ¿ Jul 19, 2015 19:01

IAMNOTADOCTOR: Sep 26, 2013

Peel posted:

If the EU and IMF made lending cash dependent on sacrifices to the Olympians, this would not make ceremonial goat death good economic policy.

No in deed, that's why in my humble opinion the question if austerity did more or less than the loans is not a productive question. But reading back on it I didn't really clarify anything with that, apologies.

The position that is mine and that I am willing to defend is that austerity can be an effective means to prevent sovereign default. The effectiveness and desirably of austerity over a default differs on a case by case basis.

Reducing austerity and people defending it to complete idiocy in snappy one liners does not really contribute to the discussion in my opinion.

Disclaimer, I'm more than willing to be proven wrong as this is not my area of expertise, but so far the more thought out and data driven post have been from post's defending aspect's of austerity.

# ¿ Jul 19, 2015 19:54

IAMNOTADOCTOR: Sep 26, 2013

Pohl posted:

This is a post, in video form. I realize it is an hour, but it is well worth that hour. He talks about a lot of poo poo even I don't understand, but he also talks about and explains a lot of the stuff I learned in school or picked up on my own time. Overall, unless you are willing to read books and books of information on this topic, this video should at least be a good primer.
Warning, the entire concept/reality is scarier than you think!

Thanks, i've seen bits of it before but at this point i'm pretty much obligated to see the whole thing to keep posting in good faith. I'll report back with my exciting "lovely goon who knows barely anything about economics" insights and criticism.

# ¿ Jul 19, 2015 23:57

IAMNOTADOCTOR: Sep 26, 2013

Pohl posted:

Still waiting for a few examples where austerity worked well and everyone came out healthy and happy. C'mon, there has to be a few examples out there..??1

Germany, Netherlands, arguably UK, Ireland, Iceland and Latvia . I know that Iceland is retrospectively often presented as the alternative to austerity but that is not true, if you look at the coverage in 2009-2011 the same groups that now point to Iceland as the shining example of non-austerity options for greece called Iceland a hopeless bitch made IMF follower of austerity. (hyperbole, but not too much)
https://www.wsws.org/en/articles/2009/07/icel-j14.html

(World Socialist Website) https://www.wsws.org/en/articles/2009/07/icel-j14.html

quote:

The government has given way entirely to the dictates of the IMF. In total, the government will save 70 billion kronur (�390 million) through spending cutbacks and reorganisation over the next three years, while at the same time increasing income taxes and charges on everyday items such as soft drinks to meet a budget gap of 170 billion kronur over the next four years. The planned tax hikes will account for up to 58 billion kronur.

...

The measures amount to a commitment from the government to impose the massive debts incurred by the financial elite on working people, before handing the debt-free institutions back to private interests.

What wikipedia has to say on the Iceland success:

quote:

A second important factor is the success of the IMF Stand-By-Arrangement in the country since November 2008. The SBA includes three pillars. The first pillar is a program of medium term fiscal consolidation, involving painful austerity measures and significant tax hikes. The result has been that central government debts have been stabilised at around 80�90 percent of GDP.

I've heard people claim that the Icelandic austerity was more severe then the greek, but I dont have figures to back up that claim. What i can tell you is that the spending deficit decreased annually by 3% of the GDP.

quote:

That isn't austerity, try again

Depends on who you talk to,

Simple Definition of Austerity: Austerity involves policies to reduce government spending and or higher taxes in order to try and reduce government budget deficits.

This is something most countries have done and is easily recognizable as "sometimes pretty sensible". If we go back to greece, I dont think Pohl or others would argue that austerity in this sense and thereby a decrease in the defecit of greek spending after 1995 would have been a bad idea. As far as I know there is no discussion what so ever that the greek crisis is in large part the result of a government overspending borrowed money. Austerity =/= austrian economics.

IAMNOTADOCTOR fucked around with this message at 03:02 on Jul 20, 2015

# ¿ Jul 20, 2015 02:45

IAMNOTADOCTOR: Sep 26, 2013

Pohl posted:

You severerly edited this post, because it didn't say anything like this at the original time you posted it. I'm doing some other stuff right now, but I will say this off the top of my head: None of those are examples of Austerity and success.

What the gently caress is World Socialist Website, and why are you posting it as a source? You then quote a wiki article on Iceland and ignore the fact that they said "gently caress you" to everyone and nationalized all their banks. Actually, that edit isn't worth anymore of my time because it is lol.

Eeeh, i fixed the spelling 10 minutes after posting (2 hours before your post, were you painting it on a chapel wall?) and that's pretty much it. But good arguments put forth, well done, why on earth did i not think about lol, thank you for the discussion.

Lets pretend you are arguing in good faith but just grumpy: the world socialist website is relevant because it indicates that what is now put forth by some of the left leaning publications as a shining example of not doing austerity (Iceland), used to be a shining example of the horrors of austerity by the same or similar left leaning publications. I thought it would be most illustrative if i used the most left leaning publication, i could find others for you but seeing as your posting is lol and it is not the most important part of my argument it dont really feel the necessity.

quote:

You then quote a wiki article on Iceland and ignore the fact that they said "gently caress you" to everyone and nationalized all their banks.

How is the default and/or nationalization of the iceland banks opposed to also implementing austerity? Are you absolutely sure you know what the definition of austerity is? I'll restate a workable and commonly accepted definition here just to be clear for you:

quote:

Austerity involves policies to reduce government spending and or higher taxes in order to try and reduce government budget deficits.

Claiming Iceland did not implement austerity is silly, both the IMF and the Iceland government clearly mention the burden of austerity and the troubles they went to go to a budget surplus. Here's an excerpt from the MFA paper, emphasis mine:

quote:

FISCAL POLICY
back on a sustainable path. A major milestone was
reached in 2012 when a primary surplus was achieved
(balance excluding interests). Further progress is being
made with the aim of reaching a surplus in 2014, a
sharp contrast with the deficit of 13.5% recorded in
2008.
� The fiscal measures have included rate increases for all
major taxes while expenditures have been cut through
public administration restructuring and cost reducing
reforms in the health and education sectors.
� The 2013 budget foresees a central government deficit
of just 0.1% of GDP and in 2014 a surplus is forecast at
around 0.9% of GDP

Source :http://www.mfa.is/media/MFA_pdf/Fact-Sheet---No-1,-2013.pdf

At this point i think there are three options for this discussion to continue, all of witch need some effort from your part:

1. You agree that iceland is an example of austerity working, but that it isn't going to work in country x for reasons a,b,c,.
2. You agree that austerity was implemented in iceland, and that it is doing fine now, but that the economic recovery was despite the austerity as indicated by ...
3. Make a nice paint drawing of me wasting my time while you type lol whatever.

# ¿ Jul 20, 2015 06:25

IAMNOTADOCTOR: Sep 26, 2013

Pohl posted:

Yeah, I had just woken up from a nap, so I was grumpy.
Maybe I just missed your post and thought you changed it completely, I apologize that happened.

1. Iceland was not an example of austerity working. I said before that your definition was flawed, yet workable in a set circumstance. Iceland is the perfect example of a country saying "gently caress NO" to austerity.
2. Go back to point 1. I do not agree that austerity was the reason that Iceland is doing fine now. I completely disagree with that.
3. Stop being so drat sensitive. You should have seen how nasty the original post was. I edited because I knew I was being unfairly confrontational.
I'm sorry if I hurt your feelings. You had some valid points and it seems like you are indeed trying to understand and study this issue. Good for you. Sorry, no lols.

No worries bae, <3

1. Okay so were still discussing the definition of austerity; could you give your definition instead of being mysterious and saying the one i provided is flawed? The one I posted is basically the textbook definition.

Wait scratch that, I'll give you the Paul Krugman(for lurkers, this is the main proponent for ending austerity in Greece and overall smart man ) textbook definition witch *suprise* is basically the same.

quote:

In economics, austerity refers to a policy of deficit cutting by lowering spending often via a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to try to reduce their deficit spending and are sometimes coupled with increased taxes to demonstrate long-term fiscal solvency

( All spelling mistakes mine)

https://books.google.com/books?id=U...sterity&f=false

Taxes were increased, agreed? Spending was cut, agreed? Deficit was cut, agreed? All three characteristics were met, under a program called "fiscal austerity". Can we both agree with the Icelandic government and its people that austerity was implemented for all commonly accepted definitions of austerity?

2 If so, we can finally agree that there is at least one country doing well after implementing austerity (the original point of contention) and continue to discuss whether or not the austerity contributed to this.

3.

quote:

Stop being so drat sensitive. You should have seen how nasty the original post was.

Okay, I'll try to contain myself, I often become very sensitive after waking up from a nap and overreact to missed posts. Honestly im fine with whatever mean things you had in your posts and everyone gets confused and lashes out now and then. The only part of your posts that slightly irks me is the complete lack of arguments and sources so far while giving me complements for trying, but i understand your busy right now so I guess its understandable.

I'm of to bed but if you'd like to continue this discussion friend i'm genuinely interested in your rebuttal to the above.

Edit: missed your edit, ignore any percieved snark above

# ¿ Jul 20, 2015 07:11

IAMNOTADOCTOR: Sep 26, 2013

Pohl posted:

Are you talking historical, or recently?
That is important.

EDIT: poo poo. I don't think I ever answered the question from iamnotacotor. What is austerity?
Does anyone have a good definition, because I don't off the top of my head. I hate to say it is like US porn and you know it when you see it, but that is where my brain is right now. You know it when you loving see it.

The US doesn't do austerity as a matter of fact, but some states do. Like Kansas. Kansas cut funding to health care, education and... well loving everything else, while cutting taxes. They didn't have a big deficit before that however, they created one. The idea was that lower taxes and better opportunities would grow the economy. That didn't work, obviously.

Oh, hi wisconsin.

The difference is, US states often have balanced budget amendments. They have to balance the budget, as per a lot of state laws. What does cutting taxes and cutting social benefits lead too... Cut benefits to the poor as you entire economy crumbles around you.

Austerity isn't always about raising taxes, but it kind of is... Since Kansas just raised taxes on the poorest people in the state in order to balance their budget. They couldn't raise taxes, "exactly", but they could raise fees. You know it when you see it. Fee's don't equal a tax... so a lot of people raise fees and not taxes. The poor people pay fees... fees and taxes are different animals but we often call them both taxes.

Kansas is bleeding itself dry, none of this is working.

That was really allitertative, I hope it made sense.

I hope you know that you are the only one who uses your definition of austerity? It's like debating communism and defining communism as the implementation of famine causing policies. Austerity is not always bad simply because it is a very basic and core economic concept that can be implemented in a social way (iceland for instance preferentially taxed the wealthy, as did ireland) or in the GOP kind of way as posted above. Equally important is the time of implementing austerity: keynes was not opposed to austerity during a boom, and I am not opposed to austerity during a sovereign debt crisis. To put it bluntly, you can use it right and you can use it wrong but the wrongness is not a key characteristic.

People itt, including you in my humble opinion, really need to accept the commonly accepted definition of austerity or that they've made up their own in which cases debate and discussion is pointless. I cant debate the merits of a program with you that is defined as : you'll know it when you see it. Especially when all the papers in support or opposed to our austerity use the commonly accepted definition. Basically, let everyone know when your making up your own new rules because at that point discussion in pointless.

# ¿ Jul 20, 2015 14:22

IAMNOTADOCTOR: Sep 26, 2013

Maybe of interest, this graph shows which countries have implemented relative austerity in 2014 compared to 2009. Iceland and Greece clearly stand out, others less often discussed such as Romania also went through sizable austerity following an IMF loan.

# ¿ Jul 20, 2015 14:42

IAMNOTADOCTOR: Sep 26, 2013

To get this subject slightly back on track, does anyone think that any of the piigs could benefit from Iceland style austerity?

Its probably silly to try to extrapolate the success of such a small country to for instance Portugal, but I really like the way Iceland implemented imf forced austerity.

(I use austerity in the general fiscal sense, cutting spending and increasing taxes. Not the d&d sense)

The capital income tax rate was doubled from 10% to 20%, the corporate income tax was increased from 15% to 20%, the social security contribution (SSC) was increased from 5.34% to 8.65% and fishing levies (important in Iceland) were increased. In addition a whole slew of new taxes were imposed (e.g. a net wealth tax, an inheritance tax, a financial activities tax (FAT) etc. etc.)

https://thefaintofheart.wordpress.com/2015/06/12/is-iceland-krugmans-inadvertent-case-for-the-monetary-policy-offset-of-fiscal-policy/

# ¿ Jul 23, 2015 21:26

IAMNOTADOCTOR: Sep 26, 2013

True, or you can be like Greece and have government spending result in a sovereign debt crisis followed by capital flight and a collapse of the banking system.

# ¿ Jul 25, 2015 04:26

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# ¿ May 9, 2024 17:27

IAMNOTADOCTOR: Sep 26, 2013

Peel posted:

The Greek sovereign debt crisis, like the other periphery debt crises, was caused by the euro.

Partly, yes. The other important parts were complete mismanagement by the greek government overusing the artificially low bond rates and the mismanagement of the banks that took up these bond and lend the money to these governments. For those arguing about the definition of austerity, have a OECD paper that discusses the most widely used and misused definitions

http://www.keepeek.com/Digital-Asse...rmdxc6sq1#page6

# ¿ Jul 25, 2015 18:11

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