The World Economic Forum opened in Davos amid choruses of central bankers and economists calling for governments to cut spending.
This message of austerity is like the call of the ancient Sirens, whose music lured sailors to shipwreck.
We should take a lesson from Odysseus, who poured wax into the ears of his crew and had himself lashed to the mast of his ship to resist the Siren call.
Austerity supporters are selling the idea that governments, like families, must cut back when income shrinks. But economically, governments are not like families.
Firing teachers, cops and government clerks will, for sure, reduce public spending. But budgets, like the song of the Sirens, are only part of the story. Listen only to the alluring lyrics and, like the many voyagers before Odysseus, we will suffer disastrous consequences – in our case falling incomes and worsening economies.
The full economic story begins with this principle taught to every economics student: spending equals income and income equals spending. Cut spending and incomes must fall; cut incomes and spending must fall.
Those who disagree with this say that only private spending can create wealth and that government spending is inefficient. I think the first argument is wrong, but the second is often true, which is why citizens need to pay close attention to their government.
When private spending shrinks, then either government spending must grow to make up for it or the other side of the equation, income, must shrink.
If we increase spending today by borrowing, we create a claim on future income. Families with debt must divert part of their future income to interest and principal to service that debt or go bankrupt. Governments are different, provided they have monopoly control of their currency. By definition, no sovereign government can ever go broke in its own currency.
NO TO AUSTERITY
The United States government, which has a monopoly on its currency, is $15.2 trillion in debt, roughly the same as the entire output of the economy for a year.
That figure has been sung in a refrain about massive debt threatening to bring down the economy and cause inflation. Facts, however, show otherwise.
The country was much deeper in debt, relative to the size of the economy, in 1946 than it is today and yet what followed was decades of prosperity. The 1946 debt remains and, after six decades of growth, it is inconsequential.
In Japan, government debt is roughly twice annual economic output and yet the country continues to function because real interest rates are at or below zero.
To be sure, conditions can change and interest rates can rise sharply, though central banks have ways to limit that. But that is not the problem today. The problem today is shrinking incomes due to shrinking spending.
Austerity budgets, by reducing government spending, will only make incomes fall more. The only way to make incomes rise is to make spending rise, which in the short run means more borrowing by governments to enable more public sector spending.
After reading the news from Davos, ask yourself why we should listen to the Siren song of the financial elite. After all, the people who steered our financial ship into dangerous waters in the first place were at the very top of this group. We should listen more to those will suffer from austerity budgets: children who only get one chance at an education, the sick and disabled unable to support themselves and seniors too old to work.
If, like Odysseus, we wish to row past our current economic straits into a new sea of prosperity, the one thing we must not do is be driven to economic madness by the Siren call of austerity budgets.
“If one has to take a job delivering pizzas until something better comes along, it won’t be the first time.”
The local printer will do any jobs he can and most of them are small. I’m no help – I’m still using the brochures I had printed up over 20 years ago.
OOTS – you’re dreaming – pizza delivery jobs are some of the first to be taken by young kids. It seems all the service jobs in the little town where I live, or even in the nearest city, are staffed by young kids.
You always sound like a Pangloss. All I ever find is that my resume and application goes into the pile with all the others. I also missed the computer revolution and am more or less self-taught on this one. And all the online jobs listings I’ve seen require more extensive computer experience. I was quoted one year at home online tuition fees from two sources – Concordia and a design school out of Pittsburgh – of between $26,000 and $40,000 per year. And there is something very suspicious about them. They don’t like to talk course costs. I find that if I ask right up front, they loose interest in me. The most recent call said he would have to talk to his supervisor and I still haven’t heard from him. I have a hunch that a lot of people are being scammed by the online education business. But I know you don’t know the meaning of the word unscrupulous. I got one unintended compliment in a very sarcastic way from one caller. He said: “alright – so you did everything right”. I actually never thought I was doing anything “right”.
I have also experienced situations where my advanced degrees actually work to my disadvantage especially where the employer hasn’t had an education. They don’t really want to see someone with more education doing their job and succeeding. It is a direct challenge to their ego and sense of accomplishment. They want to believe that they didn’t need an education and “look what they accomplished”. To prove otherwise is the challenge their sense of self-worth.
It is also amazing to me that you can say that all job layoffs can be anticipated and that everyone has the ability to plan ahead for downtimes. You may have had significant money and/or benefits that cushion the shock all your life, but that hasn’t been the case for most people I know. It certainly wasn’t my situation.
And I could truly spit at an economy that has proved to me many times that the jobs that require the greatest efforts, both physical and mental, have been the minimum wage jobs. And those that required the least effort were the best paid. The best-paid employment I had was with a defense contractor and the problem I had most of the time was staying awake or finding something to occupy my days. And the insane joke of the situation is that the supervisor assigned all tasks and he had to make certain his older staff was fed first or they become unhappy. But they were also the highest paid. Go figure? The best thing I did on that job was study for my GRE and actually raised my math score (hardly ever use it) by 100 points over the SAT scores.
The world may be divided into the predators and the prey.
But I truly despise the predators and their inevitable sense of entitlement. Networking has always been elusive to me. You have to know people who know people who can do something for you and I never seem to meet them. It is why most of the world relies on extended family ties to obtain employment.
BTW – Kids should never listen to HS teachers that say – don’t study for the SATs. And they should also know that most advice is garbage.