The Austerity Myth: Has Government Grown Beyond The Carrying Capacity Of The Free Market?

Salon Magazine posted an article in support of the New York Times’ Paul Krugman’s anti-austerity position titled, Paul Krugman’s right: Austerity kills. They go on to write:

Austerity kills — radical cuts destroy economies and lives, and the honest numbers and economics keep proving it

“I will never forgive them,” wrote 13-year-old Kieran McArdle to the Daily Record, a national newspaper based in Glasgow. “I won’t be able to come to terms with my dad’s death until I get justice for him.”

Kieran’s father, 57-year-old Brian, had worked as a security guard in Lanarkshire, near Glasgow. The day after Christmas 2011, Brian had a stroke, which left him paralyzed on his left side, blind in one eye, and unable to speak. He could no longer continue working to support his family, so he signed up for disability income from the British government.

That government, in the hands of Conservative Prime Minister David Cameron since the 2010 elections, would prove no friend to the McArdles. Cameron claimed that hundreds of thousands of Britons were cheating the government’s disability system. The Department for Work and Pensions begged to differ. It estimated that less than 1 percent of disability benefit funds went to people who were not genuinely disabled.

Still, Cameron proceeded to cut billions of pounds from welfare benefits including support for the disabled. To try to meet Cameron’s targets, the Department for Work and Pensions hired Atos, a private French “systems integration” firm. Atos billed the government £400 million to carry out medical evaluations of people receiving disability benefits.

Kieran’s father was scheduled for an appointment to complete Atos’s battery of “fitness for work” tests. He was nervous. Since his stroke, he had trouble walking, and was worried about how his motorized wheelchair would get up the stairs to his appointment, as he had learned that about a quarter of Atos’s disability evaluations took place in buildings that were not wheelchair accessible. “Even though my dad had another stroke just days before his assessment, he was determined to go,” said Kieran. “He tried his best to walk and talk because he was a very proud man.”

Brian did manage to reach Atos’s evaluation site, and after the evaluation, made his way home. A few weeks later, his family received a letter from the Department for Work and Pensions. The family’s Employment and Support Allowance benefits were being stopped. Atos had found Brian “fit for work.” The next day he collapsed and died.

While a truly heart wrenching, tragic story, the fact of the matter is that there were eligibility tests and benefit denials before David Cameron took over, so “austerity” didn’t change a two page questionnaire into the starting line of a “Tough Mudder” competition. By all appearances, this is a story of incompetence of both government and the private assessment body and not a tragedy caused by “austerity”.

What escapes the left when they rail about “austerity” and “cuts” is the fact that when there is an actual limit to expenditures – as in Obamacare – there will be choices that must be made because the resources for any given program or government are not limitless. Liberals, not being fans of limits (unless they are limits on income or speech) will always view the government as a bottomless pit that grows ever deeper as they refuse to make hard choices.

You have to score a 65 on the exam to be considered disabled?

Oh, come on. We can’t call the people who score 60 fit for work! Look how close they are! We must make an exception!

As proof of this belief, Martin Masse, writing at the Ludwig Von Mises Institute points out that there has been no “austerity” in Europe:

As we can see, government spending has never stopped rising in the Union as a whole since the beginning of the financial crisis, except in 2011 when it remained constant (Figure 3). Spending grew by 6.3 percent in the last three years, in other words during the period when “austerity” policies were supposed to have been applied.

Thus, whenever finance ministers announced budget cuts, they were actually referring not to absolute reductions in total spending but simply to spending increases that were lower than what was previously planned or to cuts that were offset by more spending elsewhere…

Governments in almost all European Union countries are therefore as large as they were when the crisis started in 2007 or even larger today.

If we define austerity as the measures taken to reduce budget deficits, then in that sense austerity is indeed responsible for the crisis. If, however, we define it more properly as policies bringing about a reduction in the size of government, then these policies cannot be held responsible for the crisis in Europe because they were never applied.

Unfortunately, confusion over the meaning of austerity impedes a better understanding of the situation and precludes a more relevant debate over the causes of the crisis.

Keynesians will, of course, regret that there haven’t been even larger spending increases, greater borrowing and expanded deficits in the past few years to stimulate the economy. But, from an Austrian perspective, bloated governments, and higher taxes certainly help explain why European economies are still in the doldrums, several years after the financial crisis.

What Europe needs are smaller governments, not just in terms of public spending but also as regards deregulation of the job market and other structural reforms to encourage entrepreneurship, private investment, and job creation. There will be sustained growth in Europe only when governments, and not citizens or businesses, finally bear the brunt of austerity.

In short, the bottomless pit is still getting deeper – albeit at a slower rate.

Deeper in the Salon article, you will find this nugget of liberal wisdom:

Government debt isn’t like personal debt. If one of us misses a mortgage payment, we risk damaging our credit rating, and possibly even losing our home. So if we owe money, we need to find a way to pay it back as soon as possible. But government debt does not need to be paid back overnight—in fact, it can be dangerous to do so. In an economy where we’re all in the same boat, one person’s spending is another person’s income. So when the government cuts spending, it reduces people’s income, leading to less business, more unemployment, and a vicious spiral of slowing down the economy.

This statement betrays the inability of a liberal commentator to look at both sides of the equation. We are NOT all in the same boat when it comes to government spending. Government spending relies on tax receipts – which are coming from a shrinking group of US taxpayers – 53% to be exact – and debt that, including the interest, must be paid for by what? That would be taxes from those same 53%. When government spending is reduced, it does cut incomes but it also cuts the amount of taxes necessary to run the government and pay the debt. Is not a dollar not spent, a dollar saved?

To use their phraseology: if In an economy where we’re all in the same boat, one person’s spending is another person’s income” is true, then it must also follow that since we are “In an economy where we’re all in the same boat”, government spending and borrowing is another person’s tax bill.

“Government is the great fiction through which everybody endeavors to live at the expense of everybody else.”

– Frederic Bastiat

It never occurs to a Keynesian that if government spending has this large of an effect, it has grown beyond the carrying capacity of a free market economy. As I have stated, stimulus spending cannot work when the bulk of the money is going to pay for “maintenance” or subsistence benefits and generates no economic value or goes to lost causes like a “green economy” that results in no jobs and no self-sustaining businesses.

But the Salon statement is more than that of an economic illiterate; it is an admission that in the mind of the liberal, the purpose of the government is redistribution of income. Government must never stop spending because there are people who depend on government outlays and when tax receipts are not enough to fund the continual increase in dependency, we must borrow to keep handing out money. Liberals treat the government as if it is a perpetual magic money machine that can just create or borrow wealth and value out of thin air. They’ve never met an issue that isn’t a “responsibility” of government or that couldn’t be solved by spending more money – even when there is no more to spend.

6 thoughts on “The Austerity Myth: Has Government Grown Beyond The Carrying Capacity Of The Free Market?

  1. The statement from the Mises website is wrong. Since population is increasing faster than the growth in spending. So there is a per capita cut in spending.

    “Government is the great fiction through which everybody endeavors to live at the expense of everybody else.”

    – Frederic Bastiat

    this is a wonderful quote since, it applies to almost all aspects of capitalist life. Everyone is trying to be a parasite.

    Oh, the damage private property has done to human relations.

    Anyways I’m not Keynesian, So, I won’t defend stimulus and other useless capitalist measures.

    • Karl, collectivism is the ultimate Keynesian world because all spending is government spending.

      The Bastait quote is about government, not society – and again there is no better match for Bastait’s definition that a collectivist society where everybody actually does seek to live at the expense of everybody else through redistribution.

      There is no “per capita cut”, if the government spends more, it spends more. The rate if increase may well not be as great as the population increases but it is still an increase in real terms.

      • Keynesian economics is all about getting consumers to spend again, that is why it provides stimulus. So, people can have some money to spend. You have just demonstrated a lack of economic education. Like I said, I’m not a Keynesian, you can print more money, send out tax rebate checks, cut taxes, not lay-off gov’t workers. But in the end the money spent goes to the pockets of those who already have money.

        • Keynesian economics is about government spending to provide an injection to the economy regardless of where it comes from. It is no different in effect to a socialist planner deciding to produce goods that are not needed because everyone is guaranteed a job.

          I’ll be happy to put my degree in economics up against yours any day.

  2. Salon: “The central goal in debt management is to keep debts sustainable. To be sustainable, government debt repayments should be kept lower than the rate of revenue from economic growth. If that happens, we will grow out of debt, as economic stimulus leads to more income and more tax revenues to reduce the debt.”

    Let me get this straight. It doesn’t matter how much you borrow. That’s not what debt management is about. The more, the better. Just make the minimum payment. No problem that the amount owed keeps rising and the credit rating is falling. It doesn’t matter if the accrued interest is so high you can’t touch the principal. Eventually, economic growth that is the direct result of government spending will (magically?) provide the revenue needed to pay down that debt. — I would love to see those projections.

    Salon: “But budget cuts have slowed down growth—and this is precisely why, in spite of all the UK’s radical cuts, the latest data show that British debt continues to rise.”

    Question: How long have these debts been accruing? Decades? How long has Europe tried austerity? A few years, maybe? I don’t know about Europe, but in the US, if we took the most austere measures possible, we would still have a hard time just paying off the interest on the debt that has been accruing for fifty-plus years. The debt would probably still increase despite our best efforts. It would be at least a decade before we made a real dent.

    And Krugman could say, ‘see, austerity doesn’t work. Keep busting out that credit card and we’ll borrow our way out of this.’

    No worries. Asteroid mines will save us.

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