Austerity Absurdity

Joe Scheffer: That hurts!
Chuck Scarett: I know it hurts!
--Joe Somebody

There is an absurd thread woven thru some of the commentary that I frequent. It goes something like this. Following the credit collapse we tried programs of 'austerity.' But when we cut spending, saved, and started to pay down debt, economic activity didn't improve. In fact it got worse. Thus, austerity doesn't work. It's like kicking ourselves when we're down. The better approach is to resume borrowing and spending.

It's tempting to label this twisted logic, but there is nothing remotely logical about this stream of thought. Yet, it is being uttered by 'smart' people who should know better.

Prolonged periods of borrow-and-spend (read: consuming more than income permits) elevate standards of living beyond levels attainable to people who live within their means. Elevated standards of living can only persist if people somehow become more productive in the future, enabling them to pay back their borrowings AND maintain high living standards.

Such productivity improvements are unlikely, however, due to the fact that, by definition, periods of borrowing for consumption deplete savings. And savings provide the capital necessary for productivity improvement projects.

It is more likely, therefore, that periods of 'austerity' will follow prolonged periods of borrow-and-spend. People will need to consume less as they work to replace resources borrowed from lenders in past periods. Lower consumption during the 'payback period' lowers demand, which curtails economic output.

This is the bust that follows the boom.

Concluding that austerity is an unacceptable response to over-consumption is among the most juvenile of propositions. That it is central to Keynesian theory speaks volumes about the intellectual capacity, or honesty, its proponents.