Government Spending is the Solution

Conservatives in the United States and across Europe continue to rail against government spending, implementing austerity measures in countries that supposedly have high levels of debt.

Everyone compares a given country, lets say the United Kingdom or the United States to Greece, threatening that the continuing spiral of government debt will ultimately sink the country and send them spiralling towards bankruptcy.

Greece, it can be granted, certainly did go on a spending spree when it entered the Euro. Government salaries were increased, money was spent on frivolous exercises such as the Olympic Games in Athens. The wealthy, and many citizens just did not pay taxes to the central government.

The net result in Greece was rapidly increasing debt, and due to a lack of government oversight, decreased revenues. German pressure forced the Greek government to institute strict austerity measures, including dramatic cuts in government spending.

The result of the austerity program was a surge in unemployment, which forced economic activity to drop significantly. Government expenditures increased because of the increased payouts to the unemployment, while revenues to the treasury decreased because of the lack of demand.

Flushed with success, the German government implemented these austerity measures in other countries, like Spain, Portugal and Italy, whose governments were seen as profligate in their spending.

Spain, up to the mortgage crisis in 2008, ran a surplus, and was receiving more than enough revenue to finance its operations. The mortgage collapse took out the main pillar supporting the economy, throwing hundreds of thousands of people out of work, and cutting revenues to the treasury.

Spain’s social spending was entirely sustainable before the financial crisis, with the Spanish economy ranked ninth in the world.

The austerity measures in Greece caused widespread strikes and riots and substantial social unrest. It also did nothing to improve the economy, reducing the revenue received by the treasury, sending its public debt soaring to almost 200% of GDP.

A similar pattern emerged in Spain, Portugal and Italy, with rapidly increasing unemployment, decreased government revenues, and social unrest. The solution endorsed by the Northern Europeans clearly does not work.

The IMF, agrees, stating publicly that it is against austerity measures, because of the immense social harm that they do, and the damage they do to the economy.

Undeterred, the Germans continue on their destructive path, forcing ever more austerity measures on Europe’s southern periphery, inducing more social discord.

In Britain, conservative the government of David Cameron embarked on a similar exercise in cuts to social spending.

The results are not hard to see. In Britain, economic growth has stalled, wavering around 1% per year. In Spain, unemployment overall has soared over twenty percent (26.6%), while youth unemployment in Spain and Greece is close to fifty percent. In Italy, it is over thirty percent, and in Portugal almost thirty-five percent.

Unemployment in the Euro area is now over eleven percent (11.8%). If the various governments in the Euro zone cannot see that their austerity measure are not working, they are clearly incompetent, or just vindictive.

The suffering to the people of Europe cannot be underestimated. The greater harm is to the youth, who will lose years of valuable experience, and will probably never catch up to their peers in other parts of the world, including Germany,

Once more in a century, Germany will be responsible for the suffering of millions of people. There are now 26m unemployed people across Europe.

It all comes down to the conservative belief in austerity and the curbing of social spending. Social programs are the single route out of poverty for hundreds of millions of people in the Euro Zone, and across much of the developed world, including Japan, Canada, Australia and the United States.

Conservatives in the United States and in Europe are determined to destroy the social safety net that supports their economies and ensures that people do not drift back into poverty. They do so despite the evidence that dramatic cuts to social programs seriously harms economic growth, and increases poverty and social disintegration.

In the United States, conservatives have become particularly conservative in their outlook, seeing any and all government spending as anathema. The problem with an all or nothing approach is the harm that it does to the economy.

Conservatives love to compare the economy to a household budget in which you can only spend what you receive in income from all sources. The problem is that the economy is not a household budget.

The United States for instance has the ability to print money. In an environment with a very low inflation rate, one way to improve the economy is just to print money. There are several very good reasons for doing this.

The public debt can be reduced quite substantially by increasing the amount of money in circulation. In a low inflation or deflationary environment, this can help right the economy. In addition to paying the public debt, that money can be used to fund important infrastructure projects.

When interest rates are particularly low, and inflation is low, it pays a country to do precisely that, borrow money to finance investments. While a country is not like a company, there are some parallels between the two.

Companies need to invest in new equipment, plants, machinery, software products to improve their position in their industry. A company cannot cut its way to prosperity. Investment, and Research and Development in new products provide companies with the impetus to compete with rivals. A company that wants to cuts its way to prosperity is ultimately doomed to failure.

A country is far more nuanced and complex than even a company as diverse as General Electric. Countries need spending on infrastructure like roads, electric grid, ports, airports and research and development into technological advances. Nations that do not invest in these things will be left out of any growth likely to come in the twenty-first century.

China and India are both spending resources on training their people, and investing in infrastructure. The United States and Europe, where hysteria over deficits has reached fever pitch would be far better employed educating their people and creating infrastructure for the demands of this century, not the nineteenth.

In the United States, spending can be slashed by cutting the military, on which the country spends vastly more than the next ten countries combined. We are not at war, we have no need for advanced fighter jets, tanks, or more aircraft carriers. There is no palpable threat out there, despite the build up in arms in China. That money would be far better employed providing jobs for the people of the United States.

Until western nations realise that austerity measures only cause social disruption, little will change. It does make me wonder whether conservatives look forward to social discord and upheaval to increase their own political power and undermine representative democracy. While that may sound conspiratorial, it does not mean that it is not their underlying policy. I certainly hope not.

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