G20 deficit cutting wrong approach to fix crisis
A major turn took place at the G20 finance ministers meeting in Busan, South Korea over the weekend, as the G20 reasserted deficit and spending reduction its top priority, marking the final step in the (re)triumph of neoliberalism as global economy’s modus operandi. Britain and Canada were the major proponents at the meeting of this deficit warrior approach to recovery while China has cautioned against too rapid an end to stimulus efforts.
This deficit reduction approach is extremely significant given that, following the economic crisis, the neoliberal model itself underwent an identity crisis, as many began to openly question the orthodoxy of deregulation, cutting spending and deficits at all costs, etc… Even the most conservative governments, as a means to help build an economic recovery, advocated for fiscal stimulus (lower interest rates, increases in government spending to help bolster demand and reduce unemployment, etc…), and the G20s stimulus approach continued right up to April of this year, where called for continued stimulus until the recovery becomes “more entrenched”. With the G20 announcement, that approach appears to be over.
What is wrong with this switch to austerity?
There is an argument that this austerity is just bitter medicine that must be taken to cure the economy of its ills. However, even if you are one to accept the idea that austerity is necessary at times to right the ship, Nobel economist Paul Krugman points out that this is clearly not one of those times. The economy, though there are signs of recovery, is still depressed – bogged down by high unemployment in most of the largest economies, including the EU and the US. And when the economy is depressed, slashing spending to reduce debt is both “an extremely costly and quite ineffective way to reduce future debt” because it depresses the economy even further and it reduces the tax dollars received (which could be used to pay down the debt in the future).
Krugman is not saying deficits should be ignored, just that it is wrong and counterproductive for deficits to be the sole focus.
Also, the austerity simply hurts poor (working or unwaged) and middle class people, and we can not lose sight of that. Having started with Greece, it seems that the plan is to go country by country, one-by-one, and force these measures which will diminish social programs, decimate the public sector and dramatically increase poverty and unemployment.
In fact, the G20 pointedly told indebted nations that they must ‘speed up’ their austerity drives. And, just today, British PM David Cameron brought the point home, announcing his drive to cut the deficit in the UK through massive cuts. He warned that Britain’s ‘whole way of life’ will change due to the most drastic public spending cuts in 20 years.
It is worth reflecting on the value an economic system that can continuously and callously demand more from its population, undermining their futures in the process, to pay for the sins of financiers whose risky speculation made them billions of dollars before the bubble burst.
Now it is on the people’s backs to clean up the mess. It is post-crisis shock doctrine for all of us. A clear reason to challenge the G20 agenda.