Rise of the pain pushers
As the pungent aroma of tear gas swirled around the Greek parliament, the government finally managed to push through a string of austerity measures demanded by its creditors. No one questions the amount of serious pain these measures will inflict, but will there really be any gain?
This question is being raised by some of the world's leading economists, and no one knows who will be proved right. Meanwhile, what economics Professor Paul Krugman calls 'the pain caucus' is very much in the ascendant among governments in the Western world. One of its most enthusiastic advocates is the British Prime Minister David Cameron, who boldly proclaimed an 'age of austerity' back in 2009.
Advocates of this policy are firmly in control of the European Union and much of the debate ahead of this year's US presidential election revolves around who is most determined to cut America's burgeoning national debt with austerity measures. However, it should be noted, that despite rhetoric to the contrary, the Obama administration's actual policies seem to owe more to the pump-priming influence of economist John Maynard Keynes than to the followers of the balanced-budget school. The pump priming seems to be working - the battered economy is recovering.
The true believers in austerity economics are largely found in Europe, where, according to Nobel economic laureate Professor Joseph Stiglitz, they are gripped by 'deficit fetishism'. He says flatly that austerity 'doesn't work. It does not lead to more efficient, faster-growing economies.'
Stiglitz and others argue that squeezing economies at a time of maximum weakness is a recipe for disaster because it produces a vicious circle of contraction, making recovery all but impossible.
However, the austerity school is firm in its view that unless national budgetary deficits are brought firmly under control, the future is one of hyperinflation and lower economic growth. They believe that pumping money into the economy by printing cash only defers the pain; it does nothing to deal with the fundamental problem. The answer, they say, is 'sound money', not governments with empty coffers printing money.
The evidence to support their thesis is hard to find. Advocates like to point to the example of Switzerland, which has been extremely careful with its finances and was therefore able to largely isolate itself from the carnage going on among its European neighbours. But constant citing of the Swiss example seems oblivious to two basic facts: first, it is a tiny nation with an abnormal economy, and second, even if they are right about Switzerland, it provides no answer for nations that already have huge budgetary deficits, other than to say they should never have reached this situation in the first place.
However, for a while, there was another nation that became a poster child for the austerity camp. When Ireland became mired in the deficit bog back in 2007, it was applauded for taking stern action to extricate itself with three severe budgets, which included slashing public services and welfare payments. As Greece stepped up to the mark as Europe's No1 problem nation, Jean-Claude Trichet, then the president of the European Central Bank, declared: 'Greece has a role model, and that role model is Ireland.'
Ireland had declared its firm intention to slash the nation's budgetary deficit from 12 to 3 per cent of GDP by 2014, and in the first quarter of 2010, it seemed to be heading in the right direction with a flicker of economic growth. However, its GDP last year swung back into recession, and Ireland's central bank is forecasting another 0.7 per cent decline this year.
Meanwhile, personal expenditure continues to plummet. Although exports are on the way up, that provides little comfort to the 14.3 per cent of the working population who were unemployed last year - a figure the bank expects to rise to 14.6 per cent this year.
In Britain, the economy stubbornly continues to contract.
Austerity might yet work, but it's hard to find evidence that it is doing anything other than causing pain.