Recession Hurts While Austerity Kills Dreams and People

Since 2008 trickle-down economics has been kept alive by the austerity delusion – combined inordinate fear with buoyant optimism – of the rich, the bankers, the mainstream economists and the media rather than reality. It has been a decade since the Great Recession and the socio-economic gap between the rich and the poor continues to grow. The reality is the neoliberal model can only deliver: austerity, stagnation, and increased economic inequality between the rich and the rest of society. When it grows it creates asset bubbles and market collapses, and then with every boom and bust cycle destroys more of the post-war safety nets. Following the shock of the recent financial crisis, which caused public debt to balloon, much of Europe has been pursuing austerity. The results of the experiment are now in, and they are equally consistent: austerity doesn’t work. Austerity programs are implemented with little regard for human costs.

What economists generally mean by austerity is a reduction in the “structural deficit” of the government, that is, ignoring the effects of the economic cycle. The automatic stabilizers of the economy mean that the deficit rises and falls as the economy contracts and expands. In a period of economic growth, tax revenues will rise and spending on unemployment benefits will fall; the cyclical deficit will decline (or a surplus will rise) even if the government does nothing at all to change policy. Every country running significant budget deficits – as nearly all were in the aftermath of the financial crisis – was deemed at imminent risk of becoming another Greece unless it immediately began cutting spending and raising taxes. Concerns that imposing such austerity in already depressed economies would deepen their depression and delay recovery were airily dismissed; fiscal probity, we were assured, would inspire business-boosting confidence, and all would be well.

The 2008 financial crisis was primarily caused by deregulation in the financial industry that permitted banks to engage in hedge fund trading with derivatives. Increasing opaqueness and complexity of derivatives created a market panic in 2007. Banks realized they couldn’t price the product or assets they were still holding. Iceland’s banks acquisition of British, Danish and Norwegian banks led to increased lending in 2007 to foreign partners likely at the same time other banks were reducing their exposure. This occurred as the liquidity crisis in international financial markets began. Because of high risk exposure Icelandic banks were shut out of European debt securities market; they turned to American collateralized debt obligations – a particular kind of derivative. The European sovereign debt crisis which started in 2008 with the collapse of Iceland’s banking system spread primarily to Portugal, Italy, Ireland, Greece and Spain in 2009. The debt crisis led to a loss of confidence in European businesses and economies – the largest economy in the world. That created the financial crisis that led to the Great Recession.

In 2009, Greece’s budget deficit exceeded 15 percent of its gross domestic product. Fear of default widened the 10-year bond spread and ultimately led to the collapse of Greece’s bond market. Many believed this would shut down Greece’s ability to finance further debt repayments. Since February 2015, the various European authorities and private investors have loaned Greece 294.7 billion euros – the biggest financial rescue of a bankrupt country in history. Greece has only repaid 41.6 billion euros. EU imposed measures required Greece to improve how it managed its public finances. It had to modernize its financial statistics and reporting. It lowered trade barriers, increasing exports. It has scheduled debt payments through 2059. The crisis triggered the eurozone debt crisis, creating fears that it would spread into a global financial crisis. Concern spread over the fate of other heavily indebted EU members. All this from a country whose economic output is no bigger than the State of Connecticut.1

In return for the loan, the EU required Greece to adopt austerity measures. These reforms were intended to strengthen the Greek government and financial structures. They did that, but they also mired Greece in a recession that didn’t end until 2017. Some argue that the legal grounds upon which the “troika,” composed by the EU Commission, the European Central Bank and the IMF, has pursued (the harsh macroeconomic adjustment plans imposed on Greece) are shaky, claiming they infringe upon Greece’s sovereignty and interfere in the internal affairs of an independent EU nation-state. In 2015 there was speculation that Greece might leave the EU. In January 2018 Greek lawmakers approved new measures demanded by international creditors, including cuts to benefits for large families and restrictions on trade unions, creating the basis for additional bailout funding. Now Greece has been freed from the shackles of international supervision, with no sign the debt will ever be paid off.

Brexit is an abbreviation for “British exit,” referring to the UK’s decision in a June 23, 2016 referendum to leave the European Union. The two main reasons people voted Leave were ‘immigration’ and ‘sovereignty’, whereas the main reason people voted Remain was ‘the economy’. Brexit was a vote against the fact the EU, as it deprives individual nations of the power to make many decisions. The EU failed to address the economic problems that had been developing since 2008, for example, 20% unemployment in southern Europe, and the problems in Greece. Voters thought politicians, business leaders, and intellectuals had lost their right to control the system. Brexit feeds into the new nationalism – a bitter populist rejection of the status quo that the global elites have imposed on the system since the Cold War, as more and more lower-income voters have decided – understandingly – is unfair.

There were unintended consequences of American authorities ignoring the madness developing in the housing market, and on Wall Street, where bankers were slicing and dicing millions of garbage-quality housing loans and selling them on to investors in the form of mortgage-backed securities. Austerity is backed by the belief that too much state spending preceded it – supported by the belief the economy should be free from intervention of any kind, and that austerity is a natural policy initiative during periods of crisis. The Federal Reserve Bank of San Francisco study made an obvious point: the Great Recession costs people a lot, “the size of the loss … represents a lifetime present-value income loss of about $70,000 for every American.” This is the consequence of loss of economic growth over the past decade.2

Statistics Canada reports that differences in health outcomes are primarily due to the material living circumstances and the associated psycho-social stresses associated with not being well off as the wealthiest 20 per cent of Canadians: “Income influences health most directly through access to material resources such as better-quality food and shelter.” What are the diseases that austerity affects? These men and women respectively are 67 per cent and 53 percent more likely to die from heart disease, 46 per cent and and 30 per cent more likely to die from cancer, 249 per cent and 264 per cent more likely to die from diabetes, 231 per cent and 211 per cent more likely to die from respiratory disease and 88 per cent and 83 per cent more likely to die from injuries than their wealthy counterparts.3

The US federal debt currently stands at about $15 trillion, or 78% of the size of economy. If current trends continue, it will roughly equal the size of the economy within a decade, the budget office said. The last time the debt burden hit that level was just after World War II. The impact of the tax cut comes on top of a preexisting problem – the spiraling price of providing subsidized healthcare and Social Security for the huge baby boom generation as it moves into retirement. Rising consumer debt creates problems for the middle class as income disruptions from job loss are often a precipitating factor leading to heightened use of unsecured credit, particularly job loss resulting in unemployment of relatively long duration. A negative net association of consumer debt on mental health, reflects the fact once occurred, for whatever reason, debt can become stressful and create concerns about repayment and about compromised future opportunities.4

Statistics Canada documents that Canadian men in the lowest 20 per cent of income distribution are 67 per cent more likely to die in any given year than the wealthiest 20 per cent. For women the figure is 52 per cent more likely. This high price is the consequence of the neoliberal project or hegemony of deregulation and austerity. We must embrace democracy, because the working class, in particular, understands democratic activism to be the most effective tool they have to attack extreme inequality and maintain a check on the power of elites. If citizens only play a passive role, then the real politics are shaped in private by interaction between elected officials and economic elites – elites who are not interested in the welfare of the classes beneath them. We must acknowledge what the data tells us: there is a causal link between the strength of a community’s health, and its social protection system.

1 Kimberley Amadeo. (04 Nov 2018) Greek Debt Crisis Explained

2 Erick Sherman (20 Aug 2018) The Great Recession Didn’t Cost Everyone $70,000: The Wealthy More Than Recovered

3 Dennis Raphael (8 Oct 2018) Social Murder and the Doug Ford government.

Evan Halper. (26 June 2018) Trump tax cuts carry a big price tag: Huge debt and risk of another financial crisis, budget office warns.

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