Tight­en­ing Belts

Mus­ings are thoughts, the thought­ful kind. For the pur­pose of these ar­ti­cles, a-mus­ings are thoughts that might amuse, en­ter­tain and even en­lighten.

The Star (St. Lucia) - - LOCAL - By Michael Walker

When­ever an eco­nomic cri­sis rears its head, most politi­cians take the easy way out and de­cide to re­duce costs by cut­ting back on a mul­ti­tude of ser­vices and in­vest­ments. But such aus­ter­ity mea­sures sel­dom work sim­ply be­cause they never re­ally af­fect the lifestyles, com­fort and stan­dards of those mak­ing the cuts; they aren't the ones feel­ing the pain. What aus­ter­ity mea­sures do is re­duce eco­nomic growth, dis­cour­age in­vest­ment in the work­force, widen so­cial in­equal­ity, in­crease the gap be­tween ‘them' and ‘us', and sti­fle en­thu­si­asm thereby mak­ing the sit­u­a­tion much, much worse on many lev­els for most peo­ple.

Tim­ing is ev­ery­thing. When an econ­omy is strug­gling to get out of a re­ces­sion, low­er­ing govern­ment spend­ing, lay­ing off work­ers and cut­ting in­vest­ments re­duces eco­nomic growth, cuts pro­duc­tiv­ity and in­creases un­em­ploy­ment. And by the way, rais­ing taxes takes money out of con­sumers' pock­ets, giv­ing them less to spend. The best time for aus­ter­ity mea­sures is when the econ­omy is boom­ing to keep growth down to a man­age­able rate of around three per­cent, and avoid a bub­ble. The less you have, the harder it is to save; the more you have, the eas­ier it is.

And an­other point: If govern­ment is cut­ting costs, why does it need to in­crease taxes? Think about it!

Aus­ter­ity mea­sures in­vari­ably com­prise re­duc­tions in govern­ment spend­ing and in­creases in tax rev­enues. These harsh steps are in­tended to lower deficits and avoid debt crises. Gov­ern­ments are un­likely to im­ple­ment them un­less bond mar­kets or other lenders com­pel them to be­cause peo­ple suf­fer lim­ited un­em­ploy­ment ben­e­fits, raised re­tire­ment ages, re­duced health care ben­e­fits, lower wages, ben­e­fits and hours for govern­ment em­ploy­ees, and slashes in pro­grammes for the poor and needy.

Coun­tries use aus­ter­ity mea­sures when gov­ern­ments and cred­i­tors be­come con­cerned that the coun­try will de­fault on its debt, which usu­ally oc­curs when the debt-to-GDP ra­tio gets above 90 per­cent mean­ing that the debt is al­most as much as the econ­omy pro­duces in a year and cred­i­tors start de­mand­ing higher in­ter­est rates to com­pen­sate them for the higher risk.

In turn, higher in­ter­est rates mean it costs the coun­try more to re­fi­nance its debt un­til the point when it can't af­ford to keep rolling over debts and it turns to other coun­tries for loans, or to the In­ter­na­tional Mon­e­tary Fund. In re­turn for bailouts, new lenders re­quire aus­ter­ity mea­sures.

Aus­ter­ity mea­sures are sup­posed to re­store con­fi­dence in the way a govern­ment man­ages its bud­get. The pro­posed re­forms are sup­posed to cre­ate more ef­fi­ciency in order to sup­port a stronger pri­vate sec­tor. Un­for­tu­nately the mes­sage sel­dom fil­ters down to those who suf­fer most. When reg­u­lar peo­ple who are strug­gling to make ends meet are told that they must make even greater sac­ri­fices for the good of the econ­omy they are sure to cast re­sent­ful glances at shiny new govern­ment ve­hi­cles, lav­ish in­ter­na­tional con­fer­ences, state ban­quets and min­is­te­rial lug­gage fes­tooned with air­line bag­gage tags from the world over.

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