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Austerity is not the Answer; Employment is the Answer

Research & Commentary
March 20, 2012

by Salvatore Babones

In Greece the unemployment rate is 20%.  In Spain it’s 23%.  In Portugal and Ireland the unemployment rate is 15%.  Things in Europe are starting to look as bad as in the United States.

Actually the official European unemployment rate is 10.1% versus 8.3% in the United States.  But unemployment benefits in Europe are much more generous than in the United States.

As a result, many people are counted as “unemployed” in Europe who would be forced to take part-time work just to stay alive in the United States — or would give up looking for work entirely.

Whether in Europe or in the United States, unemployment anywhere at anytime is a waste of valuable human capital.

In the United States as in Greece and Spain governments are cutting teachers, road workers, and even tax collectors in an effort to balance budgets.  This is folly bordering on lunacy.

What good does it do a country for a teacher to stay home unemployed while children are squeezed into crowded classrooms?  The teacher suffers the ravages of unemployment and poverty.  The children suffer a second-rate education.  Who gains?

[pullquote]In the United States as in Greece and Spain governments are cutting teachers, road workers, and even tax collectors in an effort to balance budgets.  This is folly bordering on lunacy.[/pullquote]

Well, taxpayers gain and bondholders gain.  Taxpayers are spared the burden of higher taxes.  Since the rich pay the most in taxes, they gain the most from keeping taxes low — or lower than they would otherwise be.

Bondholders gain because any reduction in government spending improves a country’s credit-worthiness.  That lowers the interest rates — and raises the prices — on government bonds.  When bonds go up in price, bondholders make a profit.

The immediate result of firing a teacher is thus to sacrifice the interests of teachers and children in order to promote the interests of wealthier people and bondholders (mainly banks and hedge funds).

A second result of austerity is to reduce the productivity of the economy as a whole as human resources go unused or are used in less productive ways (as when an experienced teacher turns to manual labor to make ends meet).

A third result of austerity is to move the long-term trajectory of society from a more progressive to a less progressive track as long-term investments in society’s future are sacrificed for short-term savings in government spending.

The answer is that in a downturn those who can pay should pay to keep society functioning at full productivity and full employment.  That means increasing top tax rates in progressive income tax systems.

In a society with a progressive income tax, only people with high incomes pay high taxes.  It is mathematically certain that the burden of government spending will fall on those who can most afford it.

Only people with income pay income taxes and only corporations with profits pay corporate profit taxes.

Increases in property, sales, and value-added taxes are much less effective.  Everyone pays these taxes, even the unemployed.  It’s a poorly-targeted policy that raises revenue by increasing taxes on those least able to pay.

In an extreme case where top incomes taxes can’t be raised quickly enough to generate sufficient income to pay the bills, bondholders will have to suffer.

This is what has happened in Greece: bondholders are sharing the burden of supporting the Greek government budget.  Bond restructuring is a good first step, but it has to be complemented by increases in progressive income taxes.

By following bond restructuring with massive budget cuts and an austerity budget, the Greek government is just perpetuating a cycle that will result in further bond restructuring down the road.

Austerity is never the answer.  Austerity is about making society’s weakest and most vulnerable members pay for the budgeting errors of the ruling class.  It never improves productivity, and it never improves an economy.  It only improves the budget situation — temporarily.

Employment is the answer.  Everyone should be employed.  With productivity always rising due to technological change, employment and wages should never have to go down.  That may sound Pollyannaish, but it’s nonetheless true.

Austerity is a political decision, not an economic one.  It benefits the few at the expense of the many.  It is as inappropriate as it is immoral.  People should work, not sit home to save tax money and boost bond prices.  Employment beats austerity every time.

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