European governments, including France, Germany and Great Britain, are all looking at austerity measures to help battle the current financial crisis. It might seem like common sense to tighten a country's belt in hard economic times, but one expert warns that the U.S. shouldn't follow suit.
Brown University political economist Mark Blyth believes that Britain's use of austerity is a dangerous idea that will ultimately lead to reducing the economy overall. If the United States government tries it, he tells NPR's Guy Raz, the same people who paid for the bailouts are going to pay for austerity as well.
Several countries are hoping that the strategy, which applies spending cuts to reduce deficits, will help pay the massive increase in public debt caused by the financial crisis.
Putting the austerity policy into effect is seen as a wise move by many of the G-20 countries. The G-20 has even backed Great Britain's recent plan to trim their huge budget deficit by enforcing massive spending cuts. Good for the U.K. if it works, but Blyth cautions it can't work for everyone.
What If Everyone Stopped Spending?
Blyth, who is originally from Dundee, Scotland, stars in a new animated video that takes a skeptical look at the plan. He sees the world as a series of balance sheets.
"Whether you're a single parent, a corporate treasurer or the United States, you have a balance sheet," he says. "You have assets, you have liabilities. And those assets have value."
Homeowners and banks alike used their mortgages as leverage during the housing bubble -- they took on more debt according to the value of their assets. But when the bubble burst, both were left in the red.
"When the assets suddenly lose value, as they did in 2008, and everybody's balance sheet is then underwater," Blyth says, "you have more liabilities than assets. And that creates a particular problem in terms of the way that we're experiencing this recession."
"If every household decides not to spend, you have no spending," Blyth explains. "If every country tries to clean its balance sheet at once, then you end up basically reducing the economy overall."
Take the U.K. for example, he says, which leads the trend in austerity politics. In debt and worried about the country's credibility in the financial markets, Britain aims to drastically reduce government spending.
"Now, if every other country is continuing to spend and continuing to grow, you can have 'growth-friendly consolidation,' as it's called. If, on the other hand, everyone does this [reduces spending] at once, it's just the same as every household not spending," Blyth says.
"You end up with a shrinkage of the overall economy for no net gain."
It's The Public Who Will Pay -- Again
That's not stopping several governments from introducing austerity measures, in part, Blyth says, because the notion "has a wonderful ring of virtue about it. Austerity, the pain after the party. We all went out and gave ourselves mortgages we couldn't afford, we're drowning in debt and consumption."
The risk in the U.S., Blyth says, is that the public who paid for bailouts will wind up paying for austerity as well.
"I actually have a great deal of sympathy with the Tea Party," he says, "and it goes like this:
"They understand that their mortgage didn't get a bailout, whereas some big banks' mortgage-derivative portfolio got a bailout, and they think that's unfair. It also means that that debt is accumulating and they're going to have to pay for this at some point. Well, isn't it then really unfair to double-tax these people by having an asymmetric distribution in terms of who pays for the debt? Because if you cut government services, it's exactly the people who consume Medicare, Medicaid, teacher's salaries -- it's these things which will be hurt."
Many in the Tea Party actually do call for austerity measures, and that's where Blyth parts ways. "To me, that's one of the greatest puzzles at the moment. I find it very difficult to understand how that link is drawn." But then, the American debate is full of contradictions.
"The argument is that we need to cut taxes," Blyth says. But if we cut taxes to stimulate the economy, that makes the deficit worse. But we can't raise taxes, either -- that's the third rail of politics. "Well, then, how do you expect to consolidate the deficit?"
"There are many contradictions in these arguments," says Blyth, "and they're born of a sense of frustration out of what I think is the intuitive understanding people have that something deeply unfair is going on."
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