Austerity & Extremism

I noted yesterday that anything the government gives you, the government can take away, and that dependency on government services — which might be withdrawn — leaves citizens weak and unfree.

One cause for the withdrawal of government that I neglected to mention (intentionally, as I hoped someone would pick it up in comments) was the matter of austerity. While the example I was bouncing my ideas off — of denying treatment to smokers or the obese — remains theoretical, the withdrawal of government services and spending as a result of austerity is very much a reality, especially in Europe.

To wit:

That more austerity produces less GDP (and very often bigger deficits due to falling tax revenues — as exemplified by Portugal) is self-evident. That society is — for lack of a better word — pissed with this outcome is the clear reality on the ground. Made dependent upon government largesse, society now finds the crutch of services, spending and government jobs withdrawn. And of course, this has political blowback.

As Tyler recently put it “nationalism is back with a bang”. But it’s not just the nationalists who are doing well, so too are the far left. Just as in the 1930s many people who have been failed by the mainstream parties are angry, and their instinctual reaction is to reject the political mainstream and look to the fringes.

Let’s look at Greece.

From the WSJ:

Two political mavericks—one a soft-spoken former Communist, the other a firebrand nationalist—are tapping into public anger at incumbents and the harsh austerity measures Greece must adopt to stay in the euro, as support for mainstream parties withers ahead of May 6 elections.

Right-wing economist Panos Kammenos and left-wing lawyer Fotis Kouvelis are poles apart ideologically. But they are currently among the most popular party leaders in Greece, and their parties have sprung from nowhere to challenge Greece’s political establishment and the austerity policies that many Greeks blame for deepening their country’s economic crisis.

Between them, Mr. Kammenos’s Independent Greeks and Mr. Kouvelis’s Democratic Left could win around 20% of the vote. Their rise is cutting deeply into support for Greece’s two mainstream parties — the conservative New Democracy party and the center-left Socialists, known as Pasok — that share power in a fractious coalition government.

Given the utter train wreck that the Greek economy is, it is shocking that these figures are not significantly higher. In the recent first round of the French Presidential election, the far left and far right polled over 30%, a post-WW2 high.

All over Europe, the unemployed and dispossessed are becoming increasingly frustrated with the status quo.

From Bloomberg:

Europe’s front against austerity has expanded in recent weeks after Spain struggled to meet European Union-imposed deficit targets, election campaigns in Greece faced anti- austerity rumblings and a revolt against extra spending cuts in the traditionally budget-conscious Netherlands propelled Prime Minister Mark Rutte’s coalition toward an early breakup.

Europe has been here before. Hitler came to power, lest we forget, on the back of a devastating period of German austerity.

As I noted in November:

After just two years of “austerity” measures, Germany’s economy had completely collapsed: unemployment doubled from 15 percent in 1930 to 30 percent in 1932, protests spread, and Bruning was finally forced out. Just two years of austerity, and Germany was willing to be ruled by anyone or anything except for the kinds of democratic politicians that administered “austerity” pain. In Germany’s 1932 elections, the Nazis and the Communists came out on top — and by early 1933, with Hitler in charge, Germany’s fledgling democracy was shut down for good.

It’s the same story; more austerity means more misery, means more political and social rumbling, means a greater support for radical political parties. We haven’t gotten anywhere near the scope or magnitude of the 1930s (yet), but the present European contraction has not dampened the technocratic fervour for deeper and faster cuts and tax hikes (which, quite obviously lead to bigger deficits, which trigger more austerity, ad infinitum). Could this at some point mean revolutions that put radicals into power? It becomes increasingly plausible.

And the initial problem in my view is excessive dependency on the state and centralisation. If the state makes up 50% of GDP, cutting spending in the interests of paying down debt will cause a severe contraction throughout the entire economy. If the state makes up 15% of GDP, less so. If the state is only a small fragment, austerity in the interests of paying down debt — even during a recession or depression — is feasible. If the state is a goliath, it will lead to a crippling economic contraction (and of course, the attendant realities of public fury and politcal extremism).

Centralised systems are always and by definition fragile to shocks and mismanagement, because the activities at the centre are transmitted throughout the entire system; poor decisions at the centre metastasise throughout the system. In a robust decentralised system, mismanagement only hurts at the local level, because there is less of a mechanism for the transmission of shocks.

The lesson sticks: anything the government gives you, the government can take away (sometimes deliberately, sometimes not). That could be healthcare, that could be security, that could be economic growth. If it’s delivered by central fiat, it’s fragile.

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43 thoughts on “Austerity & Extremism

  1. A clever person solves a problem. A wise person avoids it – Albert Einstein
    Had society been more wise, we needn’t know depend upon courageous figures like H.S.H. Prince Hans-Adam II , author of ‘The State in the Third Millennium’

  2. If govts are for by and of the people, then people should decide what the like the govt to provide, the logistics required for provided those services, and then hold govt accountable when it goes astray. Govt has gone astray. Govts are cutting programs that cost a pittance to feign fiscal responsibility, meanwhile the real culprits are free to do as they please.

    • If govts are for by and of the people, then people should decide what they like the govt to provide, the logistics required for provided those services, and then hold govt accountable when it goes astray.

      This is correct. The size and shape of government should be an output of the democratic process. What you’re missing is the blowback, the impact of the size and shape of government on the shape of society. Centralisation by definition (although in practice to varying degrees) concentrates power (corporations, lobbyists, bureaucrats, etc) and concentrates fragility. If a society chooses a highly centralised form of government then that is fine. That is totally democratically legitimate. But it doesn’t stop it from being fragile both for the people in the system, and for the system as a whole.

      I’m pleased I am getting some strong negative reactions. The fragility/robustness/antifragility triad (it’s Taleb’s idea, not mine, I am just a student of Taleb) is a truly radical way of looking at the world.

  3. I really don’t uderstand why you would thiihk anybody would accept your logic. One big idea (anti-statism) that your ride on your hobby horse through history without concern for acccuracy. Hitler came to power through a deal made by Hindenburg and the Monarchist Clinique of generals, not through the machinations of democratic politicians, through a government that operated underr emergency decrees (a distatorship already). Your analysis is a shamble.

    • “Your analysis is a shamble.”

      That’s not the only thing. There are plenty of baseless assertions and religious statements as well.

    • Ah Mr. Locke, the Nazi Party did get elected into power in 1932.

      http://en.wikipedia.org/wiki/German_federal_election,_July_1932

      While you are correct in pointing out that Hitler was appointed Chancellor through a backdoor deal in 1933, it doesn’t prove or disprove anything Aziz was trying to say and therefore his analysis is not a “shamble”.

      In fact, it is your misunderstanding of history that makes me question the validity of your comments.

      Jon, look, way over there on the left, its Marx!

        • You should. He’s not the idiot that contemporary discussions make him out to be.

          Its just his solutions to the struggle between labor and capital don’t work in the real world. He actually knows and writes about this in his books.

      • Marx was a visionary, and should be required reading. The consensus on Marx I have come to is that he was absolutely correct in his diagnostics, but absolutely iatrogenic in his prescriptions.

        By the way Jon, I’d like to see some specific and tangible examples of “baseless religious assertions”. Throughout yesterday’s thread you argued by throwing straw men at me and calling me a libertarian. This will not convince me to take your points very seriously. I can tell you’re bright, but you’re not grasping the robust/fragile/antifragile triad, which is the crux of this discussion although I think there was some kind of breakthrough when you grudgingly noted “anything anyone gives you they can take away”, which is more or less my point in its entirety that dependency is fragility.

    • Hitler came to power through a deal made by Hindenburg and the Monarchist Clinique of generals, not through the machinations of democratic politicians

      If Hitler wasn’t already getting 35-40% of the vote in the first place, do you think he could have come to power?

      Are you denying that there was a real upsurge in support for radical parties (specifically in the NSDAP and KPD) in Germany after Bruning’s (known as the “hunger Chancellor” because of the hunger the austerity caused) policies took effect?

      The reality is that Hindenburg negotiated the Nazis into (dictatorial) power for one reason: fear of the other radical side, the KPD, who posed a huge threat to the aristocracy. He saw the NSDAP as a better alternative.

      And by the way, “anti-statism” is a side issue. My “hobby horse” is fragility/robustness/antifragility. Centralism is by definition fragile. You show me a way of doing “statism” in a less fragile and less forced way (there are some possibilities — local voluntary collectives?) and then we can talk seriously about it. But I am not interested in repeating the same hyper-fragile policies that brought us to where we are today (corporatism, militarism, etc).

      • As an avid reader of Nazi history, the economic conditionsin Germany leading to its rise to power and the ideology of Hitler (lets hope history does not repeat) John Aziz you are correct.

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  6. Government adopts austerity at different levels according to the amount of debt. This means that a small government would still need to cut the same amount of spending in order to finance the debt. The other option is to increase taxes which still hinder the economy.
    If so, what’s the difference between big government and small government austerity?

    • If your government spending as a percentage of GDP is much lower, then whatever you slash will be a proportionally smaller amount of the total economic output. I still think that austerity during a depression is a very bad idea, but if you’re cutting a “third of government spending” you will cause less of a contraction if you are starting out with government spending at 15% of GDP than if it starts out at 45% of GDP.

        • For a smaller government to balance the books, they have to reduce expenditures by a proportionally smaller level of GDP.

          For a 15%-of-GDP government to reduce expenditures by 5% of total GDP, that would mean cutting a third of their spending, the equivalent of a 45%-of-GDP government cutting 15% of total GDP. A 15% cut is by definition much more contractionary than a 5% cut.

          Additionally if private transactions make up 85% of the economy, it is much easier to break even on government enterprises than if 55% of the economy is private transactions. All tax accrued from government transactions is of course not tax at all, because it is just a deduction from spending (i.e. transferring from one hand to the other). So having a proportionally larger private sector means a proportionally larger tax base.

  7. There’s a lot of debate on whether Hitler’s ascension was due to hyperinflation or austerity. And while indeed Hitler actually assumed office during the austerity part, his coming to the fore of politics and his ascension actually began at around the end of the hyperinflationary episode. But to conclude, once the harm has been done, there’s no easy way out (so what I just said is not of very much use).

    I also wanted to add something to my comment under the other article’s thread (about austerity). When I said “keeping the flow of hard currency to those countries in the idea that most economies self-correct over time is foolish” – there’s also another argument I failed to mention: there’s simply not enough “hard” currency in the world for all countries that would sign up for such a program.

    If one can find any faults with austerity is that it may be pushed too hard too fast sometimes. Ambrose Evans-Prtichard argues that no country should surpass a therapeutic 1% drop in GDP per year (this may be one of the rare moments when I might actually find some common ground with him).

    • Hyperinflation or austerity?

      Well, let’s look at the evidence. His ascension to power began over the period of hyperinflation, and his emergence into power began during the period of extreme austerity. I think it’s fairly safe to assume that both are to some degree responsible. But not necessarily in the abstract. Although it is true that the current austerity measures are pushing voters toward the far left and far right, the situation in Germany after the war was particular to that period, so while I am sure that the far left and far right will do very well today, we are not looking at history necessarily repeating itself; we are looking at a new chapter of history with some 1930s characteristics.

      • Ah, but you’re only addressing the blahblah part of my comment that in my own view was not worth discussing. A very wise in my opinion text here (along the lines of what I wrote above and in the other thread): http://www.zerohedge.com/news/give-austerity-chance-growth-spending-failed

        To avoid catastrophic outcomes, people must be accommodated to the idea that pain is sometimes inevitable. And I found it unfortunate that your blog doesn’t seem to help in this regard. We want war as a result of austerity because people learn economy from the likes of Krugman who have lost common sense (a trait common in most economists), or we want war because of hyperinflation later down the road?

        • Peter Tchir’s point is weak. He backs his argument up by showing a graph of Portugal’s position; as spending cuts get bigger, the deficits get bigger. And this then triggers more austerity? That’s just a one-way ticket to a fiscal nightmare, and to double dips and triple dips and quadruple dips.

          What does he want to give austerity a chance to do? A chance to destroy the Eurozone? A chance to increase support for the far right and far left? Well, fine. I can’t argue with this, because I am not a Brussels technocrat with any real ability to influence the outcome. Austerity is the reality, and Europe will take the consequences. But let’s just say that any economic policy that makes Paul Krugman look wise is not one I would be very keen to adopt.

          Pain in this case is inevitable at some point, but right now it is self-inflicted. Is that better than non-self-inflicted pain down the road? That’s a hypothetical. Generally my view is that it is better to cut regulation (almost impossible under the E.U.), maintain spending and encourage growth with temporary tax allowances (e.g. for small business), low-interest lending for small businesspeople, and cutting overseas spending (less relevant for Portugal as they are not a military empire).

        • Pain in this case is inevitable at some point, but right now it is self-inflicted. Is that better than non-self-inflicted pain down the road? That’s a hypothetical.

          I would look at his conclusions to find out what’s actually his point. And I find the above (quoted) troubling. Seems to imply that being prudent, moderate and taking steps in advance to prevent catastrophic outcomes is stupid because we’d better wait for the future to destroy us, why take the pain now when we can have so much more fun… for a year or two. This is one of the very rare topics on which I’m dead certain. And I wouldn’t be unless I knew my thinking is along the lines of people whose clear thinking and insight I appreciate most of the time (like John Mauldin and Taleb).

        • You need to get out of the trough before you enact a fiscal adjustment. I advocate austerity be undertaken after the economy is out of the trough.

          And by the way, Taleb and I have gone over this specific issue (I raised it with him) and he takes my point that austerity during a depression can lead to rising deficits.

          If austerity is about cutting deficits (which is absolutely 100% what I believe we must do), we should take measures that cut deficits, not increase them, and cutting spending increases deficits.

        • Austerity is about cutting deficits over the long run, taking into account all the specifics of the situation you’re currently in. I’ve gone over this in the other thread pretty clearly, so I suppose you don’t appreciate my points, so we can just leave it at that.

        • Is there really any way to determine the “long run” in economics? And by that I mean can we legitimately say that we know the effect policies will have over a longer period? The effects of austerity during an economic contraction/depression in the short-run are pretty clear — bigger deficits, and more debt. And there are not many examples in recent history of anything else.

          What you seem to postulate is that sometime down the line, there will be a tipping point; that the wider economy will readjust to the new normal (in terms of spending levels) and will begin to grow again. This will be the case in some cases. Whether five or six years of a zero-growth contractionary environment is a price worth paying seems problematic, but certainly there seems to be massive potential for debt to grow significantly during this period of fiscal adjustment, leaving an even greater debt burden even after the adjustment. And when the level of austerity is being calculated based on the size of the debt/deficits-to-GDP then you risk a cycle of endless austerity: as deficits get bigger you end up enacting more austerity, which causes deficits to get bigger. The full conclusion of this could be debt-deflation, full-blown depression, and a collapse in industrial production.

          In this economic paradigm where in the short-term cutting spending leads to more debt,there is only one reliable way of decreasing your debt-to-GDP ratio: grow GDP faster than debt. Once you have a self-sustaining organic growth pattern, and when the economy is organically creating jobs then you have a lot more scope to really cut government expenditures and government employment. Europe and America had a great chance to do a lot of that in 2003-6, and these kinds of policies would have prevented a lot of the overheating we saw in 2006-7, meaning that the Crash of ’08 might have been a lot less severe (however this is conjecture). So in conclusion, I believe in cutting spending, but only when the private sector will naturally pick up the slack, and when there is less of a risk of an austerity spiral (bigger deficits, more austerity, bigger deficits, more austerity).

        • I think we should first separate the first-class countries that have never experienced significant economic events for decades from the lower tier countries that have often been pushed into impossible situations. And me living in such a lower tier country I can attest to the fact that it indeed works. Over time, the country will stabilize at lower levels of structural deficits. I wish there was a less painful way for us, but it simply isn’t. I guess today we can include among those countries that have come to that dreadful day of reckoning even Spain and Italy.

          I would not think in terms of austerity brings more debts/deficits which must necessarily bring more austerity, but in Tchir’s terms (in the conclusion) about having a plan (that’s why I said I found his post wise). And for the US, when will ever be the time for austerity? If I’m looking at the official data, the US kept “growing” at a brisk pace for some years now.

          So it’s up to the US, UK, etc. to decide what they will do, but the possible path I’m talking about is not a postulate, it simply works, the only problem is that those first-class countries (formerly including Spain and Italy) are not used to this way of thinking as it appears like what you called “needless pain”.

        • Actually, you’ve answered when you said: “grow GDP faster than debt”. I find this a postulate. I actually have evidence that my way works; I don’t know if there’s any evidence your way of completely rejecting austerity and hoping that you can actually make it grow faster than debt in any situation without any catastrophic outcome is sound – and ALL this in the idea that any form of depression/recession is insufferable over any time span.

        • PS: I should add that I find this way of thinking – rejecting austerity completely (unless you grow GDP faster than debt – which as I said I find arbitrary and risking catastrophe if pursued blindly) totally unusual. Roubini doesn’t think that way, and neither does AEP who is actually a big Krugman fan (I would add other people here but they’re not too well known). Most economists seem to disagree with regard to the pace of tightening. They say it could have been done in a not so drastic way in Europe and that it would have helped if those countries had their own currency.

        • It’s quite bemusing to me that you are defending the IMF which in my very limited view is probably the most significant reason why Romania double dipped in the 90s, and is perhaps even a proximate cause for a lot of the ongoing political problems your country faces today. The point remains: Romanian real GDP and industrial production today are lower than they were during the ’80s (as far as I am aware — you may be able to correct me on this). That’s not a recovery. As far as I am concerned your country was screwed by the IMF (although perhaps you got off better than many of the truly Third World nations — e.g. in Africa and Latin America — who ended up giving away natural resources for IMF help, as described by John Perkins in Confessions of an Economic Hitman ).

          Anyway, Peter Tchir will get his way. Europe will give austerity a chance. I always welcome the empirical investigation of economic problems. But every month as deficits in Portugal, Greece and Spain get bigger due to falling tax revenues, I will consider it a vindication of my views.

          P.S. I do not reject austerity completely. I am very much in favour of it once there has been some degree of recovery and a return of organic growth and rises in industrial production, etc. In 2003-6 when I was a teenager and we experienced an economic boom I recognised that all this spending during the boom times was a bad idea, because it violated the biblical concept of saving in the fat years to spend in the lean ones. An austerity program for America or Greece or Spain or Portugal in 2003 would have been a great, fantastic, brilliant idea.

        • I’m not defending anyone, I’m just describing what to the best of my knowledge is how reality works. I find comparisons between today’s and communist Romania arbitrary. There are a lot of factors to consider like the rampant corruption following the fall of the regime, the already crumbling and old industrial infrastructure by the time the regime fell (probably a million others, but I’m not trying to write a novel here) etc. To the best of my knowledge, if there was no adult supervision, we’d now be a third world country (or worse, if such a thing can exist).

        • PS: And I should add that I’m not talking about the specific case of a country transitioning from a centralized economy and dictatorship to democracy and an open economy. Countries routinely come under IMF supervision (including us more recently, Hungary, Latvia, etc.) to avoid more catastrophic outcomes. Now the IMF may be the conduit for some shady business but as with everything in life, not everything is black and white and it would be a tinfoil hat hypothesis that the IMF is entirely evil and corrupt and that it was designed from the start for such evil enterprises.

    • Hitler’s fragile dreams.

      The interesting thing about Nazism is how fragile it was. How it had these huge dreams of thousands of years of domination, and yet crumbled into the sand in less than 10.

      In 1933 Hitler had a meeting with an engineer named Viktor Schauberger, who according to folklore was later (forcibly) put in charge of the Nazi attempts to build antigravitic craft (i.e. flying saucers). Schauberger told Hitler (and Max Planck, who also attended the meeting and later responded that “science has nothing to do with nature” — surely the most stupid quote of the last century?) that the Reich would not last more than 10 years, because its form and practices were anti-natural.

      How right Schauberger was…

  8. However in defence of the Economics of the Nazi regime, the public works (Autobahns) Metros etc did keep the economy moving in a time of lower business investment. I agree with you John, Austerity in a time of deflation is self fulfilling. The problem is do we spend money on consumer goods and trips abroad (Welfare and Government bureaucrats) or money on infrastructure projects that serve the nation for many years and increase the long run productivity of the economy? First we need infrastructure and skilled worker skills maintenance, then we can give money to the “people’ to spend on what gives the largest utility for them.

    Austerity on both public works and welfare will see a deflationery tail spin!

    • Lol! I love it! Of course govt has a spending problem: on destructive nonsense like war, that is. What’s so hysterically funny is that these argument are used to indict benign programs that either don’t cost that much and/or provide a tremendous good. When you are trillions of dollars in debt, how does cutting planned parenthood put anyone on the right track? When you are a war economy, why is Medicare getting blamed? When you lock up millions for drug charges, why does universal health care become the whipping boy? The solution for people like this is to basically cut every good thing and pretend that it somehow fixes the root of our problems. It doesn’t. It’s bullshit. Period.

  9. For detractors noting the increase in police numbers and prisons as part of this budget, please note Ausstralia is a very safe and non violent country, and in recent years African refugees have abused alcohol and now rapes, and stabbings are on the increase. Their community leaders have openly admitted they can’t influnce or control them. Even white middle class kids are abusing alcohol on Saturday nights and resaorting to a no no in Australian culture – Broken bottle attacks “Glassing”

    One thing I agree with is the increased infrastructure spend during a downturn in the Victorian State economy.

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