Who Benefits From Austerity?

For ordinary people, including families and businesses, when they find they have a budget shortfall, they either need to increase revenue somehow--get a job, for example--or practice austerity--belt tightening, cutting back on expenses.  Putting off buying a car, moving to a house with lower rent or mortgage, perhaps even smaller measures, like saving a little on food or entertainment, may make the difference between positive and negative cash flow.  But what happens if a whole community is having a budget shortfall at the same time?  One persons spending is another persons income.  What happens is the whole community declines--a "race to the bottom".   John Maynard Keynes called this "the paradox of thrift".  They only way to break the vicious cycle is for somebody to spend.  Often this is an outsider.  If a community can attract an outside business by giving it tax breaks or other concessions, it creates employment for locals.  But in the larger economy, this is a losing game.  If you attract Walmart or a factory to your community by giving it tax breaks or a non-union workforce, you have deprived the businesses that tried to compete with Walmart of their revenue, including other communities, you've deprived yourself of taxes to provide necessary services such as roads and welfare, and you've deprived your workers of protections from abusive management.  The factory was going to go somewhere.  Your town may benefit over the short term, but the larger economy does not.

Government can play the role of the outsider--government spending doesn't doesn't really come out of the economy--nearly all that spending goes to businesses and workers.  It's merely redistributive.  Moreover, provided government taxes equally, those taxes don't hurt anybody--everybody is left with exactly the same buying power.  Government is one of the few organizations whose interests are purely those of the country at large.  It risks being corrupted--to redistribute unfairly, to those with political influence--but as long as most decision making is conducted in the open, the people have a chance to fight this.

Government debt is unlike family or business debt, or even that of a larger community, like a state.  The small unit can get itself over a bad spell with austerity.  But the government cannot.  Broad austerity just lowers spending for everybody.   But there's a way out: the government has the ability to print money.  Too much of this causes inflation, with the instability that brings, but within moderation, this can be a good thing.  Among other things, inflation makes debts get smaller.  The people who sell debt try to calibrate them to inflation, but there's a market for that, and if they go too far, the borrower will look elsewhere.  Government, uniquely, has the ability to set its own rates.

So who is it that is trying to convince us that government austerity is an important thing?  The people who make a profit by keeping interest rates high relative to inflation--the people who are lending to government: the big banks.  The thing they least want is for government to inflate its debt away.  They have an easy to understand analogy that their spokesmen and lobbyists pitch: family belt tightening.  But the government is not a family.  Do they care that their greed is keeping the economy down and ruining the future prospects of tens of millions of Americans?  Not a whit.

No country has ever cut it's way to prosperity.  Government and business spending is the only way it's ever been done.  Neither is happening right now, and it's killing us.