While economists seem to enjoy muddling the general public’s view of economics, describing it as some sort of multifarious macabre science far beyond the comprehension of the average citizen, many economists will admit (behind closed doors of course) that the most important force determining whether an economy is successful is one that is common to all of us: emotions. Contrary to popular belief, whether an economy is growing or declining has more to do with the overall sense of financial security experienced by the general population, businesses and investors than inputs or outputs. Paul Krugman, a well-known Nobel-prize winning economist and New York Times columnist, has been one of the first to admit that financial policies that only increase the confidence of the lenders and are in fact detrimental to the financial security of the general population are not going to get us out of the crisis. In his newest book, End This Depression Now, Krugman calls into question the necessity of the much touted austerity measure favoured by many governments around the world. His theories help explain why, despite the implementation of austerity measures across Europe and much of the developing world, the crisis continues.
Since the beginning of the financial crisis in 2008, economic austerity measures have been hailed as the only possible solution, albeit an unpopular one, to the growing problems with liquidity and lack of growth and employment. Some of the austerity measures recommended to governments by high-level economic think tanks, such as the Organization for Economic Cooperation and Development, are the cutting of social services in order to reduce national budgets and the hiking up of short-term interest rates. Both of these measures put members of the general population in a far more precarious position, destroying many social services and safety nets that working households count on for basic survival.
The supposed logic behind the austerity measures is that they will reduce growing budget deficits, allowing businesses to grow and develop on their own. The Adam Smith Institute, a well-known pro-austerity British think tank, claims that austerity measures “remove the dependency mentality from people and businesses.” This apparently gives businesses added confidence and an ability to innovate on their own, thus increasing the job market. The fallacy of this claim, however, has been proven time and time again, and opposition to the measures has been growing around the world as a result. The European countries that have reduced spending the most, Greece and Spain, are the ones with the highest unemployment rates in all of the EU. In the United States, however, where the government opted to avoid austerity measures, employment is growing.
The fact that both politicians and citizens have been realizing the problems with the path of austerity is becoming increasingly clear. Last week, a Member of European Parliament asserted, “Austerity does not pull a country out of debt; it increases the burden of debt by contracting the economy and reducing government revenues. If you wanted to help an individual out of debt, do you reduce his hours and his pay? No? Then why has the Euro zone been doing exactly the same to debtor countries?” Widespread and sometimes violent protests throughout Greece, Spain and most recently Canada have shown the level of popular opposition to these measures.
In 2012 the financial crisis is still in full swing. Most analysts predict that full recovery won’t be seen until 2015-17. It is still yet to be seen if any governments will have the foresight to abandon a fiscal policy that centres on cutting deficits as opposed to creating employment. If they did, it may be just what the world needs to End This Depression Now.