Austerity can be deadly

In Greek austerity tragedy shows where not to make cuts Andy Coghlan writes:

Austerity can be bad for your health. Greece has seen drastic increases in infant mortality, suicide and depression since the government made deep cuts to healthcare and social support services between 2009 and 2012. These fallouts may soon be reprised in other countries that have embarked on tough austerity measures, such as Spain and Portugal.

Following the country's financial crash, Greece cut its hospital budget by 25 per cent cut and slashed funding for mental health problems by 55 per cent. An analysis of health statistics shows that as a result, suicides increased 45 per cent between 2007 and 2011 and, over roughly the same period, cases of depression more than doubled and infant mortality rose by 43 per cent.

Needle-exchange schemes and free condoms for injecting drug users were also cut. By 2012, new HIV cases in this group were 32 times what they had been in 2009.

The country has also had its first cases of locally spread malaria for 40 years.

A different take on Greece

Exploding the myth of the feckless, lazy Greeks by Alex Andreou.

The state of Greek politics

Paul Mason in Greekonomics looks at the political situation in Greece. It doesn't leave one optimistic.

Michael Pascoe on the Greek tragedy

Last year Michael Pascoe wrote an interesting article on the economic crisis in Greece The Greek tragedy - shoot the chorus. Ever so often I go looking for it so I can send it to other people. As I can't find where I've referenced it before I'm going to do so here so hopefully I can easily find it in the future.

The welfare state did not cause the Euro crisis

On the We are all dead blog Matt Cowgill has written that The welfare state is not to blame for the Euro crisis. It's an interesting post that shows that the idea that the "Euro crisis is a crisis of the welfare state, caused by high taxes and/or welfare spending as a proportion of GDP" is just plain wrong. In a series of graphs Matt shows that the assertion that "European countries tax & spend too much, and that the bond markets have finally stopped the party" is false.

Matt notes that:

The European sovereign debt crisis is about a currency area that encompasses too many diverse regions, with too little fiscal integration and weak oversight. It’s about a central bank that is reluctant (or unable, depending on your point of view) to play the role of lender of last resort. In the case of Greece, yes, it’s about a government that spent too much, taxed too little, and fiddled its books to hide its deficit. But look at Ireland: it’s a low-tax, low-spending country that was held up as a paragon of fiscal virtue by conservatives before 2007. George Osborne declared Ireland to be “a shining example of the art of the possible in long-term economic policymaking.”

The crisis is not about the welfare state. I can’t understand Carr’s motivation in suggesting otherwise.

This is a blog post well worth reading, but then so it the rest of Mark's blog.

Europe's economic woes

I've seen some people suggest that the Australian Government didn't need to stimulate the economy to offset the effects of the GFC. They argue that cutting interest rates alone would have been enough. I think their argument is rubbish.

• Monetary policy has a lag. Cutting interest rates today will have negligible effects on demand in the short term. Indeed some people argue that it can take 18 months to flow through the economy. By then the economy will be in deep recession and unemployment and rates of business failure will have increased significantly.
• The point of cutting interest rates to stimulate economic activity is two fold. One, people and businesses will pay less in interest on existing borrowings and so will have more money available to spend on other goods and services. Two, lower rates are more likely to encourage people and business to borrow money and spend it. However the reality is that when the economy is doing poorly many people and businesses become fearful of the their economic future. They're more likely to try to reduce their debt and save rather than spend and borrow.

In Europe must not ignore the tough lessons of history Ross Gittins somes up this latter point well:

One thing the central bank can do is cut interest rates to encourage borrowing and spending. In normal times this is usually effective, but in really bad times a lot of people are too uncertain about the future to want to borrow and expand no matter how low rates are. And if interest rates are already very low - as they are in the advanced economies now - you can't cut them below zero.

The current Government talks about keeping the budget in surplus over the economic cycle. That doesn't mean that the budget will be in surplus every year. What it does mean is that the Government will run a budget surplus when the economy is going well, but will run a deficit if it needs to stimulate the economy when growth is too low.

So why run a surplus? Two reasons: it helps to control inflation; and it means that the Government has enough funds available to stimulate the economy when it needs to.

The problem for the USA and many countries in Europe is that they've been running deficits when their economies have been strong. Over time they've built up substantial levels of debt to finance their deficits. Although this was bad policy they could afford to do it because they had enough tax revenue to service their debt. However, the GFC has seen their tax revenue plummet and their expenditure increase (on things like unemployment assistance). Now some of these countries are having trouble servicing the debt they already have. They're in a catch-22 situation. They need to run a deficit to stimulate their economies. However, they don't have the reserves to pay for the required budget deficit and are having trouble borrowing money to finance it. In fact the deterioration in their budgetary position means that they are now having to implement austerity measures - increasing taxes and reducing Government expenditure. This in turn is reducing economic activity in their economies and driving them further into recession.


As Ross Gittins writes:

Their economies are still quite weak, but they want to increase taxes or - more commonly - slash government spending to get their big budget deficits down in a hurry. In consequence of this policy of ''austerity'', the European economies are heading back into recession and their deficits are getting worse.

Why are they doing something so counterproductive? Because their stock of government debt is so unsustainably high. Whereas sensible policy involves running surpluses and reducing debt during the good years, they kept running deficits and piling it up in the noughties.

When the global financial crisis struck in 2008, many had to borrow heavily to rescue their banks and then borrow even more to kickstart their economies. Their debt is now so high the financial markets have started wondering whether they'll be able to repay it.

Then you have Greece:

Of course, when a country's sovereign debt gets so high that markets will soon refuse to lend more to it at any price, it has no choice but austerity. You can renege on your debts, but you can't run a deficit if no one will finance it.

Even if some international institution bails you out, it will punish you for your profligacy by insisting on austerity. Will this make things worse long before it makes them better? Inevitably.

The other problem for Greece is that it's in the Euro. Normally a country with its problems can at least devalue its currency or try to inflate its way out of its problems. Greece can't as it shares its currency and interest rates with the other Euro zone countries.

Back to the other countries. Ross Gittins again:

But most of the European countries aren't in those dire straits, so why are they slashing spending? What they should be doing is promising and laying plans to reduce their spending down the track, as their economies recover and can take it in their stride.

Why don't they? Because, after decades of fiscal indiscipline, they don't have much credibility when making promises to be good tomorrow. But that doesn't change economic reality: cut when the economy's weak and you make it weaker. The answer is to find ways of making their promises more credible.

Greek and Southern Europe Debt

Nicholas Gruen looks at the economic problems besetting Greece and the other southern European countries in The Greek default death spiral. He notes that vested interests and rent seekers have effectively derailed needed reforms and that default is inevitable.