Government Austerity and Socioeconomic Sustainability

49 Pages·2015·0.701 MB·English

by  P.K. Rao (auth.)

SPRINGER BRIEFS IN ECONOMICS
P. K. Rao
Government
Austerity and
Socioeconomic
Sustainability
SpringerBriefs in Economics
For further volumes:
http://www.springer.com/series/8876
P. K. Rao
Government Austerity
and Socioeconomic
Sustainability
1 3
P. K. Rao
International Development
Consultant
Princeton, NJ
USA
ISSN 2191-5504 ISSN 2191-5512 (electronic)
ISBN 978-3-319-04234-3 ISBN 978-3-319-04235-0 (eBook)
DOI 10.1007/978-3-319-04235-0
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Library of Congress Control Number: 2014941755
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Preface
This Special Monograph is intended to draw the attention of policymakers and
public policy researchers to the pressing current problems of fiscal austerity,
inclusive economic growth, and the imperatives for socioeconomic sustainability.
Devising and maintaining a fair and equitable socioeconomic system remains a
fundamental requirement for long-term sustainability of the economy. Much of the
ongoing policy practice in many countries is deficient in addressing the required
institutional and policy innovations, and is often tilted in favor of preconceived
or simplistic notions rather than founded on comprehensive objective evaluation
of alternatives that support all sections of the society. Treating fiscal sustainability
in a static framework and treating that itself as an end product is merely mistreat-
ing symptoms as well as underlying shortcomings. Winning a battle and losing the
war is not a wise approach. An integrated approach with humanistic outlook pro-
vides guidance for socioeconomic sustainability. This is warranted at national as
well as intergovernmental levels. Attaining socioeconomic stability and its sustain-
ability are viewed as the main objectives that enable deriving financial stability
and fiscal sustainability as some of the byproducts.
Inclusive sustainable development remains an overarching approach for attaining
and sustaining such stability: social, economic (including sfi cal), and environmental.
The key to the successful integration is to recognize and avail positive synergistic
interdependencies among these vital facets that sustain people and life in all forms.
April 2014 P. K. Rao
v
Contents
1 Introduction ................................................ 1
References .................................................. 4
2 Poverty, Inequality and Unemployment: Socioeconomic Policy
and Rawlsian Justice ......................................... 5
Economic Inequalities ......................................... 6
Unemployment .............................................. 7
Poverty, Vulnerability and Rawlsian Justice ........................ 13
References .................................................. 15
3 Economics of Austerity ....................................... 17
Who’s Minding the Store? ...................................... 21
References .................................................. 23
4 Government Austerity in Practice .............................. 25
Regressive .................................................. 26
Progressive ................................................. 26
Wages and Unemployment ..................................... 28
Health Effects: Physical and Mental .............................. 29
Natural Hazards, Disasters and Austerity .......................... 29
Major Concerns of Austerity Effects ......................... 32
References .................................................. 33
5 Debt Sustainability and Innovative Approaches
for Socioeconomic Sustainability ............................... 35
Extreme Events and Resilience .................................. 37
Social Protection ............................................. 39
References .................................................. 43
vii
Chapter 1
Introduction
Abstract This chapter highlights some of the key issues relevant for the policy
formulation and implementation, points toward the need for coherent strategies
that address debt sustainability as well as socioeconomic sustainability both in the
short run and long run time horizons.
Keywords Debt sustainability · Socioeconomic vulnerability · Government austerity ·
Inequalities
Fiscal consolidation, budget deficit reduction, and government austerity or reduc-
tions in public expenditure are often presumably co-aligned and the objective is
ostensibly to bring about public debt sustainability (or address the larger issues
of fiscal sustainability) over the medium and long-term horizons (typically ten
or more years). Among the relevant questions here are: What guidance can be
obtained from economic approaches for this purpose? Do selective or across-the-
board public expenditure reductions (as in ‘sequester’ in the US for some time
intervals, and several episodes of similar nature in many developing countries)
in the name of austerity measures for financial stability contribute to expanding
risk and vulnerability of some of the socioeconomic groups, and of some of the
physical assets? Is there any economic or socioeconomic rationale for the simplis-
tic methods of adopting spending reductions uniformly across the board in some
situations or for other arbitrary resource reallocations? What principles and meth-
ods are relevant to reform some of the traditional, simplistic and largely counter-
productive methods? Are administrative approaches, or policy guidance based on
sovereign debt market signals (ratings of bonds and their prices) rather than con-
siderations of socio-economic sustainability are more relevant because of statutory
stipulations and/or credit rating agency assessments of financial outlook? What
insights are important to change these narrow approaches and replace them with
a more holistic, pragmatic, and transparent mechanisms for redirecting austerity
measures considering various damages that could afflict on vulnerable populations
and assets, which in turn cost the public authorities directly and/or indirectly?
P. K. Rao, Government Austerity and Socioeconomic Sustainability, 1
SpringerBriefs in Economics, DOI: 10.1007/978-3-319-04235-0_1,
© The Author(s) 2015
2 1 Introduction
Are there win-win mechanisms that allow for desired flexibility in time horizons
and policy choices to balance the financial, socioeconomic and other objectives?
This Monograph may not answer all the questions or issues raised but offers some
insights into the fallacies, self-fulfilling prophesies of financial disasters and the
social costs of not paying enough attention to the vulnerable sections of the soci-
ety. A brief summary of various austerity measures in practice during the current
financial crises is also given in later sections.
Also of paramount importance at national and international levels are the issues of
synchronization of measures aimed at public debt stabilization and sfi cal consolida-
tion with the imperatives of meeting the universally agreed Millennium Development
Goals (MDGs, mainly in developing countries), ensuring that the frameworks rele-
vant for post-2015 Sustainable Development Goals (SDGs) are not weakened, and
availing the synergistic benetfis of sfi cal stability, inclusive and sustained economic
growth, and ensuring productive capacities of the economic systems are strength-
ened—including rapid expansion of productive employment opportunities in an inte-
grated world. The ever worsening economic inequalities (including wage inequalities
and asset inequalities) and unemployment scenarios in most countries need to be
fully recognized in the design and implementation of government austerity meas-
ures. This is important because in the current paradigms of sfi cal consolidation these
actions tend to enhance and perpetuate the inequalities in most cases.
Since many of current policy packages on public debt consolidation bring in
the counterproductive measures of public spending cuts, at least three arguments
are worth elucidating further. The main arguments that seek to support government
austerity that are typical of views of a large number of economists, and these fol-
low approximately along the lines (see also Gros 2013): (a) almost all economic
models imply that a cut in expenditure today should lead to higher gross domestic
product (GDP) in the long run, because it allows for lower taxes (and thus eco-
nomic distortions); (b) austerity should thus always be beneficial for solvency in
the long run, even if the debt-to-GDP ratio deteriorates in the short run; and, (c)
austerity always involves huge social costs, but it is unavoidable when a country
has lived beyond its means and lost the confidence of its foreign creditors.
These arguments do not appear tenable, as elucidated in subsequent sections
of this Monograph. For example, as the International Labor Office (ILO 2014)
observed, some of the direct effects of fiscal consolidation measures being pur -
sued simultaneously in several advanced economies include depressed aggregate
demand while at the same time failing to bring down the high levels of public debt
in 2013. In some of the advanced western economies, debt-to-GDP ratios continue
to rise despite fiscal consolidation measures. Country-specific fiscal consolida-
tion activities, when aggregated for a large group of countries, tend to bring down
the collective well-being. These self-defeating efforts are often contributors to the
reduction of volume of international trade, besides curtailing domestic consump-
tion and hence shrinking economic activities. Most importantly, it is untenable to
suggest that social cost is ‘unavoidable’—with little regard to the distribution of
such costs across various income groups, socioeconomic groups and the excessive
incidence on the vulnerable segments of the society.
1 Introduction 3
The desirability of long run economic growth with little regard to various social
and economic costs is founded on the assumption that that short run costs are neg-
ligible or do not count, especially when it comes to severe hardship of vulnerable
sections of the society. The assertion that incurring social costs is inevitable is also
unwarranted as this route ignores potential alternative paths of attaining fiscal and
socioeconomic stability, with the vigorous pursuit of public and private projects
that enhance productive employment—that is augmenting human capital and other
forms of capital for the mutual benefits of these inputs to facilitate creation and
expansion of ‘efficient production possibility frontiers’ (a la Paul Samuelson).
This becomes feasible when there exists stakeholder consensus and informa-
tion sharing with an objective approach. The objectivity and rationality in policy
choices remains a relatively scarce resource in many countries, however. Also it is
important note at that the key issues of ethics, equity and social justice tend to be
subsumed in favor of mercantilism if we accept one or more of these premises as
guideposts for policy. Many of the recent austerity policies have been guided by
political ideology rather than by the objectives of socioeconomic development and
also lack sound economic logic. As a consequence the policy imperatives of soci-
oeconomic sustainability are ignored; the consequences of such approaches that
accrue to the corresponding societies over time are partly irreversible, and mostly
involve higher direct and indirect costs.
Among the specific issues of relevance in the societal context are the following.
What good is a physically and educationally underdeveloped child going to con-
tribute oneself and to the society that she/he belongs? How much of such depriva-
tions due to poverty, underemployment and other forms of discrimination likely
to be accentuated in the presence of government austerity and reductions in pub-
lic expenditure in relation to the needs of the vulnerable segments of population?
These issues deserve further attention for addressing the requirements of socioeco-
nomic sustainability, lest the excessive burdens of extensive and deeper depriva-
tions will be too large for any society to carry it too long.
A group of eminent economists and social scientists (Jolly et al. 2012) in their
special document “Be Outraged: There Are Alternatives” (published by Oxfam)
summarized their position on austerity: “Pushed to extremes, austerity is bad
economics, bad arithmetic, and ignores the lessons of history…..The low-growth,
no-growth trap means that the share of debt in GNP falls ever more slowly, if at
all. It may even rise- as it has in some countries.”
More details along the above lines with explanations may be seen later in this
Monograph. Let us note that the roots of the Depression of 1929 lay in a series of
events that are strikingly similar to the recent Great Recession—stark inequality, a
real estate bubble, and a banking crises (Stuckler and Basu 2013). During 2008 the
fear that if the banks went under, entire national economies could collapse (some
banks “too big to fail”) resulted in major rescue operations, largely comprising
taxpayer funded subsidies to the large financial institutions in the U.S. and Europe.
It was feared that the damage of non-intervention would be even more cata-
strophic to the economy than the high price of helping these entities, with poten-
tial for more panic, chaotic bank runs, and less money for entrepreneurs and small
4 1 Introduction
businesses. The U.S. and European governments mobilized an unprecedented
rescue package for the banking sector to the tune of over $2 trillion. This was fol-
lowed by some packages of stimulus for the economy in the U.S., and also a drive
to reduce spending not by lowering entitlements to private corporations such as
financial institutions, but by attacking social welfare spending in most countries.
This Monograph explores the role of government austerity in socioeconomic
sustainability, and focuses on the effects of sub-optimal measures of fiscal consoli-
dation in the creation of employment and elucidates adverse roles in social well-
being and adds specific considerations in the areas of resilience to natural hazards
and disasters (although analogous logic could extend to a variety of other areas
such as education, public health and psychological aspects of well-being). It is not
maintained here that the entitlements approach is the best form of social protection
although it has some merits. The provision of incentives for performance or pro-
ductive work remains a key requirement for sustained socioeconomic development
that is fair to the hard working peoples around the world.
References
Gros, D. (2013). Has austerity failed in Europe?. Brussels: Centre for European Policy Studies.
ILO. (2014). Global employment trends 2014: Risk of a jobless recovery?. Geneva: ILO.
Jolly, R., Cornia, G., Elson, D., Fortin, C., Griffith-Jones, S., Helleiner, G., et al. (2012). Be
outraged: There are alternatives. London: Oxfam.
Stuckler, D., & Basu, S. (2013). The body economic: Why austerity kills. New York: Basic books.