A remarkable, and terrible, thing has just taken place in the Netherlands of which few Americans are aware. The ruling Dutch political coalition collapsed when the ultra-right wing party (the Freedom Party, led by Geert Wilders) refused to support its coalition partners’ austerity package (calling for tax increases and reduced government expenditures). Wilders is best known for his opposition to Islamic immigrants but is developing a new following based on his Euro skepticism. The core parties of the governing coalition were Mark Rutte’s VVD party and the Christian Democrats (CDA).
On the issue of austerity and budget deficits, the core parties are more hawkish than the German Prime Minister, Angela Merkel – and Merkel is a raptor’s raptor on these issues. Rutte was the prime minister (until Wilders’ withdrawal from the coalition caused his government to fall – he is now the interim prime minister) and Jan Kees de Jager (CDA) was his finance minister. Rutte and Jager became famous (or infamous from the perspective of most citizens of the periphery) for denouncing the periphery’s citizens and leaders as reprobates who needed to be disciplined by their moral superiors (the Germans and the Dutch). The fact that the Netherlands did not meet the deficit reduction limits of the oxymoronic European Union (EU) “Stability and Growth Pact” was deeply embarrassing to Rutte and Jager.
After the fall of their government, however, Rutte and Jager, were promptly able to negotiate an agreement in principle with three parties (typically described in U.S. papers as parties of the left) to adopt the austerity policies that Wilders had opposed. The parties that agreed to support greater austerity are the D66 (Liberal democrats), GroenLinks (the “green-left” party), and ChristenUnie (a small Christian party). “Liberal” is generally used in Europe to describe those opposed to greater governmental roles in the economy. It is remarkable that the green-left party (originally started by four parties, one of them communist and one socialist) would agree to austerity, but its leadership has become increasingly neo-liberal in its economic policies and wants back into power. D66 is an eclectic party that is often neo-liberal in its economic policies and thinks of itself as technocratic. Christian Unity is opposed to euro skepticism and supports some neo-liberal economic policies.
The three parties demonstrate the spread of support for neo-liberal economic policies among parties that were once progressive on economic issues and often remain very progressive on social issues. They demonstrate an aspect of what Francis Fukayama observed and led to his conclusion that we had reached “The End of History” because we had attained a virtually global consensus on the best means to run an economy and govern a nation. (Fukayama no longer supports that view.)
The bizarre fact is that European leaders, at the precise time that neoclassical economic dogma has utterly discredited itself empirically, has embraced the failed dogma with a passion worthy of the most formulaic romance novel. This embrace is not limited to politicians from the extreme right; much of the left’s political leadership has gotten all steamy about austerity.
The continued willingness of European economists and government leaders to support theoclassical economic policies that lead to recurrent, intensifying financial crises and cause gratuitous double-dip recessions has often been discussed and will be the subject of many future columns by my colleagues and me. This column focuses on why some private citizens who consider themselves leftists continue to support austerity. My UMKC economics colleague Stephanie Kelton (@deficitowl) tweeted a link to a story about the Dutch deal on austerity, asking, “What is the Dutch left thinking?” One of her followers, a Dutch MP from the Socialist Party, responded that the Socialist and Labor parties were not part of the deal. His tweet prompted this reply from a Dutch citizen:
@deficitowl Well, you see, there are Dutch lefties, such as myself, who have children. For their sake, austerity is necessary!
I think that this response illustrates why the right has been so successful in selling austerity in Europe even to those who self-identify as leftists. Our children are our top priority and the right has taken a policy (austerity) that is terrible for our children and turned it into a purported crusade for children in which parents willingly bear great sacrifices for the sake of their children. Under this framing, we are not chumps for supporting austerity; we are altruistic parents willing to bear any sacrifice required for the good of our children. Under this framing, when we support austerity we are acting in the manner the left has always held out as the ideal for responsible parents. We are morally superior, not selfish, when we support austerity. The right’s framing of austerity is brilliantly designed to entrap leftists.
It is an excellent approach to ask: is it good for the children? Theoclassical economic policies are terrible for our children. Austerity is one of those faith-based economic policies that consistently prove to be terrible for our children. Most of the reasons supporting the two claims I have made flow from common experience, but some diverge because a nation’s budget is not like a household budget. The overwhelming majority of people only have experience with household budgets so it understandable, but bad for our children, to assume that what makes sense for a household makes sense for a nation.
Austerity causes multiple forms of harm to our children. First, it causes recessions and makes them more severe and longer. The truly bizarre thing about the European leaders pushing for austerity is that they often concede the three points I just made about recessions. A recession typically occurs when private sector demand becomes seriously inadequate. Reducing public sector demand when private sector demand is inadequate is madness. Economists have understood for over sixty-five years that the fiscal policy that makes sense in a recession is counter-cyclical. That is why we have automatic stabilizers. Those stabilizers have substantially reduced the frequency and severity of recessions. We know what works from decades of experience, and counter-cyclical fiscal policies work well.
Similarly, we know what happens when we adopt austerity and try to balance the budget during the recovery from a severe crisis. For example, President Roosevelt finally followed his conservative economic advisors’ advice and tried to balance the budget in 1937. The results were catastrophic. The U.S. recovery from the Great Depression, which had been substantial, was suddenly reversed and the nation was thrown back into a severe depression.
The 1937 experience demonstrated one of the most important points about recessions and budgetary deficits that even economists often fail to understand. A nation in a serious recession cannot simply decide to run a budgetary surplus or even materially reduce its budget deficit. Nations do not control their budgets in such circumstances. For example, the Netherlands cut spending in 2011 to try to reduce its budget deficit to levels demanded by the Stability and Growth Pact. The predictable result was that the Netherlands was promptly forced back into recession and government revenues fell, resulting in a budgetary deficit that, while modest, exceeded the Pact. Rutte and Jager responded to the Netherland’s return to recession, which European austerity demands had caused, by trying to impose even more severe austerity.
The obvious questions are why the leaders of the interim Dutch government is continuing to follow a policy that has consistently proved to be an economic “suicide pact” (as Luis Garicano, professor of economics and strategy at the London School of Economics, has aptly dubbed it) and why three (intermittently) left Dutch parties have joined the government in imposing austerity. As the Associated Press reported on April 27, 2012, “Finance Minister Jan Kees de Jager, the architect of the deal, said Thursday that the package would be ‘sufficient to satisfy European rules,’ without elaborating.”
There is no assurance that the newest Dutch austerity will “satisfy” the Pact’s limit on budget deficits. It will, again, do the opposite. Jager did not “elaborate[e]” on why austerity would work this time because he has no credible theory of why austerity would speed recovery from a recession. No one does. Austerity is the worst available fiscal response during a Great Recession or the recovery from a serious recession.
Recessions cause unemployment. This harms our children directly and indirectly. The direct harm is obvious. European’s kids are the most likely to be unable to find a job. Unemployment among young workers is near 50% in much of the periphery. If you have two kids one of them is likely to be unable to find a job – for years. As a result, Europeans parents in the periphery are losing their children to emigration. When my colleagues and I were in Ireland and Italy this was a theme we heard repeatedly from parents. The old, sick joke about Ireland is being told again: “What is Ireland’s leading export? The Irish.”
Recessions harm our younger children indirectly. More of them end up in poverty (even in Europe). More of them are cared for by depressed parents. More of them are likely to experience divorce. Long term unemployment of a parent harms the family in myriad ways. While Europeans can often receive a free public university education, any children of unemployed parents may have to give up on their dream to attend top non-European universities.
Austerity hurts our children in other ways. It cuts government services when they are most needed due to the Great Recession. Children are often important beneficiaries of such services. Austerity generally increases inequality. European nations are being encouraged to increase their taxes on consumption (VAT). The VAT is one of Europe’s most regressive taxes and poorer children are the principal (albeit indirect) victims of regressive taxes in particular and inequality in general. (Increasing taxes on consumption in a recession is particularly harmful because it discourages the recovery of already grossly inadequate private sector demand.)
Unemployment equals waste and serious unemployment equals massive waste. It is causing the loss of trillions of dollars in wealth every year in Europe. Wealth can be used to help citizens, including our children and to make the investments in human skills, infrastructure, and green development that can create future, sustainable prosperity for our children. The Netherlands has returned to recession, but the periphery is in a deepening depression due to austerity. Austerity means that the Dutch parents and children are forced to make sacrifices that harm them and the Dutch economy. The extent of that sacrifice varies enormously, depending on whether the Dutch family has an unemployed member. For most Dutch parents, austerity is a modest-to-moderate inconvenience. The Dutch, however, through Rutte and Jager, have served as the Rottweillers of Berlin’s austerity demands. The Dutch leaders have demanded every more self-defeating austerity. They have demeaned the parents and children of the periphery who have borne vastly greater sacrifices due to the austerity demanded most shrilly by Merkel, Rutte, and Jager.
Note that the entire concept of austerity being a “sacrifice” by parents done on behalf of their children is false. A parental sacrifice is something painful we take upon ourselves as parents in order to help our children. Dutch austerity harms Dutch parents and children. It also harms people throughout the EU, because its recession reduces EU trade with the Netherlands. Austerity in other EU nations causes far more acute harm to citizens of the periphery and harms the Dutch by reducing trade with the Netherlands. The best way to help our children is to help them and their parents get jobs. Austerity represents an economic assault on children, not a sacrifice for them. Austerity is to economics what bleeding was to medicine.
Austerity does not prevent or minimize budget deficits or overall debt levels. More commonly, it does the opposite by causing recessions (the primary cause of budget deficits and governmental debt) and making recessions more severe and longer. Recessions are the greatest cause of deficits and debt. Austerity is the greatest creator of gratuitous recessions not driven by common business cycles.
In an effort to reduce the length of this column I have not addressed two of the most destructive aspects of the arguments of non-economists on behalf of austerity. I will simply note that my colleagues, particularly Randy Wray and Stephanie Kelton, have explained at length in papers that can be found at our blog (NewEconomicPerspectives) (1) why a nation state, particularly one with a sovereign currency, is not remotely like a private household and (2) there are alternatives to austerity that are vastly superior. Indeed, while the euro is inherently flawed, there are ways that the European Central Bank (ECB) could operate that would remove the ability of the bond vigilantes to cause a death spiral for a euro nation that falls into a severe recession. The ECB could turn the euro into a hybrid sovereign currency.
My UMKC colleagues and I are also are parents. One of the reasons we work so hard to combat austerity is that it poses a grave economic danger to all of our children. The danger is not hypothetical. Austerity has gratuitously forced the Eurozone back into recession and the periphery into depression. When you support austerity you harm all our children. When you are a leftist and you support austerity because you believe that you are making a painful but essential sacrifice for your children you are entering into a suicide pact that harms you and your children and consigns families in the periphery to depression, massive unemployment, increased poverty, and widespread economically-driven emigration.
When the European left supports austerity it also hands power to the most economically destructive parties of the right and makes the nation a lackey of the worst economic zealots in Germany. Rutte and Jager are a stain on the honor of the Dutch people. The most famous poem arising from World War II confesses the poet’s shame at saying nothing when they came for the various groups because the poet was not a member of those groups. Rutte and Jager did not remain silent when the Germans came for the Greeks, the Portuguese, the Spanish, and Italians. Rutte and Jager bayed for the figurative economic blood of the Greeks and other nations of the periphery. They made only the most pro forma expressions of regret at the “necessity” of using austerity to force mass unemployment and emigration on young workers and graduates who were citizens of the nations of the periphery. Rutte and Jager made it clear that the overarching priority was to impose draconian austerity on the periphery to teach the morally deficient southern Europeans the importance of “discipline.” If Rutte and Jager’s policies continue to drive the Netherlands and the Eurozone into recession and the periphery into depression they will find that the bond vigilantes and the Germans will eventually come for the Dutch – and there will be no one left to speak on their behalf.
The ruling parties of the left that have supported austerity have been crushed promptly in the next election. They richly deserved their fate. There are alternatives to austerity. Adopting austerity in a severe recession or during a weak recovery from a severe recession is suicidal. Adopting a treaty requiring all euro nations to do so is an economic suicide pact. The results of euro austerity abound – and they are horrific. Lemmings do not actually commit mass suicide, but the EU and many EU parties of the left do.
The post originally appeared at New Economic Perspectives and is posted with permission.