No blogging for long time. I think it’s time to post again. This time it’s about austerity and a book I’m reading nowadays. It’s called Austerity: The history of a dangerous idea, written by Mark Blytz. It is, definitively, a must-read for everyone interested in economics field. I’d like to stress some critical points, even though most of people refuse to understand it because of ideological or politic implications.

First of all, Austerity is a form of voluntary deflation in which the economy adjusts through the reduction of wages, prices and public spending to restore competitiveness, which is (supposedly) best achieved by cutting the state’s budget, debts and deficits.

Countries like Portugal, Ireland, Italy, Greece and Spain (PIIGS) have all implemented tough austerity packages since the financial crisis bust. The answer to their problems was supposed to be austerity. Austerity advocates said “cut the budget, reduce the debt, and growth will reappear as confidence returns”. But austerity clearly is not working if not working means reducing the debt and promoting growth.

What austerity demands is not going to work because we cannot all cut our way to growth at the same time. For someone to benefit from a reduction in wages (becoming more competitive), there must be someone else who is willing to spend money on what that person produces. John Maynard Keynes rightly referred to this as “the paradox of thrift”: if we all save at once, there is no consumption to stimulate investment”. What is true about the whole is not true about the parts.

In sum, austerity is a dangerous idea for three reasons: it doesn’t work in practice, it relies on the poor paying for the mistakes of the rich, and it rests upon the absence of a rather large fallacy of composition that is all too present in the modern world. Few of us were invited to the party but we are all being asked to pay the bill.

I’ll keep you posted about this amazing book and one of the upcoming posts will journey through The General Theory, Keynes’ masterpiece.


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