Reality Behind Austerity

November 25th, 2012
in Op Ed

The Arithmetic of Austerity. It’s Not A “Fiscal Cliff.” It’s A “Death Spiral”

by Rodger Malcolm Mitchell,

Mitchell’s laws:

  • The more federal budgets are cut and taxes increased, the weaker an economy becomes.

  • Austerity is the government’s method for widening the gap between rich and poor, which leads to civil disorder.

  • Until the 99% understand the need for federal deficits, the upper 1% will rule.

  • To survive long term, a monetarily non-sovereign government must have a positive balance of payments.

  • Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

  • The penalty for ignorance is slavery.

Follow up:

“Austerity” is a reduction in the federal deficit, which is accomplished via reduced federal spending and/or increased federal tax collections.

According to debt hawks, the “ideal” condition is a balanced federal budget, where spending equals taxes. Under this “ideal,” balanced condition, a nation with a trade deficit (as the U.S. has), will send more dollars overseas than return to our economy. Under a balanced federal budget, the total dollars in the U.S. will decline by the amount of the trade deficit.

Recently, the U.S. trade deficit has averaged about $45 billion. So our federal deficit must be at least $45 billion for the economy to break even, not counting the effects of inflation.

A common measure of economic growth, Gross Domestic Product, equals Federal Spending + Non-federal Spending, less the Trade Deficit. Austerity requires federal spending to decline and/or non-federal spending to decline, with the later being negatively affected by tax increases.

Austerity always causes GDP to be less than what it would have been, had there not been austerity.

The question then, is what effect does GDP have on austerity? As shown, for GDP to decline, federal spending and/or non-federal spending must decline.

Reduced GDP causes non-federal spending to decline, which causes lower tax collections. If nothing else changes, these reduced tax collections will increase the federal deficit, which will demand further austerity.

To maintain a balanced budget, federal spending also would have to be reduced, but since federal spending is part of GDP, the reduction in federal spending would reduce GDP.

Thus, we have an “austerity death spiral” to depression. Reductions in deficits beget reductions in GDP, which beget more deficits, which can be reduced only by reducing GDP further – a never-ending downward helix, or in the vernacular, an austerity death spiral.

Aside from reversing the trade deficit into a trade surplus, the only way to end the austerity death spiral is to increase the deficit, via federal spending increases and/or reduced taxes.

Republicans want to maintain “low” taxes and to decrease federal spending. Democrats want to increase some taxes and to decrease some spending. Either approach will lead to an economic death spiral.

Can we avoid the austerity death spiral simply by running a trade surplus? Yes, but the world’s balance of trade always is zero. So, if we run a trade surplus, other nation(s) must run a trade deficit. We would avoid depression by impoverishing other nations, which would cause them to have recessions and depressions.

In today’s world economy, where no nation is an “island,” causing foreign recessions and depressions comes back to hurt our own economy, as witness the negative economic effects the euro nations’ own austerity-induced death spirals have had on us.

Straightforward arithmetic shows that deficit reductions (aka “austerity”) reduce GDP, which in turn begins an economic “death spiral” to depression.

Keep this in mind as the politicians in Washington, at the urging of the wealthy class, debate the best way to cause our economic austerity death spiral.

Related Articles

More by Rodger Malcolm Mitchell

Analysis and Opinion articles about money

About the Author

Rodger Mitchell, MBA is a "turnaround specialist", who saves troubled companies. He is the author of the book, "Free Money, Plan for Prosperity" and founder of his own blog, Rodger M

Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

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