Spending Cuts: Austerity, or Thrift?

Europe’s search for a solution to its exploding debt crisis is couched in terms of austerity and citizen “sacrifice.”  Indeed, the Greeks riot over “austerity measures” which their government take that they consider to be going too far, and the Italian coalition government is threatened with collapse over the need to engage in further “austerity measures” to control its own long-standing national debt.  The arguments here at home over how deep to cut, if at all, are couched more and more in terms of “austerity measures.”  This raises other questions, though.

Is there no thrift involved in any of this?  Is thrift not a player at all, do the debaters tacitly assume that thrift is wholly subsumed into what is austerity?

When there are true austerity measures being contemplated or enacted, a nation is having to reduce expenditures on more than the highly useful or the nice to have features of its economy—a tax subsidy for this industry, for instance, pay raises for government employees, or expenditures on those national parks, and so on.  It’s also having to reduce or eliminate spending on the things actually necessary to the nation’s independence of action—national defense, roads and communications networks, other infrastructure items, and so on.  Austerity also cries out for tax increases to support its minimally required spending.

When the nation is being thrifty, instead, it’s managing its accounts and making the spending tradeoffs necessary to avoid overstretching is finances to the point where austerity is thrust upon it.  When the nation begins to overstretch—perhaps from a period of drift, perhaps deliberately to acquire a particularly expensive item or capability—it makes further tradeoffs, deferring spending here, eschewing purchasing altogether there—in order to bring its spending back into line.

Thrift, apart from being simply a wise management of the nation’s money, also is a powerful ward against the conditions that force austerity.  But to achieve control over our future, to avoid a need for austerity measures, in short to be thrifty, a government must achieve two things.  It must obtain a net positive income—that is, it must maintain its spending at a level at or below its revenue intake (and it must emphasize the “below” part where the national debt has gotten excessive).  The second thing it must do is commit that budget surplus to the following purposes.  First, government must pay down the national debt until that value is at a properly low level.  Then it must use the surplus to build the same sort of “rainy day” fund that many states accumulate and all responsible families accumulate, so that these accumulated savings can be tapped for unexpected needs, rather than routinely running up the national debt.  Finally, with the debt at a reasonable level and savings accumulated to a useful level, the surplus must be reduced by reducing the taxes collected from the citizens for whom the government works.

There are a couple of things that our government, in particular, can do to achieve that first requirement of achieving a net positive income and so to avoid the need for austerity measures.  One is to carefully and cold-bloodedly identify the things on which it spends that are truly necessary; the things that are useful, but not critical, to have; and the things that are, for lack of a better word, luxuries.  We have, as a nation over the last three generations (primarily spanned by the baby boomer generation after WWII), gotten so wealthy that we’ve simply lost track of the distinctions among these three categories.  Everything is necessary, because we’ve been able to afford it, or so it has seemed.

The other thing our government should do is determine where the responsibility for the spending should lie: with government, or with the individual.  Not everything on which our government spends should be a government expenditure.  One item, for instance, on which the government spent 20% of its 2010 budget, is Social Security.  A well-intended program, it was badly designed and has been badly managed by government to the point that this combination of failure will leave the program bankrupt in just a few short years.  Privatized retirement programs, where each citizen owns and manages his own retirement funding, will be a vast improvement in the government’s thrift.

This recognition of where spending responsibility lies, and an associated shift in who does the actual spending, is critical because this is the force behind thrift: the decisions made when it’s our money on the line vs. the decisions made when it’s votes and other people’s money on the line.  We’re much more likely to take care of our financial house when it’s our money, than is government, whose bureaucrats and politicians have no skin in that game.

Returning to government thrift has another beneficial pathway.  Reduced government spending, more disciplined government spending, reduces the flow of government money and of government debt into our economy.  This reduces crowding out of and competition against private enterprise, fostering their growth (and hiring).  In the end, almost any spending cut, to borrow a phrase from the present administration, is stimulative.  And so not austere.

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