Austerity: the global reach of a bad ideology

The Western world is in the grip of a bad idea that its governments can’t seem to shake off—although its peoples are starting to.

The idea is called “austerity.” It is the belief that public goods must be destroyed in order to increase private wealth.

Banks impose this policy on indebted nations such as Greece.  They say the governments must curtail public services, including schools and public health, while raising taxes and adopting economic policies that will result in higher prices and lower wages.

Supposedly the money saved can be used to pay off the nation’s debts.  The problem is that so-called austerity destroys the nation’s ability to generate new wealth, and so, as long as countries accept the “austerity” meme, they stay in debt indefinitely.

Nations that default on their debts, as American states frequently did in the era before the Civil War, are threatened with loss of credit.  But the fact is that the banking system literally has more money than the bankers know what to do with.  In practice, lending always starts up again after a few years.

Members of the European Union that use the Euro as their currency have a special problem.  Historically the exchange rates of currencies fell when the issuing nation had a balance of payments deficit.  This tended to bring the balance of trade into balance, because their exports became cheaper in relation to foreign currencies and their imports became more expensive.

Under austerity, nations attempt to achieve the same thing by increasing prices, lowering wages and cutting government services.  Unlike with change in the exchange rate, the burden does not fall upon the whole nation equally, but only on the less wealthy and politically powerless.

Austerity involves raising taxes, but never taxes on the wealthy.  That is because the wealthy are considered to be the “job creators” who must be catered to in order to bring about economic recovery.

The “job creator” philosophy is popular here in the USA.  The saying is, “No poor man ever gave me a job.”  The conclusion is that the key to jobs is to have more and richer rich people.

Well, we Americans have made that experiment, repeatedly, and it hasn’t worked.

If we want mass prosperity, we need to invest in the things that create wealth—education, public infrastructure and scientific research—and then see that the benefits of the new wealth are widely spread, so as to create markets for private business.

We Americans once made that experiment, too, and it did work.

Winning the race to the bottom

Low wages in states such as Mississippi, Alabama and South Carolina, and rising wages and worker unrest in China, may cancel out the cost advantage of locating factories in China, according to the Boston Consulting Group, a management consultant firm.

In short, the United States is competing by driving down the earnings of American workers rather than on the basis of superior inventiveness, productivity and management.

Here is the situation, as reported by Labor Notes:

Wages for China’s factory workers certainly aren’t going to rise to U.S. levels soon.  BCG estimates they will be 17 percent of the projected U.S. manufacturing average—$26 an hour for wages and benefits—by 2015.

But because American workers have higher productivity, and since rising fuel prices are making it even more expensive to ship goods half way around the world, costs in the two countries are converging fast. …

BCG bluntly praises Mississippi’s “flexible unions/workers, minimal wage growth, and high worker productivity,” estimating that in four years, workers in China’s fast-growing Yangtze River Delta will cost only 31 percent less than Mississippi workers.

That’s before you figure in shipping, duties, and possible quality issues. Add it all up, says BCG, and “China will no longer be the default low-cost manufacturing location.”

Labor costs typically are only 10 to 15 percent of the total cost of a manufactured product, so a small wage differential doesn’t make a big difference.