World Economic Forum: At Davos, Austerity Reigns
By Peter S. Goodman
As much of the globe grapples with lean economic prospects, and as Europe in particular sinks toward a recession that could spread to multiple shores, world leaders gathered here this week appear to be operating with a rough consensus over how to proceed: Attack budget deficits by cutting spending in a bid to sow confidence in bond markets.
The logic of austerity as curative assumes that the basic problem limiting economic growth is investor fears about the size of government budget deficits, and visions that the bond market may suddenly demand sharply higher rates of interest to enable lending. Governments could be forced to impose growth-killing tax increases to square their books. With such worries in mind, those in control of money are supposedly hewing to the sidelines, depriving economies of credit and investment.
Among finance ministers participating here at the annual World Economic Forum, the word “uncertainty” has been getting a vigorous workout. When times are troubled, goes the thinking, lack of clarity provokes investors to imagine the worst, and to act accordingly. They hold tight to their money, producing self-fulfilling prophesies of pullback.
“If you want to have more internal demand, you have to have confidence,” the German finance minister Wolfgang Schaeuble declared here Friday morning, during a discussion about the future of the eurozone. “If you make your deficit sustainable, people will gain confidence.”
But among some economists, deficit reduction as a growth strategy amounts to a wrong-headed leap of faith.
“Austerity won’t even prevent the next crisis, let alone solve the current one,” the Nobel laureate economist Joseph Stiglitz told The Huffington Post.
Cutting government spending in times of economic weakness further reduces demand for goods and services, he said, which reduces incentives for businesses to invest and hire -- a self-reinforcing dynamic of diminishing fortunes.
In a lunch address earlier this week, the billionaire investor George Soros delivered a withering critique of austerity, one that has become something of an official minority view among those concerned about the current policy trajectory. Warning that the continued embrace of austerity could result in many years of wrenching pain, Soros singled out Germany for imposing harsh fiscal discipline on its fellow eurozone members -- not least, Greece -- as condition for financial support needed to prevent default.
“The austerity that Germany wants to impose will push Europe into a deflationary debt spiral,” Soros said, referring to a cycle of falling prices, which deprive companies of an incentive to invest and hire, which in turn reduces vigor in the economy. “Reducing the budget deficit will put both wages and profits under downward pressure, the economy will contract and tax revenues will fall.”
Such a scenario, Soros added, would produce a result opposite from the policy aim -– larger budget deficits, “requiring further budget cuts, and setting in motion a vicious circle.”
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