Austerity

26 Oct
The UK has ‘socialism for the rich and capitalism for the poor’
– Ha-Joon Chang

Comparing household finance to national finance generally produces horseshit, however the following analogy clearly makes the point that austerity is an insane way to try to fix an economy in depression.

So I have a mortgage – I got into debt to enable me to make a long-term investment in my future.

Say my recalcitrant teenage child steals my credit card and racks up loads of debt. Rather than punish them, I foolishly say that it’s not a problem and take on the debt, for the sake of family harmony, and add the debt to the mortgage.

I blame the family cat for the debt.

But then I get it into my head that to keep up repayments of this increased mortgage I must live a more austere life: I don’t invest in my job training, I start saving money on food and eating less healthily, I stop paying for healthcare and I drop my gym membership to save money.

This of course makes me less able to do my job, less employable, and I don’t receive the pay rise and bonus I usually get. It also means the kids start getting ill, and don’t do so well at school.

It then gets harder to make my mortgage payments.

Further, I’ve had to remortgage at a higher interest rate. This is because the bank has noticed the effect that my austere life has had on my income, so downgraded my rating because I’m not as creditworthy as I was.

I now have two options: further cut backs, making myself and my family suffer even more, or invest in my future, making me more able to pay off my debt.

Austerity or fiscal stimulus? I trust I’ve made it clear enough for you.

If I haven’t:
– I am the current feckless government
– the teenager is the banks with their CDOs, high leverage and the like
– family harmony means not upsetting my rich friends at the banks
– my mortgage is the wholly affordable government debt
– the cat is a combination of the Labour party on the one hand, and the poor, the jobless, the disabled and foreigners on the other.

And if that isn’t clear enough, here are some very simple graphs to spell it out.

And if that still isn’t enough read a bit of economics; look at previous incarnations of austerity, say in Argentina, Mexico and Brazil, and see what people say about it, for example Nobel prize winners Professor Joseph Stiglitz or  Prof Paul Krugman. Or watch this simple 5 minute video from economist Ha-Joon Chang.

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