Wednesday, April 24, 2013

Austerity doesn't really work without deflation

In our economy, I don't think austerity would work without deflation. "Deflation" meaning the lowering of things like property values, salaries and so forth. This started to happen during the crash of 2008, but it didn't get as far as it could have. Also deflation brings lots of "adjustment problems" like people being upside down in their homes. In reality, deflation hasn't really taken hold that much. Housing prices are starting to climb again and rents have never really dropped that much. Health care costs, executive pay and many other "costs" in our society continue to climb.

One might think that austerity could work under the philosophy of "starving the beast." Just cut the flow of money and things come down. One might say that austerity could trim everything from people's unrealistic expectations about life to fat union contracts as things adjust to an environment of less money. Well, it hasn't really worked, or at least it hasn't work very evenly. Also, not that many people work under fat union contracts anymore. Instead, austerity has led to vast unemployment. This actually adds the costs to society that are associated with long term unemployment.

In spite of attempts at austerity, the cost of living, that most people face, continues to grow. Health care costs, for instance, have kept growing. Maybe slowing a bit, but not slowing enough. Many of these costs are driven by the continuing and relentless rise in salaries of corporate executives; for instance, I'm remembering the recent Time Magazine article discussing hospital costs and hospital administrator salaries.

Austerity doesn't really work unless there's true deflation and true deflation may not be desirable. One might say, "be careful what you ask for cause you might get it."

By austerity, I mean (for the most part) governments cutting back on spending. Government tends to prop up consumer spending, these days. With out it, we'd be spending less, but spending less needs to go hand in hand with deflation; especially for the percentage of Americans who are living paycheck to paycheck and aren't living very extravagantly. For instance, people can cut down on the size of their housing, but in some areas, just a one room apartment can be costly. One might say, move to a cheaper area, but does that help our economy's efficiency's; especially considering where jobs are and the commute distances?

Without deflation, austerity just tends to add to the gap between the wealthy and the average person as the wealthy aren't willing to practice enough austerity themselves.

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