From independence, freedom and truth

Economy

Austerity and reality

Fernando del Pino Calvo Sotelo

May 4, 2012

Austerity is the latest buzzword. In the good old days it used to be regarded as a virtue; today it only seems to mean bitter difficulty, severity and harshness. It shouldn’t come as a surprise, then, that austerity has brought so much criticism with it: easy tasks attract far more volunteers than difficult ones. However, we are really in need of all the austerity in the world because our situation is truly critical. Not just because the media has lately decided to focus on Spain, seemingly forgetting Greece, Portugal, Italy or…France; neither is it critical because in any given week we see our country rating downgraded, our spreads moving higher or the stock market sinking; the following week the opposite could occur and our situation would remain just as critical.

The situation is critical because Spain has suffered a huge, gigantic credit bubble. In other words, our debt went through the roof and we didn’t react on time. This crisis has not been caused either by our competitiveness going over the hill or by the rigidity of our labor system. Of course, both are serious weaknesses that should be corrected if we want to get out of this, but this crisis is the Great Debt Crisis, the excessive debt crisis. In Latin, the root of the word debt could be interpreted as “having without owning”. One morning we have woken up to this rough, harsh reality. It’s not beautiful, we might not like it, but it’s called reality; we can look the other way and try to ignore it; we can bury our head in the sand and vehemently deny its very existence, but reality will still be there, stubborn, unflinching and mercilessly unconcerned by our fear. In the Adult World, you are not supposed to run away from reality but rather to confront it. And this is our reality: our non-financial corporations’ debt, as a percentage of GDP, is the highest among the world’s ten largest economies; our households are among the most indebted in Europe and our public debt is moving up to the same top ranks as fast as it can. Our deficit last year was the second highest in the EU, and matters are made much worse by both the certainty of the hidden debt caused by the increase of accounts payable and the understandable mistrust on the reliability of official figures. Credit has totally dried up and our financial system is, to put it politely, in an extremely fragile situation. We have first enjoyed and then suffered the mother of all housing bubbles, dwarfing the one in the US, a bubble that saw credit to developers multiply by ten in just eight years (2000-2008), ending up weighing circa 45% of GDP. Our official unemployment rate, still on the rise, is the highest in the OECD, whereas the youth unemployment rate would be labeled as obscene had we not got used to it. The political and economic system brought about by the 1978 Constitution has proved unsustainable due to its many inefficiencies and weaknesses; it got close to bankrupting us in the early nineties and, should we not change it in depth, might be successful in doing so today. We bear the unbearable burden of an enormous bureaucracy and a chaotic legal, regulatory and administrative system, with our 17 autonomous regions and the central government ludicrously competing in bringing out tons of new rules every day with the accompanying cohorts of bureaucrats commissioned to enforce them. After the latest and outrageously treacherous tax increases, we suffer one of the highest personal taxation levels in the world. And, finally, because we have simply run out of money, the weakest members of our society begin to see the much needed support this same society should be bringing them in jeopardy. I might sound alarmist. Precisely. I do want to sound the alarm.

It is amazing that with such heavy doses of reality upon us, the recently passed labor reform has provoked a happily failed general strike promoted by Unions, Inc. and by the same party that was in power until three months ago, that is, the specialists in finding imaginary “green shoots”, whose successive denial, inaction and apparent fabrication of an artificial deficit number are to be held responsible for a large part of what is happening right now. The labor reform should have gone much further to rebuild our labor system, the most rigid and obsolete of the whole OECD, according to this same organization.

It is as amazing that the recently approved Budget cuts are described as “extraordinary and deep”, when all they do is to increase our debt even further, albeit at a slower pace than before. And the worst of it all is that these reforms have been reluctantly undertaken to comply with rules imposed from the outside. Does this mean that should the EU not demand these cuts our political class would continue to spend as if there was no tomorrow and bring us to total bankruptcy?

Several voices are already being heard criticizing the austerity measures even before any of them have been put to work. Obsessed with that weird measure called GDP, they identify public expenditure with growth and advocate that the government ought to keep spending more than it takes in and get deeper into debt. They tend to forget a little detail: someone will have to lend us the money. They argue that a pretty smart guy, someone called Keynes, defended a similar idea. I have to acknowledge that my taste in choosing economists is eclectic and simple: I only like those whom I understand. For instance, I understand part of what the Austrian School says or what Hyman Minsky writes in his Financial Instability Hypothesis, which explains so well what is happening these days. Imagine my frustration when no one talks about the economists I like while everybody talks about that Mr. Keynes. As far as I understand it, the fervent believers in the infallibility of this man born in England in the 19th century think, in 2012, that the solution to happy over spending is just a bit more of the same bad medicine; they also think, GDP permitting, that the most productive investment made by a mindful businessman after careful analysis has identical accounting value to the most extravagant squandering made by an eager-to-be-reelected politician. They appear to believe that ever increasing amounts of debt should not bother anyone because we will always find a charitable NGO to lend us the money, or we might even manage not to return the principal at all. Finally, according to my sources, they firmly believe that politicians have perfect knowledge of what is going to happen and what sort of action is required at every moment in time. Needless to say, politicians find these beliefs appealing and pretty irresistible, even magnetic, so all of them, without exception, are big fans of the Brit. To be honest, it seems that Mr. Keynes, rightly or wrongly understood, has been a splendid justification for the socialists of all parties, insatiable in the pursuit of more and more power and more and more money, to take our money and liberty away from us under an intellectual and altruistic disguise.

Now, let’s forget about academic mental musings and apply common sense instead. Spain is extremely indebted and is dependent on its lenders. It is a tough situation, but it is reality. Interest rates might move up because of unexpected inflationary fears or because of the worsening of the lenders’ risk perception on the ability of us borrowers to service that debt. This would effectively translate into default. We have to adjust out public expenditure to a sustainable level of public income, which is far lower than the bubble figure seen in 2007. The adjustment cannot be based on skinning the taxpayer even further. We must reduce spending. A lot, a lot more that the reduction proposed by the current social-democrat government, which has proved to find much more delight in increasing taxes than in eliminating unnecessary spending and waste.

The Russians say: “Pray, but keep rowing to shore”. Absent of any conviction in the measures it has grudgingly taken so far, our government seems to be buying time in the hope the storm will abate. What it should do, though, is to row much more vigorously and throw overboard unceremoniously anyone hindering the pace of reform. Time is running out.

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