The concept of economic austerity has been observed and debated since the inception of modern capitalism. In short, it is a proposed solution to financial downturns, where governments reduce spending on social programs and public initiatives in order to lower deficits, at the cost of higher unemployment and lower GDP. These types of spending cuts are frequently touted as the sensible way of navigating recessions without incurring more public debt. Austerity recently emerged in the aftermath of the 2008 global economic crisis, especially in the West, where the immense social welfare systems of European nations became targets.
Treating social programs as a luxury had resounding effects on the economic outlooks, living and working conditions, and overall well-being of the vast majority of those in the West. The 2008 recession marked a true turning point; it showed what governments would do if push came to shove. Proponents of austerity policies pointed to the then-urgent need to reduce deficits and minimize debt, as governments were already hemorrhaging economically. While, on paper, this presents as a logical solution, the on the ground reality for millions tells a different story.
To the disadvantage of many, economic stagnation and worldwide recession during the COVID pandemic, among many, many other phenomena, led to a period of consistent austerity programs around the world. Governments, more subtly than in 2008, scaled back public spending and made gradual cuts at welfare systems, the retirement age, public health care, and other costly but equally invaluable expenditures. Since the world shut down in the beginning of 2020, those in the West (and also beyond) have witnessed a combination of higher living costs than ever and minimal government supplementation.
Argentina’s newly-elected president, Javier Milei, has committed to austerity policy as the only path to escape their ongoing financial crisis. High inflation, low currency confidence, and turning to foreign loans is not an uncommon sequence of events in today’s volatile world economy; Milei, while controversial, is not alone in his perspective. Does austerity have merits, despite all of its immediate drawbacks in the short term?
If we flashback to 2008, many states were in a crisis; unable to drag themselves out of the global recession, and risking long-lasting declines and setbacks, they were painted into a corner of austerity. This was especially prominent among EU states, who were fiscally committed in certain areas and unable to re-prioritize and lacked the quantitative easing capabilities of the US. Even in instances with a degree of flexibility, governments opted to keep banks afloat and double-down on existing financial systems.
Without intervention, economic stability and outlook diminished rapidly for most in the West. The effects of trimming social welfare infrastructures has undoubtedly been detrimental in ways which probably will not be fully understood for years to come. At a minimum, the sharp decrease in public funding across the Euro-zone is a contributor to stagnant GDP growth since 2008 measures were implemented.
The question remains - what exactly did austerity resolve? In 2008, anyway, that was not what leaders were focused on. Austerity was not a true decision, it was a forced move based on prior missteps and understood to be costing populations across the world tremendously in terms of capital, quality of life, stability, and opportunity. More mild and gradual forms of austerity policy, however, reverberated as a way for governments to shift priorities while minimizing political costs of doing so; this became even more common during the COVID years.
In the grand scheme of the 2008 recession, austerity policies have been proven to have little to no effect on long term economic prospects of a country, and slashing public spending has been commonly observed to be ‘friendly fire’ as far as economic policy goes. In the context of the COVID pandemic, the widely-criticized public stimulus handed out by the US government was overwhelmingly put back into the economy by recipients.
In terms of direct consequences, austerity has not been shown to be a reliable strategy to fix recessed economies, but undisputedly impacts the livelihood of individuals, especially lower and middle class individuals who rely on social programs for basic necessities and government spending to spur growth in the economy.
As mentioned previously, the exact consequences stemming from austerity policy and government cuts are frequently opaque, especially when considering secondary and tertiary effects. However, one possible pitfall of post-2008 austerity policy lies in the world’s delayed COVID response and lack of preparedness from public health organizations. Some speculate that austerity eroded the ability of the world, and especially the West, to counter pandemic scenarios while also preventing the most vulnerable from accessing affordable and high-quality care.
Moreover, when the world economy took a nose-dive during COVID, governments turned to subtle austerity policies which placed pressure on federally-funded programs, encouraged quantitative easing to extreme levels, and slowly eroded buying power, job markets, and overall economic stability of citizens.
In examining the merits of austerity policies, it is crucial to note that benefits do exist, both short term and long term. Aforementioned realities in 2008 for many European nations meant that austerity was the only option when considering social and political implications and seeking to preserve the Liberal International Order. Without this fall back, the EU could have even risked dissolvement, and long-standing institutions of the IMF, World Bank, and every instrument of capitalism and development would have faced an utter crisis. In the immediate sense, economic levers including austerity are what governments and leaders rely on in worst-case scenarios.
In a wider sense, austerity movements, while not conducive to improvements in society, can become stable over time. Additionally, the ‘deal’ is simple; countries spend a decade or more digging themselves out of the previous recession, debt, currency crisis, and/or other mishaps. Ideally and in theory, social programs and public spending could return once the tradeoff is complete, minus any relative growth lost from austerity in the first place.
On the topic of austerity’s role in the Liberal International Order, there is a certain symbiosis between it and loans from the IMF and World Bank. Notably, many of these loans are conditionally based on recipients cutting government spending, especially to social programs, despite the IMF itself admitting the incongruence of austerity in practice. In essence, Western institutions reward countries for leaning into austerity and fiscal conservative-ness even if no future gains come of it.
In many ways, the current case of Argentina shows exactly how governments and economies can get trapped in a cycle of debt, currency devaluation, and stagnation. Argentina’s economy has been mismanaged, but placing the blame primarily on social programs would be ignoring decades of poor monetary policy and dictatorship. Argentina has received significant aid and loans, but continues to spiral downwards. President Milei’s ideas have their proponents and detractors, but most agree that initial circumstances will be especially challenging for Argentinians and their daily lives.
Overall, austerity policy has had its legacy ingrained during the aftermath of the 2008 recession and also throughout COVID, despite the limited positive results shown. Importantly, austerity policies serve as a protector of the Liberal International Order during the most turbulent of economic hardships without actually working effectively for their intended purpose of reversing economic hardship. In this sense, Western governments have failed their populaces by pursuing policies minimally beneficial to most at a massive cost to anyone relying on social welfare to survive. Argentinian president Milei’s endeavors have already seen large scale protests in response to austerity and the gutting of existing systems. Austerity should not be considered a cure for economic woes, but rather a tool of last resort that may or may not work and harms those most vulnerable.
References
1 "Austerity measures and the right to social security," UN Office of the High Commissioner on Human Rights.
2 " Austerity Raises Covid Deaths," Institute for New Economic Thinking (2021).
3 "End Austerity: A Global Report on Budget Cuts and Harmful Social Reforms in 2022-25," European Network on Debt and Development (2022).
4 "IMF: Austerity Loan Conditions Risk Undermining Rights," Human Rights Watch (2023).
5 "More Austerity in 2023 Will Fuel Protests," Global Issues (2023).
6 "'People are going to suffer': Argentines grapple with austerity shock," Reuters (2023).
7 "Thousands take to the streets to protest austerity measures of Argentina’s new president," PBS (2023).
8 "What Have We Learned About Austerity Since the Great Recession?," Center for American Progress (2014).