Market Analysis

What’s In a Name?

The common media chorus has been “austerity” is dooming Europe to its fiscal woes, whereas if they’d only adopt “growth” measures, they’d recover sooner. But taking that at face value requires a number of assumptions less commonly discussed.

If you had to pick between “growth” and “austerity,” which would you pick? Growth sounds much more fun, doesn’t it? But austerity—sounds downright ... austere! It conjures images of American Gothic. Or the Cratchits’ paltry Christmas celebration before Ebenezer Scrooge’s arrival. Merriam-Webster defines austere thusly: “Stern and cold in appearance or manner; morally strict; markedly simple or unadorned; giving little or no scope for pleasure.” Fun stuff, indeed!

Given that definition, the tenor of much recent reporting on Europe’s available choices is hardly surprising. By most accounts, struggling nations can either choose austerity (i.e., no fun—ever again) or growth—there’s little or no in between. But what do those two paths entail? Most describe austerity primarily as decreased government spending plus tax increases, whereas growth implies mostly increased government spending without tax increases. Given some European nations’ proclivities for generous social programs, “growth” (as defined) sounds far less painful. Austerity sounds like the government’s going to stop the game and take the ball to boot.

To me, the first problem with these definitions is the underlying assumption they’re based on—namely, that growth comes predominantly from the government; therefore, any action taken to address fiscal woes necessarily hinges on government spending. On either path (as defined), government spending is the key factor—either needing to be trimmed to balance the budget (“austerity”) or vastly increased to spur consumption (“growth”). Increase government spending, and you just may grow your way out of your current woes. Pare it back, though, and you doom yourself to eternal stagnation.

But what if government’s not the key economic factor commonly thought? What if the key’s actually the private sector? Then the goal of “austerity” could look quite different. For example, it could be decreasing the government’s overall size relative to the private sector—which sounds far less foreboding. The good times don’t have to end, they just need to be privately funded rather than publically. Or it could entail reducing government regulation currently impeding rather than assisting the private sector in paring costs and operating more efficiently.

The reality is austerity’s definition matters immensely—and in that sense, I think the majority of media’s angle has been overly extreme. If it’s indeed tax increases and reduced government spending, as the media commonly opines, I agree—it’s not likely to be pretty in struggling European countries for some time. But if it’s some combination of reduced government spending (maybe to allow tax cuts) and reduced overall regulation, it’s far more likely a winning strategy—and not just for the current crisis, but well into the future, too.

While it’s certainly possible (indeed, likely) government spending cuts create some interim losers, in the long run, the economy’s overall health likely benefits. Consider: Those dollars not spent by the government are ultimately dollars returned to (or better yet, retained in the first place by) the private sector to spend as it sees fit—maybe on refurbishing businesses; maybe hiring additional workers; maybe paying workers more or improving benefits provided. The possibilities are near-limitless, as opposed to the possibilities when government takes those same dollars and dedicates them to programs which may or may not be the most efficient way to accomplish the end goal, however socially worthwhile.

The same outcome likely results from decreased regulation—businesses spend less complying with needless or overly complex or onerous (or, or, or) rules, freeing those dollars for more efficient and productive uses. (By the way, this whole argument applies equally to the US—if we were to apply similar “austerity” measures—including simplified taxes, decreased overall government spending and streamlined regulation—it’s entirely possible the US economy would pick up steam faster than it currently is.)

The proposition Europe as a whole faces a stark choice between growth and austerity—the former leading to vibrancy, the latter to disaster—is overly fatalistic. It’s just not that simple. Believing increased government spending somehow magically induces consumption betrays many things—among them, a fundamental misunderstanding of how economies work and a lack of faith in free markets’ abilities to eventually right themselves, given a relatively red tape-free environment in which to operate.

Ultimately, the ability to attract and keep business is likely what’s going to make or break currently struggling eurozone nations. That last bit is likely not accomplished purely through increased government spending. And it seems some in the media are starting to catch on to this idea, too—recently, there have been some enlightening (and enlightened) editorials in leading financial publications including the Financial Times and The Wall Street Journal, to name a few. European leaders would do well to read up—and to start ditching the mentality “austerity” is the economic equivalent of a funeral. Connotations aside, it’s more likely to contribute to Europe’s rebirth than so-called growth plans.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.