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Stephanie Seguino and Paul Jay dig deeper on inflation and the true cost of austerity

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Baltimore. And this is part two of our interview with Stephanie Seguino.

We’re talking about the effects of austerity, particularly the effects that aren’t as easy to quantify, for example the lack or weakening of a social safety net, what effect that has on children and their future ability to produce and create and innovate. But now we’re going to go a little further.

Now joining us again from Vermont is Stephanie Seguino. She’s a professor of economics at the University of Vermont, a research scholar at the PERI institute, University of Massachusetts Amherst.

Thanks for joining us again.


JAY: So we’ve talked a bit about children. Let’s go a little further. Your research shows that, first of all, austerity disproportionately affects women and even more disproportionately affects people of color, and then, of course, women of color. And that has a connection to what society has in terms of its ability to produce and innovate and such. So how’s that argument go?

SEGUINO: I’m going to sort of revise a little bit. You know, I don’t know that we can say that austerity necessarily affects women more than men. I think there’s some evidence in some countries. It depends upon the specific policies, for example.

But, you know, where I see, really, actually, the place that we haven’t focused enough is that the effects disproportionately affect lone parents. They happen to be disproportionately women. And in the case of the United States, for example, the unemployment rate that we observe of single mothers is double that of married women, for example, and of married men. Similarly, in Europe a number of the austerity policies seem to be disproportionately affecting lone-parent families. And that’s the trajectory through which I think we are going to see negative effects on the future labor force. That is, that resources that–going to households with children are sharply diminished as a result of austerity policies.

And what that means is that the cognitive abilities of children are circumscribed and that their probability of finishing high school, let alone college, is severely diminished. And this is going to have negative effects on the productivity of the labor force. And, you know, if we think of the U.S. and Europe as high-tech economies in which we require a skilled labor force, to the extent that austerity decreases investments in children, the quality of that labor force and the quantity of that skilled labor force is diminished as a result of these austerity policies.

JAY: But isn’t part of the thing it kind of depends whose seat you’re sitting in? Like, if you’re sitting in an ordinary person’s seat, then the idea–it makes perfect sense that society should be as productive as possible, because everyone will do better. But if you’re sitting in the seat of–as–and you’re sitting on a seat which is sitting on the top of a pile of a lot of cash, then the issue of the productivity of society really isn’t the issue. The issue is the return on your capital. As long–like, right now, the stock markets are going through the roof while productivity, the basic economy is practically stagnant in terms of any real growth. But what do I care, if I’m sitting on a whack of cash and I’m making a killing in the markets?

SEGUINO: Sure. Well, a couple of things. First of all, I think that, you know, this issue is one for governments, right? The government is concerned with the long-run health of the economy. So maybe the financial sector doesn’t care.

But here’s what I would say as an economist. You know, to be–what our job as economists is is to assess the costs and benefits of a variety of policies. There are costs that are imposed that will come back and haunt even those at the top of the distribution. And I mentioned in the earlier segment–and I’ll go back to it again–Haiti is such a clear example of the overall costs of failing to invest in those at the bottom of the distribution, and particularly children.

The Haitian elite simply do not have a skilled labor force with which they can–that they can employ and move into higher value-added industries. And they themselves are affected by the implications of the severe poverty and inequality in Haiti. And so they themselves are not removed from the effects of this.

Now, mind you, these effects take many years to take hold, and I think in that sense we all suffer policy myopia. But we also suffer from an excessive focus on the financial and not from the effects on social reproduction and social infrastructure of the economy. And, you know, as I said, our job as economists, in my view, is to really accurately quantify both the costs, the benefits, but also the costs. And these costs are not being integrated into current policies with regard to austerity.

JAY: Yeah. I mean, I’ll give you a local example. I was talking to a woman in Baltimore. She’s going to college now. When she was in high school, there actually was a daycare for single high school mothers, and because of the daycare in the school, she was able to finish high school and then go to college. And she, I think, rather obviously is going to be a far more productive person. But that’s a kind of an experimental program. There’s very few schools, if I understand it correctly, in Baltimore that have daycares in the schools, and the argument will be, oh, we can’t afford it, which means the people that have the money don’t want to pay taxes that would pay for that. And it’s not the society doesn’t have the wealth to afford that as that the people that have it don’t want to give it up.

SEGUINO: I agree with you. And I agree that–I mean, I would argue that there’s an insufficient understanding of the failure to make those expenditures. I mean, in a way I think not only could we–that is, we can’t afford not to make these expenditures. And I think we’re in, really, a moment of myopia and not focused on the long term.

I might add that, you know, in this discussion, you and I have talked about the impact on children. But of course there’s impact on daily life of adults who work. And it’s a long-studied concept in economics hysteresis, that is, the erosion of skills of long-term unemployment, especially in a skill-based economy. So even in–we don’t even have to wait until children grow up to see the effects on labor productivity. These effects are going to be visible in our lifetime if the high level of unemployment that we observe now continues.

JAY: So I guess, if one looks at this inflation argument, that the reason for austerity is to prevent inflation building up in the economy, which is the greatest fear of people that have money, because if you’re sitting on a whack of assets, inflation decreases the value of your assets, so you’re more worried about inflation than almost anything else. But your argument is that these things are inflationary because in the long run the cost of production goes up. But don’t we have to kind of–first of all, unpack that a little bit more, that what you’re saying is that this is an inflationary factor. But how do we know, I guess these people would ask, which is more inflationary?

SEGUINO: Which is more inflationary, that is, government budget deficits, you know, or these social expenditures? If I could use an example that I often use with my students–and that is, you know, not all spending is good, right? Some–I think if you were–when I was in Italy recently, I think Italians agree that the government has not served them well in terms of public spending. So I don’t want to suggest to you that all public spending is good and all cuts are bad. But I want to make the following analogy to you. When I ask my students, if I were to give you $100,000 and you could either go to Las Vegas and gamble it or you could invest it in a college education, which group is more likely to be able to pay back that debt in the future, and–you know, reasonable students will say those that get a college education.

And so what that means is that by making those investments and expanding in your productive capacity, your income will be higher and you will generate the income to pay back the debt that you incurred. And that’s really the basic premise here is that by reducing those investments, we’re reducing not only the labor productivity of workers, but we’re reducing their future income. We’re therefore reducing the tax revenues that we might collect on them in the future, and that actually could make budget deficits worse, something we have already seen in some European countries recently, in the U.K. for example. The budget deficit and the national debt has risen with austerity not fallen.

JAY: I mean, don’t we have to always say the following? This is a society where there is a small stratum or class of people whose primary focus is on return on investment, ’cause they have a lot of capital to invest, so their economic strategy is all based on that. I was talking to my bank manager the other day, and I am not one of these people that has investment. But I’m asking, what’s the outlook for the economy? What’s the bank projecting? And he says, oh, we think slow growth, and things are going to pick up, and this and this and that. And then at the end of it he says, of course I’m only talking about the markets, and that that is all they’re focused on. They’re focused on either the stock market or the derivatives market. You know, right now there is a problem with such low interest rates. You can’t make any money on your money unless you’re playing speculative plays or you’re taking the money here and taking it down to Latin America or somewhere where you can get 9 or 10 percent on bonds, you know, in Brazil or other places. I mean, but that’s where their mindset is, where everyone else is looking at, well, how do you get more jobs into the society, how do you have a better infrastructure in society. But that stratum, those things only matter if somehow it helps them get more return on their investment. Right now it really doesn’t. And we have to–we’re not all in it together I guess is what I’m saying.

SEGUINO: I would argue that maybe not in the short run, but certainly in the medium to long run we are.

JAY: But do these–just to interrupt for a sec, do these people have a medium and a long run?

SEGUINO: You know, the more I’m an economist and a social scientist, the more I realize that our perceptions are malleable. And I think that one of the reasons that there’s such a narrow focus on the short run and financial markets, for example, is that we have inadequately assessed the cost of austerity and the cost of high levels of unemployment over the long term. So I think there is a miscalculation on the part of not only government policymakers but also the financial elites.

JAY: But is it not also it’s in the–you know, if you’re sitting in one of these perches with all this money, you’re making so much short-term money that you figure, well, I’m okay, my kids are going to be okay, my grandchildren are going to be okay, and I don’t need to look further than that? And in terms of looking at the society, you know, they never really suffer the consequences of this, or very rarely do this stratum suffer the consequences of such policies.

SEGUINO: Well, I would say that that is true. But I want to just say also there is this human element. And I don’t disagree with you at all. When the question is why at certain periods of history do we actually get economic elites who are supportive of welfare policies and other periods of history in which they’re much more myopic, I think that’s an interesting question. What’s the social dialog and the political dialog that is happening that shapes those perceptions? I mean, I think that it is true that globalization has made it easier for financial and economic elites to disregard conditions in their own country, but ultimately the global economy is one economy and eventually you can’t escape the fact that a global depression or recession is ultimately also going to hurt those who–the, essentially, economic elite.

JAY: I think you’re right, but I think you have to kind of get there. Like, I mean, to–my answer to your question would be, when they think their system is at threat, whether it’s at threat by a, you know, 1930s style economic crisis or if it’s threatened because there is a kind of Soviet Union that–you know, whether it ever really was is another question, but at least for a long time in post World War II, and especially in Europe, a lot of people thought it was an alternative, with full employment and health care and all the rest. So they kind of needed to say, look, capitalism can provide all this stuff too. But now they don’t. With the collapse of it in Soviet Union and more or less in China, they don’t need to prove that anymore.

SEGUINO: I would say that, you know, I think that you have a point in the sense that when–crisis changes perceptions and attitudes. On the other hand, I would argue that as humans, hopefully we can get to a place of policymaking that doesn’t require such economic pain and crisis in order to make the changes that we need to make. And in that sense, you know, I think that the short-termism and the myopia that we seem to be–experience, I mean, my goal, at least, in this has been to try to bring into the macroeconomic discussion these supply-side effects of austerity with a lot that we have learned both from psychology and sociology, but also from feminist economics, that I think provides a much, much better picture of the long-term costs.

If I might just add, you know, there’s a great economist at University of Chicago, James Heckman, who is a very neoclassical economist, and yet his research has focused intensively on the impact of expenditures on early childhood education. And there are various estimates, but they range from, you know, $1 of investment can yield $7 of return over the lifetime of the child.

Now, it’s that kind of work that I think needs to be done for us to be making better choices.

JAY: Yeah. I mean, my only argument is that this is going to have to come from people who aren’t sitting on piles of cash. I don’t know that those people are going to be persuaded by this kind of rational argument. But I do think ordinary people who will benefit from the kind of things you’re talking about, they need to get that this kind of austerity isn’t good for them and that there is a difference about, you know, who benefits and who doesn’t from austerity.

SEGUINO: Well, I agree with you and I share your concern about whether financial and economic elites listen to these kinds of arguments, although, you know, at least most of the countries I’ve been in recently are still democracies, right? And I think that the broader issue is then to educate the public so that they are less susceptible to the arguments that austerity somehow is the moral thing to do, right, that households balance their budgets and governments should too. And I think that’s been a persuasive argument that entirely misses the cost of austerity, apart from its distributional effects.

JAY: Alright. Okay. Thanks very much, Stephanie.

SEGUINO: My pleasure. Thanks.

JAY: And thank you for joining us on The Real News Network.


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Stephanie Seguino is a professor of economics at the University of Vermont and a research scholar at the PERI Institute at the University of Massachusetts Amherst. She is also a Professorial Research Associate at the Department of Development Studies, School of Oriental and African Studies (SOAS) at the University of London.