Does Austerity Increase Inflation?

Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

One of the arguments in favor of austerity is that it’s supposed to reduce inflation. Cuts to public sector debt is supposed to reduce inflationary factors in the economy.

Well, our next guest says perhaps it has the exact opposite effect. She just returned from Europe, where she’s been looking at this question.

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

Thanks very much for joining us, Stephanie.

STEPHANIE SEGUINO, PROF. ECONOMICS, UNIV. VERMONT: My pleasure.

JAY: So let’s just get what the basic pro-austerity argument is, and then tell me what’s wrong with it.

SEGUINO: The basic pro-austerity argument is that budget deficits are inflationary, right, they are excess government spending over revenues, and that creates excess demand for goods and services that will drive up prices. And there’s also the argument, of course, that the financial sector observes these budget deficits and in anticipation of inflation raises interest rates. So all together the argument is that budget deficits drive up prices, and austerity therefore will reduce these price pressures and reduce inflation.

JAY: What’s wrong with that? That seems to be the guiding light that’s directing most economic policy and most or if not all industrialized countries.

SEGUINO: You know, I think there’s a couple of things wrong with this. One is the timing for undertaking austerity. You know, budget deficits aren’t always bad, and during periods of economic crisis what they do is they put a social safety net under families who are supporting children, which has benefits for the long run. It maintains investments in children, who are one of the most significant forms of capital that societies have. Failure to make those investments when children are young or disadvantaging their parents significantly actually has negative effects on children in utero and throughout their lifetime in terms of their cognitive ability, and thus their long-term productivity as workers. And this is leaving aside the potential costs in terms of social costs of austerity during times of very, very high unemployment.

JAY: So you’re saying that the destruction or weakening of a social safety net, which is more or less what austerity is about in most of the North American and European countries, at least, and other parts of the world, that children suffer most, childhood development suffers, schools suffer, and as a result these kids are less productive when they grow up, and that’s inflationary. So, first of all, why is that inflationary?

SEGUINO: Well, simply in terms of the cognitive development of children and their ability to–it affects high school graduation rates, for example. And a lot of research shows that it has very negative effects on lifetime earnings. And it therefore influences, for example, the degree of innovation in a society, right, in its research, its effects on research, and so on and so forth. So in the long run you have a less skilled labor force, and therefore the unit costs of producing a good rise.

And let me just give you an example of this. I spent a number of years living in Haiti, in which investments in children were very, very weak and the productivity of workers was extremely, extremely low as a result of this. So we know this. We have seen experiences of this in many countries of the world during economic hard times. The effects are very long-run. They’re very long-lasting.

JAY: So is there other places where you’ve studied where you can actually see, you know, evidence of what you’re saying? I mean, people–I can imagine people that run banks hear this argument and it sounds a little esoteric.

SEGUINO: Well, I mean, if you look at unit labor costs, right, if you look at unit labor costs across countries, that is, the cost, in terms of wages, of producing a unit of a good, those unit labor costs vary dramatically across the world. So they’re much higher in very poor countries that invest less in education, that have less to invest in education, that have less health care, for example, and less other forms of social and physical infrastructure. So this is not hypothetical. We observe this in the data across the world.

JAY: Well, then, why is it cheaper to produce in those countries? I mean, why are so many jobs leaving the United States or Canada and going to those kinds of places?

SEGUINO: Well, because of the low wages that you can pay compensate for the lower productivity.

JAY: And that their wages are that much lower that the lower productivity doesn’t matter. But if that’s the case, then why should financial elites care?

SEGUINO: Well, if that’s the case, what it means is that–you know, let’s just take the United Kingdom, where there are very extensive cuts being proposed and already have been implemented. What this means is that you have a less productive labor force in the United Kingdom. What that means is corporations are going to want to invest in other countries where labor is much more productive.

JAY: Well, one of the sectors I would think would thrive with this, and it leads to certainly a certain amount of growth and more jobs, is that there certainly will be more prisons.

SEGUINO: You know, I mean, look, we could go there, right, with that argument about the negative effects on the social cohesion and social fabric of austerity. And I think that that’s a very real one.

But I think that even before we get to that, issues of social trust, for example, are–you know, and social capital, an ill-defined term in economics, is nevertheless a very important one. And I think that we already see that social–the social fabric unraveling in a number of European countries. Greece in particular impressed me with not only the decline of the social–of the physical infrastructure, but also what looked like a decline of the social fabric. There’s a sharp increase in ethnic attacks on people who are perceived to be minorities, for example, that I think are ultimately costly.

And I guess this is my point to you is that economists are not very good at quantifying these social costs, but sociologists and psychologists have been doing this for a very long period of time. And I think it’s very important for economists to integrate that research so that we can adequately assess the costs and benefits of austerity policies. Right now what we’re focused on primarily is the financial aspect of it, but we’re not focused on the race or gender effects of this or the impact on social infrastructure, which is a little more difficult to quantify but nevertheless very real.

JAY: Okay. We’re going to continue the discussion in part two. And this is kind of a new format. There are people that have been saying our pieces are too long, and there are people that have been telling us our pieces need to stay that long. So we’re going to try to please all of you. So we hit sort of the main points in this part one. Part two, we’re going to dig a little further into it. And if you’d like to hear more, particularly about–we’re going to talk a little bit more about the effect of ethnicity and austerity in Europe and how that might also affect places like the United States.

Please join us for the next segment of our interview on The Real News Network.

End

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.