Wednesday, January 15, 2014

Economy: Austerity Generates Gigantic Costs

By Jutta Wolf | IDN-InDepth NewsAnalysis

BERLIN (IDN) - Austerity policies in several countries around the world are denying work to millions of people and leaving vast production opportunities unused, says a new study by the German-based World Future Council (WFC), which places the value of lost production at 2.3 trillion U.S. dollars annually. This corresponds to Britain’s gross domestic product. Losses in the 18-nation Eurozone triggered by public austerity alone are estimated at a minimum of 580 billion Euros each year.

"Given the huge challenges we face including stopping climate change and overcoming poverty, it is shocking that such a large economic potential remains untapped because of misguided policies,” says WFC and Right Livelihood award founder Jakob von Uexkull. To address the situation of the global economy realistically, the study uses an evaluation approach that relates unemployed labour to underused productive capital.

"According to the International Labor Organization (ILO), 200 million people are unemployed. If public austerity was ended, many of them could work to produce sustainable products or perform much-needed services. Instead, we lose their productive potential and condemn them to often long-term unemployment," adds von Uexkull.

In the Eurozone, which is particularly affected by public austerity policies, the value of its lost annual production is calculated at 580 billion Euros. This is more than three times the gross domestic product of Portugal.

"Austerity may make sense if all economic resources such as labour and physical capital are used to capacity. However, such a situation is rare. Due to the current under-utilisation of production capacity, we are wasting the potential to invest in protecting the planet from climate change and environmental collapse as well as improving education and medical care," explains Matthias Kroll, economist at the World Future Council and author of the study,

Kroll points out that contrary to the widespread view, austerity policies are not only practiced since the 2008 global financial crisis, but have been implemented for over 30 years. Many countries are living below their potential because they do not use their existing production capacities, creating idle real capital and large-scale unemployment.

In fact the term austerity has undergone a significant transformation. It was originally used in Britain during the Second World War when the challenge was how to maximise the output of war materials and how to ration popular consumption. Today the term stands for an economic policy, which from a microeconomic standpoint has become a savings policy for the national economy.

The study explains: “The national economy as a whole can save by cutting public expenditure in a crisis like economies on the micro level (that is, households) can. However, what is applicable on the micro level is not directly transferable to the macro level.

“On the contrary, spending cuts worsen economic crises. In a recent study the IMF estimates fiscal multipliers to be considerably in excess of one, meaning that reduced public expenditure causes a relatively stronger depression/reduction of economic productivity. “

Methodologically, neoclassical economic theory can neither explain mass unemployment nor unused production capacities. The study takes to a heterodox approach to explain the under-utilisation of productive capacities in a real world market model. It indicates that additional demand frequently results in additional production rather than increased prices.

‘Cradle to cradle’

The study adds: “Absurdly, while living below our economic potential we are living above the means of our finite raw materials and produce excessive CO2 emissions. The win-win response is to reduce our CO2 emissions and our over-consumption of finite raw materials by utilising our free productive capacities to expand renewable energies and redesign our production, as far as possible, according to the ‘Cradle to Cradle’ principle of closed loops.”

The study finds that there are huge global un-utilised productive resources that – with an income multiplier of two – can generate initial job-creating projects for the sustainable transformation of our energy and production systems at a cost of US $1.14 trillion per annum. Excessive demand and inflationary dangers would not occur even if these projects were funded with newly created money as the new production would absorb this.

The study highlights:

Climate protection investments: In the global climate protection debate it is generally accepted that annual investments of three figure billions of dollars are needed to transform our energy production from burning CO2-heavy, fossil raw materials to using renewable energies. It is also clear that the slow speed of this transformation is not due to limited industrial production capacities – for example, in the photovoltaic branch about half the world's 60 Gigawatts of production capacity stands idle – or a lack of qualified labour.

Investments in a green industrial revolution: The key to an ecological transformation of production lies in the use of raw materials in – as far as possible – closed material circuits as in the ‘Cradle to Cradle’ model. Failure to implement this is not because we do not have enough engineers or scientists but because of ineffective regulation and insufficient financing.

An efficient health sector: Sufficient trained medical personnel, technical equipment and medication are the foundations of an efficient health sector. There are no objective reasons why these cannot be supplied. But health sector resources have been cut in many countries due to self-imposed austerity.

Meeting global educational needs: The education sector requires adequate schooling facilities, sufficient teachers, professors and other education staff. A fundamental lack of productive resources that hinders the expansion of the education sector cannot be identified.

Ensuring food security: To ensure adequate nutrition for all necessitates sufficient food production and a functioning distribution infrastructure. Insufficient resources to provide this have not been identified.

These examples are not exhaustive, notes Kroll. “They show that solutions to some of the most significant global challenges are not being thwarted by a lack of productive resources but by a lack of financing facilities. However, monetary resources are not per se a scarce resource but a good which can be produced at will.

“The international banking sector has shown that the provision of monetary resources in large quantities is possible. First it financed unproductive and speculative spending on a massive scale and in doing so created a financial bubble. Once this bubble burst the central banks tripled their money creation to prevent the financial system from collapsing. It would of course be more effective to use part of this money creation to finance real investments that help solve the acute humanitarian and environmental challenges the world faces.” [IDN-InDepthNews – January 14, 2013]

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