The Age of Austerity

Among policy wonks there’s a great debate raging: can a nation save its way to prosperity? But among the electorate, the issue seems to have been decided.

Economists have been divided over whether Britain’s new frugality will work. Most are skeptical: Keynesian orthodoxy would posit that a decline in government spending will multiply it’s way throughout the economy and lead to economic stagnation at best, if not outright decline. Cutting spending when the economy is fragile is dangerous.

But others aren’t so sure. They note how the stimulus program in the US didn’t exactly prime the pump here, and that other countries facing structural challenges have enacted austerity budgets with good results. Both Canada and Sweden eliminated their deficits in the mid-90s and ended up growing faster with tighter budgets than they had before their governments cut back. Both were just coming out of a recession, Sweden had also just experienced a nasty banking crisis.

But whatever the debate among economists, the electorate seems to have already made up its mind. If current polls are to be trusted, voters could send a host of fiscal conservatives to Congress this election. Contrary to the conventional wisdom, cutting spending seems to be popular.

It could work: reduced government deficits can “crowd in” private investment and lead to an economy more focused on savings and investment and less dependent on consumption and debt. The Age of Entitlement was about handouts; the Age of Austerity is about take-backs. Entitlement asks, “Did I get mine?” Austerity asks, “Do we really need that?”

Douglas R. Tengdin, CFA
Chief Investment Officer
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