Revealed Preferences for Austerity. (from “Interfluidity”)

An excellent post at Interfluidity titled “Depression is a Choice” argues that, for all the protests, the well-off middle classes of Europe and the US were complicit with austerity policies.

Usually, economists are admirably catholic about the preferences of the objects they study. They infer desire by observing behavior, listening to what people do more than to what they say. But with respect to national polities, macroeconomists presume the existence of an overwhelming preference for GDP growth and full employment that simply does not exist. […]

But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary.

 

In other words: these were the preferences of the average voter. Don’t look at what voters say, look at what they do. Portugal and Greece are good examples of this.

In the greek elections of 2012, the two usual parties who share power in Greece got a combined share of 50% of seats in Parliament, while Syriza got 17% of seats. In other words, 50% of voters revealed a preference for continuity.

In the portuguese elections of 2011 90% of MPs where for the 3 parties who had signed the “memorandum of understanding” (i.e. the austerity program) with the ECB/IMF/EU. In fact, the majority in Parliament (60%) were for the two most conservative parties. Again: the revealed preference of voters seems to be complicit with austerity programs.

 

One possible objection is that of “fear of consequences”. This isn’t so much an objection, but one of the points. Back to Steve Waldman:

 The revealed preference of the polity is to resist losses for incumbent creditors much more than it is to seek gains. […] The polity prefers inaction to bearing this risk.

This preference is not at all difficult to understand. The ailing developed economies are plutocratic democracies. “The people” do have power, but influence is weighted in a manner correlated with wealth. The median influencer in these economies is not a billionaire, but an older citizen of some affluence who has mostly endowed her own future consumption. She would like to be richer, of course. But she is content with her present wealth, and is panicked by the prospect of becoming poorer. For such a person, the depression status quo is unfortunate but tolerable. The risks associated with expansionary policy, on the other hand, are absolutely terrifying.

 

This is certainly one part of the story. Other parts of the story are: lack of meaningful alternatives, and a political elite that does not care for the lower economic half of society. But the complicity of the middle classes – and therefore their legitimate democratic interests – plays an important role in explaining the recent European disaster.

 

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