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The Lesson of Czech Austerity

RONLT (Readers Of No Left Turns) will note that I am a surveyor of Czech news and happenings. As of late, the news has been especially interesting. The Summer elections wrought a crushing defeat upon the Social Democrat - Communist partnership which had expected to seize power. Instead, a coalition of conservative, right-leaning parties swept into government by the largest majority in the Czech Republic's history. The right campaigned on an austerity message of fiscal sanity and stabilization through genuinely needed reform - but they had remained rather quiet for a few months as they built a government and planned.

They have now announced the means to their end. The 2011 state budget narrows the deficit by 17%, the public finance gap will be reduced to 2.9% by 2013 (from 5.9% in 2009) and, perhaps most dramatically, public sector wages and operating costs will be slashed by 10% next year.

The effects of this fiscal austerity policy (or, rather, mere expectations of such a policy) are tangible. The Czech koruna has gained 5.2% against the euro (which Czech has wisely declined to adopt) since the Summer elections, ranking the koruna as the world's third best-performing currency during the period. The S&P has raised Czech's standing from "stable" to "positive." And the public seems optimistic of the future.

Perhaps Czechs simply recall communism well enough to avoid its lures and snares (even in the guise of socialism - or "social democracy"). But by their example they are a city on a hill - visible, one should hope, even from the corridors of Washington. The Tea Party movement speaks to the relevance of their fiscal message here in America - if only we had a conservative, right-leaning political party with the courage to govern according to such principle. I think the result would be just as surprising - and rewarding - here in America as it has been in Czech.

Categories > Economy

Discussions - 18 Comments

It shouldn't be a surprise that slashing government budgets will cause the currency to strengthen. Whether the end result will be economic revival, or a deflationary spiral that will make the country worse off, remains to be seen. The Czech Republic's current strategy seems eerily similar to that taken by most countries in the early years of the Great Depression, with uniformly bad results. Indeed, this policy was a major factor in the fall of the Weimar Republic.

John, is that an argument against "fiscal sanity and stabilization through genuinely needed reform"?

Let's also keep in mind that "social democracy" and the "welfare state" were created to combat communism in the 1940s and 1950s. Read your Keynes. The origins of the Cold War are saturated with agreements from both American political parties emphasizing the importance of keeping the country's poorest citizens placated (in order to avoid socialist sentiment). I think it's hilarious that today, teabaggers are apt to call programs like Social Security or Medicaid "socialism."

"Social democracy" was also something the United States totally supported after the Second World War. Shoot - we were its main proponent. It provided just enough capitalism to help the European economy and our own economy as well as just enough social welfare to avoid upsurges in extreme political ideology (i.e. fascism and communism).

Kate, I'm genuinely conflicted. On the one hand, the history of countries that respond to economic crisis by cutting their budgets (and, I should add, raising taxes) is not a happy one. On the other hand, given that the Western world is facing unprecedented levels of debt, and that we've seen the consequences of this in countries such as Greece, I'm reluctant to endorse piling more on.

Matt, it's worth remembering that Weimar Germany had the world's most generous social welfare system in the early 1930s. Also, I'm not sure I buy your implicit claim that Social Security and Medicare are measures that mainly benefit "the country's poorest citizens." It has always been the middle classes that have benefited most from them. This is why we'll never see those programs substantially cut.

Also, Matt, I don't know that I've ever heard tea partiers calling Social Security and Medicare "socialism." It seems to me that liberal commentators have been bashing them for attacking the current administration as socialist while defending Social Security and Medicare (see my comment above about those being, in effect, welfare programs for the middle class).

Cannot speak about Europe, but the American economy had been careering downhill for more than two years before Pres. Hoover requested Congress increase taxes to fill the budget deficit.

In 1929, most countries were on a gold standard. Monetary authorities were severely constrained in their ability to supply the demand for real balances, so the price level declined as people's propensity to hold cash balances increased. Discretionary monetary policy is the rule now, hence 'quantitative easing' hence price stability in lieu of deflation.

The American economy was contracting quite rapidly from the fall of 2008 to the spring of 2009, then reached a point of stability followed by some modest growth. Public works spending has a long lead time so the stabilization cannot be reliably attributed to the stimulus program which went into effect just weeks earlier. Public works programs proved ineffectual in Japan during the years running from 1989 to 2002. It is reasonable to suggest that the multipliers derived from public expenditure vary quite a bit according to circumstance.

We had a discussion in this forum some weeks back on a paper published by Christina Romer not too many years ago. One tentative conclusion of that paper was that tax increases to reduce public sector borrowing appear not to be severely contractionary.

What does history show about cutting taxes and budgets? It doesn't matter. We can watch Czechoslovakia and see what happens. I have asked, wondered, and worried about how conservatives will ever democratically reduce a massive government weighed down with entitlements. If you are entitled to something, that is something like a right. Can we say to those dependent on government, you do not have that right? Can you put a bloated welfare system on some kind of economic diet?

We have never really backed off from increasing government.

And, no, Matt, the Tea Party has no coherent stand on Social Security or Medicare. Nor on anything much beyond an vague but intense sense that government is too big, headed the wrong way and that both parties have let the US citizen down. You probably will hear some of them denouncing those programs as socialist. However, haven't you also seen signs protesting Obamacare at the rallies that say, "Don't touch my Medicare!"? Maybe it is the "Anti-Party". The Internet and modern communications may be making the necessary cohesion of Van Buren's party-system leadership obsolete.

"What does history show about cutting taxes and budgets? It doesn't matter. We can watch Czechoslovakia and see what happens."

Kate, that was truly an amazing trio of sentences you strung together there.

So, you'll use a time machine to demonstrate how the lessons of history (re: these econ. issues) don't matter?

No, I didn't mean that. Yes, that was poor phrasing. It does matter, but what didn't matter, (in my silly mind at that moment) was that anyone really needed to respond with an answer. Then I thought, maybe there isn't anything quite historically relevant. Therefore, the current Czech example might be the most pertinent we have.

The in-the-meantime- thinking was that I was just reading about Coolidge and how despite his austere reputation when it came to the nation's finances, he actually increased spending on all sorts of things, expanding government (Hoover as Commerce Sec. helped) not as much as his immediate predessors, but not reining anything back, either. Then I thought about Reagan, who also talked a great government austerity plan, but also did not really carry it out.

Anyway, all that and more was rumbling in my mind while my daughter was standing nearby asking, "What about dinner?" So I didn't go into the whole mess I was sorting though in my head. Sorry.

I had actually started the comment only intending to answer Matt.

This is interesting about the nature of the Tea Party: http://www.worldaffairsjournal.org/articles/2010-SeptOct/full-ORourke-SO-2010.html

I'm not sure I buy your implicit claim that Social Security and Medicare are measures that mainly benefit "the country's poorest citizens."

Moser - fair enough. I could have / should have said "Medicaid" or "public schools" or "food stamps." You're right about Weimar too, but it wasn't something that sprung out of nowhere. If I remember correctly, Bismarck enacted state-sponsored health insurance in the 1880s (1880s? 1890s? somewhere around there). And while you're right to point out that that was long before Keynesianism, it was most definitely due to pressure from a frustrated industrialized labor movement taking shape in the wake of Marx. I'm fairly confident that one of his main priorities was dampering socialism.

That last sentence refers to Bismarck. Not Marx. Heh.

Hmmm. I would be interested to see quotations of public statements of politicians of either party, made ca. 1942 or at any other time, that identified the purpose of social democratic measures as keeping the 'poorest citizens placated'. Urban life was as tranquil in the 1940s as it has been at any time since the close of the frontier. Cycles of urban rioting and rapid increases in common crime did occur -- a generation earlier and and generation later, not then.

I should note that Medicaid was enacted not during the War or immediately after, but in 1965. Novel social democratic measures in effect in 1945 were limited to Social Security old age and survivors' benefits, unemployment compensation, public and subsidized housing, and state administered relief payments. There was no public medical insurance.

(There were several contradictions within that comment, of course, but I was kind of taken aback that you apparently think that Czechoslovakia is still a country.)

Cutting back across the board WITHOUT raising taxes is what is needed. The government simply isn't competent to take on all the jobs it has over the last century. People are going to have to 1) relearn how to care for themselves (in community self-help), and 2) relearn how to tolerate a certain level of "human wreckage." Jesus was right, there will always be poor people, and this is because of a one or more of the following: low intelligence, bad luck, ill health, or personal choices (not an exhaustive list, so don't jump on me for that). No matter what anyone does, there will be unfortunate and/or ill-disciplined people who will fall through the cracks and live in poor (sometime revolting) living conditions.

The only real solution is for good people, acting on their own and out of the goodness of their own hearts (and not at the point of government's gun to their heads) to help those who aren't as well-off. The whole progressive agenda is ill-considered and unwise; it fails to understand the kind of animal we are. Humans cannot be remade -- our social solutions have to work around human nature, not against it.

Food stamps also didn't come into existence until the 1960s and, of course, public schools have been around since the early republic. I've never seen anything to suggest that these were instituted out of fear that the poor might otherwise resort to political extremism. The poor have generally been politically apathetic, but even if they became politicized there aren't enough of them to pose a threat.

There is a famous quote by Eisenhower to the effect that it would be unwise for Republicans to try to undo Social Security and other New Deal measures, but this was because they were popular, not because he feared the rise of radicalism. Indeed, even at the worst point of the Depression, in 1932, the Socialist Party received fewer than 900,000 votes, while the Communists polled only around 100,000. In other words, for every vote that went to a Socialist or Communist, nearly sixteen went for Herbert Hoover.

Bismarck did indeed institute his social security program in the hopes of winning the working class away from socialism, but the Weimar Republic's social welfare system was far more extensive, and was created by the leadership of the at least nominally Marxist Social Democratic Party. It was anger over high (and rising) taxes, government-imposed high wages, and the rising power of the Communists that Germany's middle class turned to the Nazis.

Sorry, "anonymous" above was me.

If I am not mistaken, industrial production in Germany fell by about 20% during the period running from 1929 to 1932. The contraction was not as severe as experienced in the United States or Canada but it was experienced by a country which had suffered economically over the period running from 1914 through 1929 (wartime shortages &c) in a way that most other occidental countries had not. The country had also suffered a national humiliation during and after the war and was thus vulnerable to revanchist politics in a way no other European country was. Members of the bourgeoisie invested in bonds and such saw their savings rapidly eliminated during the inflation of 1922-24.

If you look at the performance of Germany's political parties over the course of the Weimar Republic, you see the Communist Party scoring a median of 12% of the vote and the Nazis 6%. Another 10% typically went to the National People's Party, whose support for the constitutional order was equivocal and contingent. The country's political order was vulnerable throughout and the stressors it experienced were far more extensive than high taxes.

Craig, even this evening I went Blink, Blink! before I knew the error. I do not like this business of getting old and the tricks the mind plays with memory where some things learned in youth are useful and some not. Apologies all around, even to the Czech Republic and Slovakia.

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