Austerity is Easy, Growth Isn't

This morning, former U.S. Ambassador to Italy, Ronald Spogli, made an appearance on CNBC (video above). Of course, he was asked about the EU debt crisis. One of his comments caught my attention:

I think growth is one of the most elusive things for these countries to achieve. You can press the austerity button and you can try to gain compliance. Competitiveness, they're working on competitiveness and that's the issue because there is no similar button in my opinion, for growth. You just don't press the growth button one day and growth happens. Certainly liberalization has helped, but it helps over time.

Although I may not agree with his political orientation (he was George Bush's ambassador) and with everything he said in the interview, the comment above was very insightful. A country facing a financial crisis may or may not have any easy obvious choices. If is has it's own currency and is not already heavily in debt to global capital markets, it can engage in deficit spending to increase demand (the Keynesian solution). If that option is blocked, it is easy to resort to austerity, even if it generates wide-spread hardship.

Real solutions to the crisis are not that easy. If the crisis was generated by external events in the world system (such as the US Subprime Mortgage Crisis' effect on the EU), it may not be that easy to withdraw from the global economy or, in the case of Greece, from the EU during the debt crisis. If the crisis was generated within the country due to poor regulation or weak political institutions (for example, weak tax collection, shortfalls in government revenue and increases in debt), it's not so easy to change institutional arrangements, as the US is finding out.

Ultimately, the answer is more economic growth but everything depends on how that growth is achieved. If growth is based on the exploitation of either environmental or human resources, the growth is not ultimately sustainable. Right now, the world economy is desperately in need of technological changes that reduce resource inputs, increase labor productivity, increase employment and reduce CO2 emissions and other environmental damage. These are contradictory objectives and the necessary technological changes, particularly in terms of energy intensity and emission intensity, are having trouble emerging even while financial innovation has run wild. Financialization is probably another one of those "easy" things to do, like austerity, that isn't very functional for the society as a whole.

Ambassador Spogli is in a good position to understand these issues. Not only was he Ambassador to Italy but he also started one of the first private equity firms that have become key players in the financialization of the US economy.