Did you know that Merriam-Webster named “austerity” as its Word of the Year in 2010? It was quite the popular search term. Before the European debt crisis last spring, few had heard of this word and what impact its actions can have on society.
“Austerity” is defined as a policy of deficit-cutting, lower spending and reduction in the amount of public services provided by a government entity.
Last year, Greece, Spain, Hungary and the United Kingdom all began implementing draconian cuts in their spending and services in the wake of potential economic collapse and bankruptcy of their governments. These austerity measures calmed volatile debt markets and aided in an equity market rally through the end of last year. Although painful in the short-term, these actions will provide long-term benefits to these countries.
Just as the economic downturn spread across the globe, so has the notion of austerity for our state and local governments. The Federal Government has the ability to borrow money with significant potential. This will be further debated later in the year when Congress and the President look to raise the debt ceiling of our country.
Unfortunately, governors and mayors don’t have that flexibility. Most states are required to balance their budget based upon their Constitution. Those budgets were balanced in part from massive stimulus dollars in 2009. With those funds now gone and tax revenues sharply lower, legislatures are faced with the decision of either raising taxes or cutting spending.
From New Jersey to Detroit to California and even here in Maryville, governments are taking austerity measures to balance their budgets and keep spending in check. This is likely to continue throughout the year and has a great impact on the future growth of our economy.
With increased government layoffs, how will our economy continue to recover from the Great Recession? Increased unemployment will put additional undue pressure on the housing market and reduce consumer spending. From the State Capitol to your local DMV, you are bound to see stricter budget measures and possibly job cuts to curb past spending. This could very easily derail the current economic recovery and drive the country back into a downturn. But there is hope.
Corporate America chose to take its own austerity measures at the onset of the financial crisis. Companies slashed their payrolls, reduced expenses and cut their dividends to stay afloat. Two years later, they’ve returned to profitability and rallied the equity markets. They have another choice to make today. They can use the cash on their balance sheets to mitigate the problems in the public sector by hiring back workers and creating jobs to stimulate the economy.
Austerity measures are the probable medicine for ailing public sector budgets. Corporate America can provide some help in preventing these problems from weakening our entire economy. It will take courage from corporations to keep us out of an economic hole. And on this week of Groundhog Day, let’s hope that they don’t see their shadow.