The United States media has an interesting relationship with the word “austerity”. Apparently for the US media, austerity measures are a hot-topic in Europe. US publications such as The Wall Street Journal and New York Times have published articles analyzing the austerity measures implemented in regard to budgetary issues in the PIIGS (Portugal, Ireland, Italy, Germany and Spain). Economists from Paul Krugman to Mario Draghi have debated the effectiveness and scope of austerity measures in the processes of fiscal reconsolidation and deficit-cutting. The most recent IMF World Economic Outlook also offers a more quantitative econometric approach on assessing the effects of fiscal consolidation (their opinion was that estimated fiscal multipliers have been systemically too low, essentially saying that the negative short-term effects of fiscal cutbacks have been larger than expected).
Sentiment from FSG executives continues to reaffirm this growing aversion to the word “austerity”, and what it implies. Cost-cutting as the primary strategy for balancing budgets discounts the obvious economic advantages of pursuing a more equalized approach. In some emerging markets that exhibit tremendous growth potential, regional executives are worried that corporate budget-tightening and a laser-like emphasis on profitability is yielding the same short-term negative multiplier effect that the Eurozone just experienced. Harsh austerity to budgets is leaving regional executives with little room for flexibility, and with top-line revenue growth readily available, emerging markets could easily reap huge rewards for executives that are determined to not implement standardized austerity across the board. While spending clearly needs to be reined in, a bit of leeway should be extended in emerging markets where this “multiplier” could provide the biggest benefit to the company as a whole.
Along similar lines, Ernst and Young published a report estimating that banks will need to write down another $175 billion, as bad loans are forecasted to increase to 7.6% in 2013 from 6.8% in 2012. In FSG’s view, the austerity cycle creates deeper recession, weakening the banks further, and propagating this vicious cycle.
However, multinational corporations are not the only entity failing to grasp the insight here. The US Democratic Party is missing a big opportunity to leverage these recent developments in their favor. Many citizens remember the proliferation and media scrutiny of the so-called “Death Tax” before the 2008 general elections, made famous by Frank Luntz. The seemingly innocuous estate (or inheritance in UK) tax was successfully morphed into a diabolical government plot by Republican political strategists. Instead of an accepted status-quo, the estate-tax was used as a political rallying cry. As if this strategy needed further validation, Luntz’s best-selling book is actually titled, “Words That Work: It’s Not What You Say, It’s What People Hear”.
In the United States media, debt-ceiling negotiations have rarely been covered at their most fundamental level, which is the question of “Austerity or Stimulus?” As I have just covered, the word austerity and negative connotations associated with it are capable of triggering powerful images in the mind of the public (Greek protests and rioting anyone?). If democratic strategists begin to pivot their tactics to emphasize the ramifications of austerity, as opposed to spending their time defending the benefits of entitlement programs, then maybe, just maybe…we won’t end up like Greece after all.
