“Economics: A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants.“ taken from investopedia.com
That was the definition that my freshman year’s high school teacher of introduction to economics wanted us to learn. Needless to say that back then and throughout the following years it seemed all too abstract. For some of my old schoolmates that blurry definition might have never become any clearer as they eventually either dropped out of school or took a different direction. As for me, my enthusiasm for the matter didn’t go away so I ended up majoring in Economics. Nevertheless it was only midway through graduation that this definition started to make some sense.
When the full notion of economics finally struck me I realized that I had been brought up with this mantra all along. “It’s all down to make choices” my parents taught me. “You can’t have it all” or “In order to have this you’ll have to relinquish that” I used to hear very often*. Except that this reasoning wasn’t any good to persuade a 4 year old kid that he was only entitled to choose a miniature car out of a showcase of some dozens. Try this speech on someone that young and you might have to deal with a public demonstration of a whining free-style break dance display hard to rein in (sorry about that, mom).
When I came of age my parents’ doctrine strictness began to produce some results as I started to weigh in different options whenever I wanted something: “Shall I buy a new pair of jeans, new tennis shoes or a new coat?“. One final step involved taking into account the time scale. In other words that meant considering different options within different time frames. Graduation implied to be able to make a decision in real-life (one-shot opportunity): “Parents’ financial support to buy a car now vs. parents’ offer to provide for a post-graduation degree in a few years’ time?”
As in these mundane examples of an individual’s upbringing the same principles should apply both to a household or to a nation’s economy: choosing between a multiplicity of options spread across different time frames using relatively scarce resources (time, money, labor, land, skills, etc.).
Like we all know events have unfolded in such an uneconomic fashion that reality started to bite as of late, specially to those households/nations highly indebted. Nowadays you get to hear talking quite a lot about “austerity”, specially in Southern European countries. Meanwhile scapegoat seekers insist to point their fingers to its, so-called, “advocates” for all the pain it’s causing rather than trying to understand reality.
In fact austerity should be acknowledged as a consequence of past choices and frankly it was past due**. Let me clarify with the following examples:
– you can’t, as a household or nation’s government, focus all your resources on the present time and ignore future liabilities attached;
– you can’t (and shouldn’t) fulfill all your desires (an untamable drive) if that means getting strapped for money in the foreseeable future;
– you should carefully weigh your current (or any additional) expenditures when your budget is starting to look over-stretched and you aren’t seeing any income raise or off-setting wealth generation;
– you surely shouldn’t rely on low interest rates to stay afloat while you keep on spending.
To sum it up, who did, with a given endowment, run successive budget deficits, relied on cheap and plentiful credit to fund them, entrusted its fate in ever present tailwinds and somehow expected not to balance its accounts anytime in the future?! I better rephrase it…who didn’t?!
Well, on a household point of view, you just need to take a look to macroeconomic statistics for the last three decades to witness the run-up in the brotherly link between consumption and indebtedness and how savings almost became extinct. Further, on a wider scope, check out those western world sovereign debt figures and their persistent fiscal deficit numbers one more time…
At this juncture a lot of western world citizens, namely those from South European debt-ridden countries, have to mull over several rifting issues concerning: their lifestyle, how wide and thick they want their social safety net to be, how democracy should work (specially the role of political parties), how to enforce accountability of public acts, how to curb shady and powerful lobbies’ influence, their euro membership, etc.
Although one thing is granted: those frothy years of deluging cheap money prone to misuse and to addiction are nowhere to be seen in European debt-laden countries for a long time to come. As of late their governments and the ECB have been trying to turn the yesteryear’s poison – extremely loose monetary policy – into today’s painkiller however with (very) modest results. In case they haven’t noticed that wrench won’t do the trick anymore. And to fix this full-blown euro-zone crisis there are reasons to worry about: we’re talking about a very depleted toolbox to cope with a lot of malfunctions!
Unlike the prestigious newspaper slogan – that would fit perfectly fine when it was unveiled in 2007 – we no longer live in financial times…
* Unlike the reader might be thinking my parents have both majored in Chemical Engineering.
** I might agree there’s a limit to the extension and enforcement of it – for the sake of general population well-being – but still I deem austerity a necessary evil.