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The Value of Austerity

During troubled times, it is often wise to seek counsel from history, but more specifically from our forefathers. A common tribute paid to our parents and grandparents is the recognition of their willingness to do without. Those who lived through the 1920s and well into the years since 1945 can often attest to the value of thoughtful saving and prudent spending. Choices were governed by need, value and long-term contribution more than by status. Unfortunately, lessons shared by parents and grandparents with those born during the second half of the previous century seem to have been largely forgotten.

As noted in previous Blogs, when reviewing the past 60 years from a macro perspective, global growth and development have been awesome. Space travel, communications, the Internet, commerce, transportation, and free market expansion have grown to amazing levels. Through this period, there have been those who seemed unmoved by reason, empathy or the common interest as they relentlessly sought power and market share, but they were also the drivers of what now constitutes the global economy. During this time there were also those who shared cautionary tales of past societies that squandered wealth and opportunity. Historians have offered comparisons that revealed remarkably similar circumstances that ended badly for those who lacked the wisdom to heed admonitions to curb the desire for more – especially if gain for some meant loss for those less empowered.

History tells us that periods of rapid growth and expansion are typically followed by periods of contraction and recession. While this cycle over time appears to result in an upward spiral, to those living a diminished middle class dream, it will appear as a Sisyphean cycle of relentless tribulation. We are in an extended recessionary period because of a profligate federal government, the financial sector was (and remains) over-leveraged, and personal debt was at an all-time high. People have enjoyed several decades of government subsidies, personal expansion, hyper-recreation, expanded vocational opportunities, and residential options never before seen in this country.  During the current decade, much of this will change.

Most economists agree that jobs are created by a confident business community, which, in turn, depends on confident consumers. When consumers are hunkered down trying to recover savings or save their homes, they are not in an expansionary mood. And it is just such a mood that must drive the world economy from its current rut.

There is no real evidence that an economy can grow itself out of the type of situation the U.S. is experiencing. Growth can neither be legislated nor dictated. It is a natural social and economic phenomenon that results from balance…reasonable debt, opportunity, markets, and demand. All of these, of course, require confidence.

Europe and the U.S. must embrace realistic expectations. Both sides of the Atlantic have experienced enormous development over the past 50 years, but neither pace nor trajectory is sustainable. Not to say there cannot be a continuation of free market democracy and sensible growth, but it is a new age that requires new expectations. Developed economies will not grow at the rate enjoyed in previous decades. It will be 1% to 2% below those norms. Because unemployment typically increases by around 7% during severe financial crises and often remains high for up to a decade, job recovery expectations must also be more realistic.

Unemployment will remain high as society sorts out and re-centers, and business will continue to cautiously assess options and opportunities. The sooner we embrace the need for even moderate austerity, the sooner the economy will find a new center and begin its recovery. Paying down debt, careful spending, innovative marketing and enhanced education will become new cornerstones for development; and each must be driven by more targeted strategic and operational planning in government and industry.

Austerity is not a negative option for government or business.  The world has changed and we must embrace new realities. Currency and economies are fully interconnected; markets rely on one another; banks operate globally. The U.S. still has huge loan issues that inhibit confidence and undermine otherwise reasonable economic options. The sooner we get serious about austerity, write-down unrecoverable debt, and begin building a new foundation for a sustainable future, the sooner America will recover.

In the meantime, I encourage you and your community to move into the fourth quarter with a recommitment to the future and to careful planning. Stay vigilant, stay current, pay attention, make good plans, and seek new opportunities to serve the common good. Above all, confront reality as never before. Many of us have faced difficult times and prospered through them. We, and America, will do so again.

With over three decades working in and with federal, state and local government, John Luthy understands public agencies.  Known for his real world, straight talking style, he is a leading futurist specializing in city, county, state, and federal government long-range thinking and planning. John is the author of Operations Planning: A Guide for Public Officials and Managers in Troubled Times, and The Strategic Planning Guide, both published by the International City/ County Management Association (ICMA). His 2010 book, Planning the Future – A Guide to Strategic Thinking and Planning for Elected Officials, Public Administrators and Community Leaders, is being hailed as the best book for public managers and community leaders who are committed to building a sustainable future.  An innovative and dynamic presenter, John is frequently asked to speak and consult on how to prepare public organizations and communities for emerging challenges (public futures at http://www.futurescorp.com).

One Response

  1. Hi John,

    I know that you are always calling for austerity, but this latest “The Value of Austerity” seems to me the best (or worst) of your blogs.

    Statistics and “ocupy” movements tell us that there is NO lack of money in the world, it is that the 1% have a lot of it, and are not paying their fair (should be around 70% for those making more that 5 mill a year) share of taxes. Also, we have fought 2 wars with heavy cost ($ and otherwise) and as a result of all these US government is broke (all finances are influenced by the US). The middle-class (70% of consumption in US) has no money, the gov has no money and the corporations have 2 or 3 trillion in cash (that they are lending to the government). Austerity will make this mess worse (the rich 1% will NOT practice austerity — why should they — and the middle-class will have to).

    Our grandparents had to be austere after the same gross inequality happened during the 20’s, which caused the collapse of Wall Street (they were not handed out money at the time). My ancestors were not happy and I don’t know about your family, but in my family they had to be austere (no jobs, or clients, is a good incentive). As soon as the war was over, my grandfather bought the best Buick he could get and started travelling to Europe. He was a cautious spender but not, by any means, austere.

    Unenployment will remain high, and will become a lot higher due to technical innovation. China can produce goods for the rest of the world with only 5% of its population (the rest are still living as they have for centuries) and with a lot of automation. And automation is getting better, productivity, and by extension wealth, grows with every invention. The world in 2000 was tens of times richer that in 1900; the same will happen by 2100, the world will be richer. This wealth MUST be distributed, otherwise the owners of the patents, the factories and the stores will have ALL the money; and the 99% will be poorer than today, in a world much richer that this one.

    Dr. Humberto Contreras

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