The Austerity-Stimulus Polarity

The global economic crisis of the past three years has devastated many economies, stretched fiscal means to capacity and changed the economic expectations for generations of citizens.  Calling what is being experienced in the US and other countries around the globe a “recession” almost does not do it justice.  In the context of recessionary events of the recent past, this one is clearly different.

Same but Different

One of the major differences comes in the form of our expectations of what the economy will look like after recovery.  Recovery from past events usually involved the eventual return to equilibrium employment levels, which suggested the economy returned to capacity and added back similar kinds of jobs (within some reason) as those affected by the economic contraction.  (Although it is also worth noting that in recent events the economy has tended to add back fewer than it claimed during recessions.) This would support the notion of a classic “V-shaped” recovery.

In the beginning of this crisis, there was a lot of conversation that this economic event would follow a “V-shaped” recovery path (or at worst something resembling a “U-shaped” recovery).  In fairness, historically speaking that’s not a bad bet if you are dealing with incomplete information.  (It’s also an optimist’s position which now a days is sadly refreshing.)  However, as innocent a position as it may have been, it had some significant risk as a starting point for a policy debate about what should be being done to facilitate economic recovery.

In the US, about 14 million people are unemployed. (To give some perspective, that’s the entire population of Canada between the ages of 14 and 70!) The structure of the US economy before the crisis was arguably not based on solid economic fundamentals (construction, real estate, leveraged retail spending, mortgage finance, etc.), so on that basis alone it seems very unlikely that the recovering economy will add back many of the jobs once held by these 14 million people. (This is not to mention the competitive head start rival economic regions have in situations like this.) Many of these folks will be structurally unemployed until positions are created for them or they retool their careers. Arriving at this conclusion effectively eliminates any possibility of a speedy return to economic prosperity regardless of the extent of the short term, economic medicine doled out. (Ditto for other counties in recession around the globe like Spain, Ireland, Greece, UK, etc.) Clearly this is going to take some time to get back on track and in the meantime there are significant issues complicating the situation that have to be gingerly managed.

Saving Our Way to Prosperity?

In many troubled economies, debt has become a real issue of concern and “austerity” a familiar term.   Clearly austerity measures are required during periods of economic hardship, but this pursuit alone has limits to its effectiveness.  The reality is that despite the desire to push austerity as far as it can go to balance budgets and/or facilitate de-leveraging, at some point the practice actually becomes its own barrier to success in the absence of real economic growth.  A very simple analogy would be an income earner, from a household that is struggling to pay its obligations, dropping a shift at work to spend the day clipping coupons.  Clearly it would be better to work the shift AND clip the coupons.  This might be an over simplification, but in light of a lot of current dialogue it is worth saying that historically nations have not saved their way out of most economic hardships – most grew their way out of it and some even managed to exercise prudence at the same time.

In the early-mid 1990’s Canada was in the midst of a recession and was carrying a large public debt, which was increasingly eating up the annual purse in debt servicing costs.  The newly elected Liberal party and the newly minted Finance Minister Paul Martin set out to bring in cost cutting measures aimed at balancing the budget and repaying national debt.  There were many hard choices made with large cuts to government services.  In the end, Canada emerged with a strong, vibrant economy, balance budgets and 1/3 the original public debt level.  Mr. Martin was largely credited with steering the nation through those tough economic times, executing on unpopular changes and leaving the country in a much better position than he found it.

This story probably sounds like it could be the poster child for austerity boosters everywhere.  However, as hard as the austerity measures were to deliver to the public – which Mr. Martin should get full credit for – the strong economic expansion of the Canadian economy during that period really made the austerity measures pay dividends. (In fact, one could easily argue that the previous Conservative government’s work on Canada-US free trade and the presence of a very favorable export exchange rate should get a lot of the credit for the economic expansion and the restoration of fiscal health to Canada.)  In the absence of the country’s economic growth, the savings from austerity alone would have likely delivered much weaker results than experienced. The learning here was that while public frugality is important, promoting and creating the conditions for growth also matter – a lot. It comes down to living within the carrying capacity of the economy, while creating the conditions for maximum potential output.

It sounds so easy doesn’t it?  Looking back at the Canadian example, you will note that it was not one group of political leaders that created the final economic product.  In fact, if you play the “suppose game” and imagine a situation where either party is historically absent from the picture, thus erasing their respective contributions, you would have good reason to believe that the final outcome would be different – and not in a good way.  So what’s going on here?

First, Start By Admitting You Have A Problem Polarity

In the business world, the difference between poor performance and great performance often comes down to a firm’s ability to create and navigate change. Corporate leader’s success or failure in this regard can be often traced back to their ability to recognize and properly manage the polarities within their business. Management teams that develop a strong competency for managing polarities can expect to consistently demonstrate superior results, within their respective industries, over time.

(If you would like to learn more about the Polarity Management Model, read “Polarity Management: Identifying and Managing Unsolvable Problems”, by Barry Johnson.)

If you have been tuning into the economic conversations in the US and Europe over the last two years, there has been a lot of debate about trying find a consensus course of action to promote economic recovery. Generally speaking, opinion oscillates between the stimulus perspective and the austerity perspective. The tension between these two positions stem from the fact that both have desirable fiscal outcomes but they are fiscally regarded as either-or options right now.  Nevertheless, capturing the positive results from both austerity and stimulus, while making every effort to minimize any negative consequences, would be an ideal outcome. This sort of relationship is indicative of a polarity.

The Austerity-Stimulus Polarity

For the sake of the discussion, consider the following simple polarity map of austerity and stimulus.  Please note, this is not an exhaustive map, you may think of positive and negatives for each pole that are not included here.

On the top of the map is the polarity’s greater purpose statement, which defines why we care: Economic Growth and Prosperity.  On the bottom of the map is what we fear by not being successful: Economic Recession or Depression.  On the opposing poles are the courses of action that are in tension: Government Austerity and Government Stimulus.  The upper quadrants of the map (blue and green) represent the positive results of focusing on each respective pole. On the bottom of the map (yellow and tan) are the negative results of over-focusing on each respective pole at the neglect of the other pole. (Once again the points in these quadrants are not exhaustive lists, but rather just enough detail to make the point.)

In this example, if the government focuses too much on one pole, say the stimulus pole, at the expense of the austerity pole, the country will suffer the negative results of too much stimulus focus (lower right quadrant).  Since the results in this quadrant are not desirable, the government will naturally seek solutions to these negative results and will shift fiscal focus to the austerity pole hoping to capture the results in the upper left quadrant.  Of course too much focus there, at the expense of stimulus, will eventually lead the country to suffer the negative results of austerity in (lower left quadrant). In turn, these negative results will motivate government to seek the positive results in the other pole and so the figure eight oscillation across the polarity map continues.

Polarity management literature offers some important insight into what can go wrong if a polarity like this one is unintentionally mismanaged.  Imagine, however well meaning, that a government that tries to ideologically maintain the country’s position in one pole (either austerity or stimulus) too long. We know that the country will without question suffer the negative results of that pole.  When this happens governments have to lead change and shift its fiscal stance to the opposite pole in order to realize economic relief from their troubles. This sounds easy but it can be very difficult if governing parties are ideologically stuck to one pole or the other by their support base. During these crucial economic moments, the role of elections in managing the polarity may become very important.  (Returning to the Canadian example, it was two different governments, each contributing to different poles, that ultimately contributed to the country’s economic recovery and current prosperity.)

Successful polarity management involves recognizing the polarity oscillation for what it is – inevitable. Therefore creating a consistently superior outcomes means managing that oscillation so that the positive results of both poles are maximized and the negative results are minimized.  Graphically you want to hang out in the upper, positive quadrants longer and move quickly through the lower, negative quadrants.

In terms of aggressively changing course, polarity management literature suggests that if you force change and drive stakeholders too hard toward the opposite pole, the first results experienced is almost always the negative results of the new pole. This is the result of a very rapid movement across a polarity, which forces stakeholders, ready or not, to let go of the positive aspects of their comfortable pole, in order to realize the positive results of the other pole.  Reluctant stakeholders will experience the negative results of their new pole first simply because these results are often the antithesis of the positive things they regret giving up.  One could easily argue that the severe austerity measures in some countries and the reaction of their stakeholders are a fine example of what happens when you drive change hard toward one pole.

So What. Now What?

This is where leadership at all political levels really matters.  Lifting beleaguered economies off their lows is going to take a full-on commitment to manage this particular polarity well.  Many of these economies are starting out in the austerity region of the polarity map due to their precarious debt position.  They need to step back and try to move on some initiatives that will deliver some positive results from the other pole. They can ill afford to stay myopically focused on austerity measures and sustain the suffering of its negative results over an extended period of time.

Simply put, countries in this situation need to be able to afford their austerity measures. For instance, although austerity might negatively affect social programs helping the less fortunate, this becomes less of an issue if they can find sustainable employment opportunities.  (This is a no-brainer.) However, failing to create the conditions that provide employment opportunities makes austerity alone a very cruel and ineffective fiscal necessity. As experienced in Canada, concurrent improvement in economic conditions takes the bite out of austerity so you can afford to continue aggressive de-leveraging without it becoming a barrier to the economic growth, prosperity and general well-being of citizens.

Managing this polarity successfully, across a broad political spectrum and over time, requires agreement not on the overall change needed, because both austerity and stimulus are correct to some extent, but on the early warning indicators that a change must be taken to move fiscal policy toward the other pole. (Acting on these early warning signs is how successful polarity managers limit their exposure to the negative results of the lower quadrants.) If a set of early warning indicators for both poles can be agreed upon and communicated to all stakeholders, the only thing left to debate is the appropriate action plan, which can and will vary from circumstance to circumstance.  In other words, what’s left to debate is the “how” not the “what”. The alternative debate about the “what”, which we have seen often in the last three years, goes nowhere fast because everybody is essentially right. You just can’t solve a polarity – its a fools game.

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About Derek Burden

Business economist with over 20 years experience in the private sector.
This entry was posted in Economic Crisis and tagged , , , . Bookmark the permalink.

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