Practical analysis for investment professionals
25 April 2013

Poll: Which Austerity Measures Will Be Most Likely to Affect Recovery?

Posted In: Economics

In a poll conducted earlier this week in the CFA Institute Financial NewsBrief, we asked readers, “What austerity measures likely will be most effective in achieving sovereign financial recovery?”


Poll: What austerity measures likely will be most effective in achieving sovereign financial recovery?

Poll: What austerity measures likely will be most effective in achieving sovereign financial recovery?


Fewer than 25% of 988 respondents replied, “None — austerity is doing more harm than good.” More than three-quarters of respondents believe that austerity is necessary. This view is strongly in accord with the northern European nations — including Germany, the Netherlands, Finland, and the United Kingdom — which continue to advocate for austerity in handling Europe’s economic and debt woes.

However, support for such measures is beginning to attract some notable critics, including European Commission President José Manuel Barroso and more neutral parties, such as the International Monetary Fund and Bill Gross of PIMCO, the world’s largest bond fund manager. Gross reminded Europe that to engender economic growth, it needed to spend money. I think all respondents would agree that there are no easy solutions to sovereign financial recovery.


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: jason@jasonapollovoss.com

10 thoughts on “Poll: Which Austerity Measures Will Be Most Likely to Affect Recovery?”

  1. Nitin Srivastava says:

    Interesting poll Jason,
    I am wondering how these poll results would have changed after the fall from grace of the Rogoff-Reinhart argument in favour of austerity? Perhaps timely to repeat the poll and see if these beliefs are deep-rooted or impacted by the 24 hour media cycle. Would be a good experiment in behavioural finance.
    Cheers
    Nitin

  2. Hi Nitin,

    You will likely be pleased to know that the poll was conducted after the Reinhart-Rogoff paper’s conclusions were called into question. In fact, the vote tally was gathered Tuesday through Wednesday, whereas the RR story broke last week.

    This poll was run in CFA Institute’s NewsBrief so respondents are all within that audience and the NewsBrief covered the RR research story. All of this to say that I think the above results likely incorporate a discounting of the RR story.

    With smiles!

    Jason

  3. Ashish Agarwal says:

    Hi Jason,
    I do agree with the poll but I feel that investments need to be directed and channeled efficiently so as to foster growth. Expenditures made to increase value is the need of the hour and excessive spending without any reason may cause more harm than good. Just my point of view.

    Cheers,
    Ashish

    1. Hello Ashish,

      I agree with you wholeheartedly, in a world with scarce resources return on capital is the only humane/intelligent/wise course of action. Spending for spending’s sake is detrimental to the financial ecosystem, and the ecosystem, in general.

      Thanks for commenting!

      Jason

    2. Roger Lindsley says:

      I would advocate for not increasing Public payrolls (except where there are clear deficiencies, and with broadly re-negotiated compensation and benefits) but I would advocate for private sector investment and very targeted infrastructure investment.

      Private sector tax credits for increasing employment, maybe revisiting the 50 employee headcount for mandatory benefits, and incentivizing employee education and training- are good counter-cyclical investments without long-term commitments.

      Infrastructure (targeted) is unique in potential. Maintenance schedules can be advanced and idle equipment and labor employed with zero fear of crowding out. The cost of borrowing is low now and all indications are that we may be in for a Japanese ZLB time frame.

      The larger problems related to demographic shifts require significant policy reform, seemingly politically impossible when applied near term to seniors, but more possible when applied to future seniors so this should be written in now for implementation later… and immigration reform. It is absurd to turn away educated foreign nationals who can grow GDP.

      The purpose of credit is to transfer capital to more productive use, it is difficult to imagine a less productive use than US 10yrs at 1.7%.

  4. Roger Lindsley says:

    The readership is not actually financial industry executives, it is probably comprised of lower level financial working conservatives.

    No one I know is voting for tax increases – matched by spending cuts especially- at this time. Everyone is watching inflation and Japan’s example.

    The Dec 2012 IMF paper was not missed by people paying attention and accountable. The IMF was #1 in Austerity when the crisis started, for them to 180 with data to back it up is more informative than all the Keynsians stacked end to end to the moon.

    This poll is representative of a very skewed population. Investment decisions by any investment firm would not include tax increases as a recommendation.

  5. Hi Roger,

    Thank you for your comments. Feel free to provide a link to your preferred IMF readings on the subject.

    With smiles,

    Jason

    1. Roger Lindsley says:

      The Dec IMF paper can be accessed here.

      http://www.imf.org/external/pubs/ft/wp/2012/wp12286.pdf

      “A fiscal consolidation is found to be substantially more contractionary if made during a recession than during an expansion. First year cumulative multipliers for consolidations that began during downturns range between 1.6 to 2.6 for expenditure shocks…” (pg. 6)

  6. Hi Roger,

    Thank you for the link and the further explication of your point of view.

    Jason

    1. Roger Lindsley says:

      From Credit Writedown, a couple of Eurozone charts. http://www.creditwritedowns.com/2013/05/the-ecb-will-act-to-avoid-a-deflationary-spiral.html

      From the Fed
      “The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.”
      http://www.federalreserve.gov/newsevents/press/monetary/20130501a.htm

      Comparing CPI and Industrial Input Price Index to M2 shows an increase in purchasing power while the money supply is greatly expanded. In a stable inflationary regime an expansion of the money supply should drive down the purchasing power of a dollar, in an inflationary period the purchasing power should dramatically decrease as the supply of money increases, instead we see both the purchasing power of a dollar increase and the money supply increase.

      Retail measures prices (CPI et al) have fallen in the last two years slightly, while the IIPI has fallen faster. The stability of the CPI can be attributed to “stickiness” where businesses can maintain retail prices and retain effective “profits”. We do see some of this in the commodities sector,especially in the volatile energy sector where spot prices have been affected by political events and constraints, and not actual increases in the cost of production.

      Deflation worries have more basis and support in the near and medium terms than inflation worries. The long term (famously nebulous and not lent to prediction) inflation worries are now being measured against the Japan ongoing Japan experience. Adding to deflation’s weight is the circular Central Banks’ devaluations with limited economic impact.

      Fiscal stimulus of a proportionate scale is the only untested response to date in the financial crisis (ex Japan beginning 2013). Policy makers concerned about long term debt implications also need to include output gap costs to the economy and revenue. Other structural damages from the output gap are difficult to measure but no less of an impact on the long term economy, i.e. chronically unemployed workers and a lack of competitive investments retarding future GDP.

      Balance sheet correction is a Newtonian response in a Quantum financial universe.

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