Tuesday, April 24, 2012

Austerity and Trust

Image credit: marketjyotish.blogspot.com
As weekend voting in France and the collapse of the Dutch government signaled a backlash against austerity in Europe, analysts are wondering what its impact might be elsewhere.

Simon Johnson believes that the replacement of right of center governments with left of center ones won't change a thing as options are limited. The Austerity Has Just Begun is the way Johnson states their predicament.

Robert Reich draws lessons from Europe for the US as the presidential campaign season kicks off. For Reich it is not enough for the Democrats to say that "things would have been worse" under the Republicans. With trust in both their parties running low, neither camp has been able to establish a statistically significant lead over the other as the anemic economic recovery plods along

The UK budget recently passed by the Conservative-led coalition government might provide a few clues to US voters as to what life would be like under a Republican White House and Congress. Aside from effectively cutting entitlements to pensioners and reducing state spending at a rate unseen since the end of the second world war, the treasurer George Osborne eased taxes on the top marginal tax bracket by 5%. This has subsequently led to a precipitous fall in their polling.

Even in Australia, the debt and deficit debate is raging even as the government promises to deliver a surplus as it hands down its budget next month. Although it might be the sole advanced country that can afford at the moment to incur a deficit, the Labor government is being cornered into this box by the conservative opposition which promises to outdo them in reining in spending (despite the fact that they too have spending proposals of their own).

Psychological experiments involving groups and leaders have shown that when voters identify with their leader or consider him or her "one of them", they are more likely to accept withdrawal of resources (austerity) from that leader than if it were imposed by some outsider. When a leader who does not fit in with their group favors his own group with resources (tax cuts), they are also more likely to perceive this as unfair.

If elections are to be framed as a contest of who voters trust more in handling the economy, the likelihood is that conservatives will have an edge (as in the case of the UK where tories still poll better than Labor in terms of economic management).

If elections are fought over which party voters are more likely to trust to scale back entitlements in a socially responsible manner, the party associated with the broad middle and lower income classes is more likely to pull ahead. Likeability and trust is perhaps what it all boils down to.

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