Hard Steps To Take, But In The Right Direction

What is austerity? In Spain it means a 3% hike in sales tax – up to 21%. Eliminating the extra paycheck central-government workers receive each December. Removing tax breaks for home buyers. Paring down unemployment benefits. It may not be pleasant, but Prime Minister Mariano Rajoy sees it as the “the only [path] that leads to recovery.”

The IMF calls them “difficult steps, but we believe steps in the right direction” that will help “underpin the soundness of its public finances, … the prerequisite for sustainable growth and employment gains.”

Bold, painful, but absolutely essential steps to take. And as would be expected, anathema to those who still believe that only consumption can turn an economy around.

“As Spain endures a double-dip contraction, there are concerns that the stern economic medicine might be more than an already weakened patient could tolerate,” says the Wall Street Journal. Spanish economist Robert Tornabell warns, “This time, they are really touching the vital organs of the economy.” He sees only danger in “increasing consumption taxes at a time when the businesses don’t invest, and the economy is in recession.”

To most modern economists, Tornabell’s warning rings true, which may well bring the policy to a premature end before we get to see what it might really do for the country. But the Prime Minister’s logic is inescapable.

No matter how deep the hole, there is no hope of climbing out until you first stop digging it deeper. At some point the quest for growth must accede to the pressing need to stabilize an economy’s foundation. Given a chance, I would like to believe that people would embrace the hardship.

If the Spanish government helps the people understand in simple terms why these steps are necessary and of enduring benefit to them, they would become more willing to accept them. But the people must first believe that the government is being totally honest and candid with them.

The mark of true leadership is mutual trust and respect. Great leaders implicitly respect their followers’ need to be informed and trust them with that knowledge. They also understand that they must earn their followers’ respect and trust.

Openly admitting that they have made mistakes in the past and are willing to work with the people to correct those mistakes should be a government’s first step towards restoring respect and trust in its citizens.

It’s a tough step to take, but it is in the right direction.

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