Spending and the Butterfly Effect

In chaos theory, the butterfly effect is where a small change in one place can result in large differences to a later state. One application of this theory is determining how policy decisions being made across the globe will affect the world economy. Many are aware of the economic problems in Greece, Ireland, Spain and Portugal, but Europe’s core economies (Germany and France) and now the United States have also seen their GDP growth slow significantly. Leaders have responded to the dangerously high debt-loads in many countries by increasing taxes and cutting spending. This has many, including the International Monetary Fund, worried that decreased world spending could put the economic recovery in jeopardy and possibly cause another recession.

Spending cuts are also being combined with other policy decisions around the world that, when aggregated, have yet-to-be-determined consequences. The majority of the world’s growth is coming from developing countries including Brazil and China. These countries are facing stubbornly high inflation and have been raising interest rates and implementing other policies in order to cool the economy. Europe and the United States have benefited from this growth by exporting many of the key products and machinery that these developing nations need to sustain their break-neck growth.  If this growth were to slow down, many countries would be negatively affected. Emerging markets also depend on large, developed countries to buy many of the products that they are producing. Argentina's Deputy Economy Minister has led the charge in saying that cuts in developed nations would negatively affect worldwide growth. Argentina sends 27% of its exports to Brazil and China while the NAFTA trade bloc and the European Union receive 26% of total exports. Argentina and many other countries would clearly be affected greatly by a slowdown in developed nations and emerging markets. 

These strained conditions have also caused a considerable amount of social unrest across the globe. After Italian officials announced changes to labor laws as part of a larger fiscal balancing act, labor representatives organized an eight-hour strike that shut down transit and businesses across the the country. Citizens are finding the social services that they once took for granted are the easiest to cut and usually the first to go. England and Greece were both forced to make tough spending decisions and had to address citizen protests after many thought the cuts and measures were unfair.

The effects of government decisions will undoubtedly be magnified when combined on a global scale with other countries' policies. What these magnified effects will be is anyone's guess.