Austerity

Developments in British Politics 10, 2016

2017

Introduction From a crisis of the state in Greece to bankruptcy in the city of Detroit, the effects of austerity have had stunning policy implications in much of Europe and North America since the ‘great recession’ started in 2007-08. The history of contemporary austerity is remarkable for how quickly policy consensus was established between global economic institutions, central banks, and national policy makers. After a short flirtation with policies which promoted economic stimulus, politicians in country after country made the case for the necessity of “fiscal consolidation” or austerity, often pushed by the large international lending institutions, such as the IMF, World Bank and the European Central Bank. National (and sub-national) varieties of austerity were rolled out across much of Europe and the US, much as it had been across developing countries in previous decades.

2012

When David Cameron spoke about an 'age of austerity'he was describing the economic policy that would come to define his government. But 'austerity'is a misunderstood term. One way to think of it is in relation to the concept of a fiscal stimulus. In the standard Keynesian model, when consumption or investment are subdued, government spending or reduced taxation can 'kick start'the economy and boost output. In theory, governments can run a debtfinanced budget deficit.

As austerity becomes the new normal for advanced nations, questions are raised about whether nations can make the hard choices necessary to bring about a sustainable fiscal future. The political defeat experienced by so many European governments undertaking fiscal consolidations points to the vulnerabilities that leaders will face. This article shows that how some Organization of Economic Cooperation and Development (OECD) nations have survived the daunting politics of fiscal consolidation by timing actions for periods of economic recovery and political honeymoons following elections and by pursuing deficit reduction strategies that emphasize broad sweeping changes yielding high potential for dramatic economic gains over the longer term. Unlike many European nations today, the seemingly endless appetite for US treasuries by worldwide markets give the United States the luxury of choosing to begin deficit reduction only when the economy strengthens. However, the absence of market pressure also reduces the sense of urgency, consigning national leaders to create internal crises such as the 2012 "fiscal cliff" to force their own hand. While the polarized politics characterizing our party system does not bode well for concerted fiscal action, divided government carries the potential for spreading political risks and promoting more sustainable fiscal outcomes, as it has in our recent history and in other nations as well.

Challenge, 2011

As economic austerity threatens to sweep Europe, the highly unrealistic expectations about the benefits of government spending cuts are not fully appreciated by the public. It is unlikely that they will result in substantial expansion; to the contrary, potentially they are extremely contractionary. The strong analysis in this piece, using the British budget proposals as a key example, starkly shows that the required changes in investment, savings, and other variables by the private sector to produce growth are utterly implausible. Slow growth, or even recession, is the likely outcome.

SSRN Electronic Journal, 2019

B. Year on Year Real Growth, as a% (in billions of local currency/average consumer prices) Country

2017

Crosscountry differences in austerity, defined as government purchases below forecast, account for 75 percent of the observed cross-sectional variation in GDP in advanced economies during 2010-2014. Statistically, austerity is associated with lower GDP, lower inflation and higher net exports. A multi-country DSGE model calibrated to 29 advanced economies generates effects of austerity consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity was so contractionary that debt-to-GDP ratios in some countries increased as a result of endogenous reductions in GDP and tax revenue.

Challenge, 2010

2020

In 2008-2009 the United States and other advanced economies experienced the most severe financial crisis since the Great Depression of 1929 (Salvatore 2013: 39). The liquidity crisis on Wall Street morphed into a global economic contraction, and the subsequent bailing of banks deemed ‘too big to fail’ across the Global North, transmuted the disintegration of the financial sector into a crisis of sovereign debt (Blyth 2013: 5-6; Orr 2012: 1). It is thus the so-called sovereign debt crisis that has reignited the debate over austerity as the cure or the disease for contemporary economic problems (Konzelmann 2014: 701). There is undoubtedly a lot at stake in debates surrounding austerity and the term conjures up issues such as freedom, human rights, democracy and morality. In this essay however, I will focus on austerity as an economic policy predominantly in the context of the Global North. I will begin by defining the current economic problems that burden global capitalism. I will the...