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Austerity

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For other uses, see Austerity (disambiguation).
For the current widespread opposition to present-day austerity measures, see Anti-austerity protests.
Look up austerity in Wiktionary, the free dictionary.

In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided.[1] Austerity policies are often used by governments to reduce their deficit spending[2] while sometimes coupled with increases in taxes to pay back creditors to reduce debt.[3] Austerity was named the word of the year by Merriam-Webster in 2010.[4]

Reasons for taking austerity measures

Austerity measures are typically taken if there is a perceived threat that government cannot honor its debt liabilities. Such a situation may arise if a government has borrowed in foreign currencies which they have no right to issue or they have been legally forbidden from issuing their own currency. In such a situation banks may lose trust in government's ability and/or willingness to pay and refuse to roll over existing debts or demand exorbitant interest rates. In such situations, inter-governmental institutions such as the International Monetary Fund (IMF) typically come in and demand austerity measures in exchange for functioning as a lender of last resort. When the IMF requires such a policy, the terms are known as 'IMF conditionalities'.

Typical effects

Development projects, welfare, and other social spending are common programs that are targeted for cuts. Taxes, port and airport fees, and train and bus fares are common sources of increased user fees.

In many cases, austerity measures have been associated with short-term declines in standard of living until economic conditions improved and fiscal balance was achieved.[citation needed]

Theoretical considerations

Contemporary mainstream economists consider macroeconomic policy in a dynamic stochastic general equilibrium (DSGE) framework, where fiscal policy is discussed within an optimal taxation framework that assumes a representative agent is optimizing over a long-term horizon. The reasoning behind such models is that the effect of any government deficit can be alleviated by changes in spending decisions. This occurs because the agent will be responsible for paying off that deficit in the future. Thus, from a modern mainstream macroeconomist's point of view, reducing government deficit allows the private sector to consume more and support the economy. This viewpoint stems from their belief in the existence of a general economic equilibrium, which predicts that economic fluctuations revert back toward a "normal" state of affairs automatically. For this reason econometric models that are used in economic forecasting are calibrated to show convergence to full resource utilization and employment despite government's fiscal tightening.

Old-Keynesians, such as Alvin Hansen, had a totally opposite view: they argued that government deficits provide the private sector both with new money for saving (the deficit) and a means to save (government interest-bearing bonds), increasing private sector wealth, and this wealth effect would reduce the need to save from current income. In their view government debt enabled the private sector to continue consuming. It was therefore not a burden, at least when held domestically, but a necessity.[5] This approach has interesting parallels with Richard Koo's recent concept of balance-sheet recession.

The chartalist school argues that money exists because of government's charter and not because of the existence of gold and silver (metallism). They advocate government's active management of the money supply, and creation and destruction of money if necessary.

Controversy

Main article: Anti-austerity protests

Austerity programs can be controversial, as they tend to have an adverse impact on the poorest segments of the population. In many situations, austerity programs are implemented by countries that were previously under dictatorial regimes, leading to criticism that the citizens are forced to repay the debts of their oppressors.[6][7][8]

Economist Richard D. Wolff has stated that instead of cutting government programs and raising taxes, austerity should be attained by collecting from non-profit multinational corporations, churches, and private tax-exempt institutions such as universities, which currently pay no taxes at all.[9]

In 2009 and 2010, workers and students in Greece and other European countries demonstrated against cuts to pensions, public services and education spending as a result of government austerity measures.[10]

Opponents argue that austerity measures tend to depress economic growth, which ultimately causes governments to lose more money in tax revenues. In countries with already anemic economic growth, austerity can engender deflation which inflates existing debt. This can also cause the country to fall into a liquidity trap, causing credit markets to freeze up and unemployment to increase. Opponents point to cases in Ireland and Spain in which austerity measures instituted in response to financial crises in 2009 proved ineffective in combating public debt, and placing those countries at risk of defaulting in late 2010.[11]

Word of the year

Merriam-Webster's Dictionary named the word "austerity" as its "Word of the Year" for 2010 because of the number of web searches this word generated that year. According to the president and publisher of the dictionary, "austerity had more than 250,000 searches on the dictionary's free online [website] tool" and the spike in searches "came with more coverage of the debt crisis".[12]

Examples of austerity

See also

References

  1. ^ Elmhirst, Sophie (24 September 2010). "Word Games: Austerity". New Statesman. Retrieved 29 September 2010.
  2. ^ Traynor, Ian (11 June 2010). "Austerity Europe: who faces the cuts". London: Guardian News. Retrieved 29 September 2010. {{cite news}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  3. ^ Wesbury, Brian S. (26 July 2010). "Government Austerity: The Good, Bad And Ugly". Forbes.com. Retrieved 29 September 2010. {{cite news}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  4. ^ [1][dead link]
  5. ^ Alvin H. Hansen Fiscal Policy and Business Cycles
  6. ^ Harvey, D (2005) A Brief History of Neoliberalism
  7. ^ Klein, N. (2007) The Shock Doctrine
  8. ^ Chomsky, N (2004) Hegemony or Survival
  9. ^ Wolff, Richard (4 July 2010). "Austerity: Why and for Whom?". RDWolff.com. Retrieved 29 September 2010.
  10. ^ Kyriakidou, Dina (4 August 2010). "In Greece you get a bonus for showing up for work - Arcane benefits add billions to Greece's bloated budget". Toronto: thestar.com. Retrieved 29 September 2010.
  11. ^ Stiglitz Says Ireland Has Bleak Prospect of Cutting Deficit, Saving Banks - Bloomberg
  12. ^ Contreras, Russell (December 20, 2010). "Audacity of 'austerity,' 2010 Word of the Year". Associated Press. Retrieved December 20, 2010.[dead link]
  13. ^ Time Magazine (1952), "ARGENTINA: Inflexible Austerity"
  14. ^ Germany Approves Biggest Austerity Plan Since World War II | News | English
  15. ^ "WRAPUP 4-Greek debt costs spike on budget jitters". Reuters. 21 January 2010.
  16. ^ "UPDATE 2-Italy joins Europe's austerity club with deep cuts". Reuters. 25 May 2010.
  17. ^ AFP: Japan unveils budget austerity guidelines
  18. ^ "Soros says EU "wrong" to push austerity on Latvia". Reuters. 10 October 2009.
  19. ^ "Mexico's Austerity Plans". The New York Times. 8 February 1985.
  20. ^ Revista Envío - President Arnoldo Alemán Between the Fund and the Front
  21. ^ Bankrupt Hamas government unveils austerity package
  22. ^ EUobserver / Romania sees biggest protest since 1989 over austerity measures
  23. ^ Salvadó, Francisco J. Romero (1999) Twentieth-century Spain: politics and society in Spain, 1898-1998
  24. ^ Coates, Sam; Evans, Judith (7 June 2010). "Cameron fingers culprits for Britains 770bn debt pile". The Times. London.
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