{"id":6621,"date":"2019-09-13T09:34:34","date_gmt":"2019-09-13T09:34:34","guid":{"rendered":"https:\/\/progressiveeconomyforum.com\/development\/?p=6621"},"modified":"2019-09-13T09:34:37","modified_gmt":"2019-09-13T09:34:37","slug":"austerity-demystifying-a-still-poorly-understood-concept","status":"publish","type":"post","link":"https:\/\/progressiveeconomyforum.com\/development\/blog\/austerity-demystifying-a-still-poorly-understood-concept\/","title":{"rendered":"Austerity \u2013 Demystifying a (still) poorly understood concept"},"content":{"rendered":"\n

In spite of being Merriam Webster Dictionary\u2019s \u201cword of the year\u201d in 2010<\/a>, with more than 250,000 online searches, the arguments about what austerity is \u2013 and what its effects are likely to be, in different sets of circumstances \u2013 rage on. In my new book, Austerity<\/em>, we step back from the emotional reactions on both sides of the debate; and we carry out a much more forensic analysis, following the evidence \u2013 and only coming to a conclusion when all of it has been carefully sifted and considered. <\/p>\n\n\n\n

Since austerity and public debt are inextricably linked, our analysis begins with the origins of public debt and central banking, back in the 17<\/a>th<\/a><\/sup> century<\/a>, when attitudes about debt were as polarised as they are now. We then examine shifts in both the uses to which government debt has been put, and responses to the questions of how, when, and under what circumstances \u2013 or even if \u2013 a government\u2019s budget should be balanced.  <\/p>\n\n\n\n

During this long historical period, we consider\nthe shifting economic dynamics of capitalism, as it evolved from a largely\nagrarian, to an increasingly industrial, to a financialized post-industrial economic\nsystem. These have changed beyond all recognition since the time of Adam Smith\nand his contemporaries, who were among the first to theorise austerity. When\nthey were writing, public debt was mainly used to fund temporary military\nactivities. The emergence of the welfare state during the early 20th<\/sup>\ncentury changed all this, as governments assumed an increasing (and\nincreasingly financial) role in the economy, with a permanent budget commitment\nto providing some level of social security. <\/p>\n\n\n\n

Austerity<\/em> unpacks these inter-related developments and questions, as well as the arguments for and against fiscal tightening \u2013 which, unlike attitudes towards debt, economic dynamics and social structures \u2013 have actually changed very little over time. We then move away from ideas and history to study the actual, measurable effects of austerity. <\/p>\n\n\n\n

Almost uniquely, my book includes a chapter on\nNational Accounting, which looks at the effects of austerity (and stimulus) on\nboth GDP and the governmental and private sector\u2019s budget balance. As a result,\nit becomes much easier to understand not only what the results of austerity are\nlikely to be, but also the influence of other factors on the outcomes of fiscal\npolicy, such as the rate of economic growth and the fiscal multiplier,\nsomething that is very hard to calculate without the benefit of hindsight.  <\/p>\n\n\n\n

To dig deeper into the question of the likely\neffects of austerity, I\u2019ve constructed a set of comparative case studies, of\ncountries that, since the First World War, have either embraced austerity to\nconfront the economic and political challenges they faced, or had it forced\nupon them as a condition for financial assistance. We also examine cases where\ngovernments chose an alternative path to austerity. Our aim is to assess the\noutcomes realized in the light of the objectives, stated or otherwise. We also\nconsider questions, like \u201chow much debt is too much\u201d?  Although politicians have tried to put\nnumbers to this \u2013 especially since the 2008 financial crisis \u2013 the cases reveal\nthat the political economics are far more nuanced; and whilst some countries,\nlike Greece, encountered difficulties with debt in excess of 100% of GDP,\nothers, like Japan, sailed serenely on with well over twice that amount.<\/p>\n\n\n\n

From this, it becomes clear that it is not\nnecessarily a question of whether austerity is \u201cgood\u201d or \u201cbad\u201d, but rather, in\nwhat circumstances fiscal tightening might be deemed appropriate (and effective),\nand when it is more likely to be counterproductive. There are not many hard and\nfast rules in economics; and austerity is no exception. Thus, my answer to the question of whether or\nnot reductions\nin government spending (and\/or increases in taxes) can ever be a useful policy\nis: \u201cIt depends\u201d.  There is little doubt that austerity is far\nmore likely to coincide with the objectives of public deficit and debt\nreduction during a boom or established recovery, when GDP growth is strong\nenough to support it and when protections are in place to support the most\nvulnerable in society; and it will be counterproductive during a recession or a\nrecovery that is not strong enough to withstand it. <\/p>\n\n\n\n

But perhaps the most significant lesson to take away from our examination of austerity \u2013 in theory, policy and action \u2013 is the same as for any other economic policy: Before committing to an idea \u2013 and the policies informed by it \u2013 take a long, hard look at economic history; and check how well the theory fits the reality.<\/p>\n\n\n\n

Flickr\/Elbereth Elflein<\/a><\/em>.<\/p>\n","protected":false},"excerpt":{"rendered":"

‘In my new book, Austerity, we step back from the emotional reactions on both sides of the debate; and we carry out a much more forensic analysis, following the evidence \u2013 and only coming to a conclusion when all of it has been carefully sifted and considered’. 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