Austerity delusions

12 Nov, 2019 at 21:05 | Posted in Economics | 2 Comments

7ti40If failing to understand some basic Keynes­ian relations is a part of the explanation of what happened, there was also another, and more subtle, story behind the confounded economics of austerity. There was an odd confusion in policy thinking between the real need for institutional reform in Europe and the imagined need for austerity – two quite different things …

An analogy can help to make the point clearer: it is as if a person had asked for an antibiotic for his fever, and been given a mixed tablet with antibiotic and rat poison. You cannot have the antibiotic without also having the rat poison. We were in effect being told that if you want economic reform then you must also have, along with it, economic austerity, although there is absolutely no reason whatsoever why the two must be put together as a chemical compound.

Amartya Sen

austerity22We are not going to get out of the present economic doldrums as long as we continue to be obsessed with the insane idea that austerity is the universal medicine. When an economy is already hanging on the ropes, you can’t just cut government spendings. Cutting government expenditures reduces the aggregate demand. Lower aggregate demand means lower tax revenues. Lower tax revenues means increased deficits — and calls for even more austerity. And so on, and so on.

2 Comments

  1. I have written extensively on the myth of expansionary fiscal consolidation or the austreity fad. Here is a select list of my opinion pieces and a journal article.

    “Revisiting the evidence on expansionary fiscal austerity: Alesina’s hour?” (with Iyanatul Islam), 28 February, 2012, http://www.voxeu.org/debates/commentaries/revisiting-evidence-expansionary-fiscal-austerity-alesina-s-hour
    “Expansionary fiscal consolidation myth” (with Jomo KS), 11 August 2016, http://www.ipsnews.net/2016/08/expansionary-fiscal-consolidation-myth/
    “Latvia: Going beyond the fiscal austerity debate” (with Iyanatul Islam), 27 June, 2012, http://voxeu.org/debates/commentaries/latvia-going-beyond-fiscal-austerity-debate-1
    “Fiscal austerity and the youth employment crisis” (with Iyanatul Islam), 1 June, 2012, http://voxeu.org/debates/commentaries/fiscal-austerity-and-youth-employment-crisis

    “The Debate on Expansionary Fiscal Consolidation: How Robust is the Evidence?”, The Economic and Labour Relations Review Vol. 23 No. 3, Sept. 2012, pp. 13–38 (with Iyanatul Islam)

    • Thanks Anis, I will definitely be reading the article on Alesina’s hour.


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