Monday, May 21, 2012
Vuk Vukovic
The debate on austerity v stimulus is again the main focus of attention. Particularly due to the recent results of the Greek and French elections where opposition to European “redistributive austerity” is gaining strength. Even though they don’t refer to it as redistributive austerity, but as “painful cuts that are hurting growth”. Even in the very phrasing of the debate as ‘austerity v growth’, it is obvious that people don’t really understand what austerity is, and even less what their governments are doing.
… governments sometimes do tend to use tax hikes to lower the deficit. But essentially the very definition of austerity primarily implies cutting spending and cutting entitlements in order to create more scope for the private sector to grow on its own, i.e. to remove the dependency mentality from people and from businesses.
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More on austerity
ReplyDeleteby Vuk Vukovic
Don’t worry, I’m an economist!
http://im-an-economist.blogspot.jp/
The debate on austerity v stimulus is again the main focus of attention. Particularly due to the recent results of the Greek and French elections where opposition to European “redistributive austerity” is gaining strength. Even though they don’t refer to it as redistributive austerity, but as “painful cuts that are hurting growth”. Even in the very phrasing of the debate as ‘austerity v growth’, it is obvious that people don’t really understand what austerity is, and even less what their governments are doing.
ReplyDeleteThe recent texts from the Mercatus Center, Cato institute, Tyler Cowen and many others shed some light on this and have pointed out to a controversial yet very true fact that there is no real austerity in Europe, at least not the type that could theoretically help the economies recover. In fact, just yesterday Tyler Cowen asks what is austerity, trying to come up with a precise definition in order to overcome the biases behind the term and its policy effects. Looking at Wikipedia and Investopedia he finds the following:
“In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided.”
“A state of reduced spending and increased frugality in the financial sector. Austerity measures generally refer to the measures taken by governments to reduce expenditures in an attempt to shrink their growing budget deficits.”
Defining the term is particularly important for the policy implications. As you can see there is no mention of tax increases in any of the two definitions. However, governments sometimes do tend to use tax hikes to lower the deficit. But essentially the very definition of austerity primarily implies cutting spending and cutting entitlements in order to create more scope for the private sector to grow on its own, i.e. to remove the dependency mentality from people and from businesses.