What is austerity?

by on May 14, 2012 at 1:41 pm in Economics, Uncategorized | Permalink

Or should that read what is “austerity”?

The May 11 IHT has a headline “German line on austerity appears to soften,” and the article is about monetary policy and inflation targeting (I don’t see it on line).  While monetary policy has ramifications for fiscal policy and output, I would not refer to tight money as “austerity,” in spite of the mood affiliation.

I googled “austerity define” and Wikipedia reports this:

In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided.

Notice that is mostly about spending, and notice the word “and.”  I find this definition confusing, especially if one interprets the “and” strictly.  Tax hikes are then mentioned:

Austerity policies are often used by governments to try to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt.

That seems to make the “tax hikes” something other than “austerity policies.”  The Macmillan on-line dictionary makes it all about spending and not about taxes at all.

A financial source in the top ten, Investopedia, reports this:

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.

That starts with spending, then shifts to the financial sector (?), and the second sentence shifts back to spending.  That’s confusing too.  How do higher taxes fit in?  What are the baselines?

Krugman I do not think has offered a definition or measure of austerity (he spends more time doing a link-less attacking of others, including possibly myself, for claims about austerity which he does not document anyone making or they simply did not make), but he seems to think that automatic stabilizer-driven spending increases do not count as spending increases for the purpose of defining austerity.  Neither does spending on bank bailouts count for him.

I could imagine a definition something like this: “the net effect of all government fiscal policies on ngdp, relative to the baseline of a stabilized path for expected ngdp growth.”  Or should it read: “…relative to what will happen to ngdp growth in the absence of budgetary changes”?  I wonder if some Keynesians have in mind the baseline of “the expansionary policies which I think would be appropriate,” in which case doing less than the Keynesian optimum is always a form of austerity.  Angus notes correctly that clear definitions of austerity are hard to come by.

In Bucharest I cannot alas consult my library for further definitions.

In any case, austerity is a misleading and often misunderstood word.  It is better if we describe policies more concretely, and in fact that is not hard to do.  Furthermore, insisting on a clearer accounting should not be equated with “austerity denial.”

Bill May 14, 2012 at 1:51 pm

I googled “mood affiliation” and found no definition, other than passages from this website.

But, I didn’t know that Wikipedia replaced The Oxford Dictionary, or Palgrave’s for that matter, on economic terms, such as austerity.

Jason May 14, 2012 at 5:39 pm

That’s because “mood affiliation” has a name

http://en.wikipedia.org/wiki/Affect_heuristic

Bill May 14, 2012 at 10:38 pm

I am familiar with affect heuristics and the psychological shortcuts and biases therein, as well as the literature. Neither the wiki link you cite, nor any papers I’ve read, refer to it as mood affiliation.

Maybe Tyler should use the term affective response. But, I would note that the affective response to some words may vary according to pre existing poltical or social beliefs, so if it is used in this context I doubt it has much meaning.

sam May 15, 2012 at 12:29 am

Top link when googling “Mood Affiliation”:
http://marginalrevolution.com/marginalrevolution/2011/03/the-fallacy-of-mood-affiliation.html

“It seems to me that people are first choosing a mood or attitude, and then finding the disparate views which match to that mood and, to themselves, justifying those views by the mood. I call this the ‘fallacy of mood affiliation’…”

Bill May 15, 2012 at 2:06 am

Sam, When Bill uses the term “mood dis affiliation” you can link to this post for Bill’s definition.

It’s just that I still haven’t seen a workable definition of mood affiliation to put the dis on to define the antonym.

ciaran May 14, 2012 at 2:11 pm

I find this insanely bizarre, tax rises definitely count as austerity and are perceived as such by the general public. For instances in Ireland a significant component of the “austerity” measures have been tax rises, particularly in the form of a pension levy on public servants. This is definitely perceived as, and referred to as, austerity, I can assure you.

I think perhaps this whole debate testifies to a certain anti-government mentality among american conservatives.

Jonathan May 14, 2012 at 2:25 pm

Suppose I told you that tax increases were counted as “evilness” and perceived by the general public as “evilness.” Would that make them (to an economist) evil? I think Tyler’s point is that tax increases and spending reductions might well have different effects, so to lump them all in the bin of “austerity” which one is perfectly free to do definitionally will naturally confuse debate. Further, different sort of spending reductions (and different definitions of what might count as a reduction) might have very different effects as well.

I don’t think this has anything to do with an anti-government mentality — the question is if comeone calls for austerity, or criticizes austerity, or proposes an alternate form of austerity, or anti-austerity, it would help all to know what is being proposed. And since austerity isn’t an economics term, and is one over which economists are being asked to speculate, don’t you think it barely possible that the demate is liable to get confused?
And what the “general public” percives and considers is, to put it mildly, not all that relevant, is it? What is the “general public’s” feeling about NGDP targeting?

Andrew' May 14, 2012 at 2:38 pm

What if your landscaper came to you and said “We are going to cut back and live more austerely. We need you to give us some more money.”

That would be pretty weird wouldn’t it (especially if you don’t have a landscaper)?

It may speak to the differing views on the separation of economy and state.

KLO May 14, 2012 at 3:08 pm

Wouldn’t it be equally weird if your landscaper refused to trim your bushes on account of his new austere lifestyle? I don’t think this analogy sheds any light on the subject.

Andrew' May 14, 2012 at 3:13 pm

If he said he had to sell his truck and that’s why he couldn’t trim the bushes it works. My point was that calling just tax increases “austerity” doesn’t make much sense. Austerity implies a total package. It also implies, well austerity. He doesn’t have an austere lifestyle if all he does is raise his income to match his existing expenses. Who are these people who said “give us austerity, and by that we mean only raise our taxes!”?

lupus400 May 15, 2012 at 4:25 am

Exactly! Such austerity does seem a sustainable way to a recovery!

andy May 14, 2012 at 3:26 pm

“It may speak to the differing views on the separation of economy and state.”

Exactly. Increasing taxes when a state goes to war can be understood as austerity (i.e. “we” got war, wa have to pay for it; we cannot spend it on leisure). But, if we do, the state budget doesn’t seem to be the right tool to find out, if people are austere.

I just don’t see the ‘common goal’ that ‘we’ are trying to reach with the austerity measures. Thus it seems to me we are talking about the ‘state’ being austere, not a whole economy. So we should look at state expenditures… I always thought austerity is about spending…

GiT May 14, 2012 at 8:24 pm

If my landscaper came and told me I had to cut back and live more austerely, because he needs my money to pay his debts, that would be pretty normal. Of course, I might just find a new landscaper. But maybe not.

Ryan May 14, 2012 at 11:51 pm

The problem with your analogy is that you and your landscaper are separate entities while the government and society aren’t. The government is how we spend money collectively. Whether we raise taxes and buy something collectively or lower taxes and buy things individually, we are still getting things for our money. Instead, if we cut government spending without lowering taxes or raise taxes without increasing spending and instead use the money to pay bondholders, we get to have less stuff, which is why either is austerity. Things get worse when the bondholders don’t use the money to buy things for themselves or lend people money to buy things (at least not from the country doing austerity). This leaves those who lost customers to the increased taxes and decreased spending with no new customers to buy their goods.

JeffC May 15, 2012 at 5:35 pm

so a package of nothing but tax increases would still be called austerity ? really ??? do you see how the word austerity is being abused to the the point of having no meaning anymore …

I assume your wonderful leaders also claim a smaller increase is a budget/spending cut or “austerity” … I don’t think that word means what you want it to mean …

Joel May 14, 2012 at 2:20 pm

It is always a very good thing to interrupt a bitter debate and ask for the definition of the most used term in that debate. Blaise Pascal sees this attitude as defining the “esprit de géométrie” that he wishes more people would have. I kind of understand
why Krugman does not count bank bail-out as (negative) austerity, but I am not sure why he doesn’t count “automatic stabilizer-driven spending increases”. It’s good you ask him the question.

Doc Merlin May 14, 2012 at 2:21 pm

“In any case, austerity is a misleading and often misunderstood word. ”

Misleading… no.

Misunderstood… yes and purposefully so. At some point Tyler, you need to realize that Krugman et. al. are being dishonest in this debate.

Thor May 14, 2012 at 10:20 pm

Oh, I think Tyler realizes it. There’s no challenge there.

The challenge would be to get Krugman to be honest with himself and admit that he’s playing with a definition to win a debate that matters deeply to him.

NAME REDACTED May 14, 2012 at 11:47 pm

I’m not convinced its Krugman. I suspect more and more of his recent political stuff is written by his wife.

The Original D May 14, 2012 at 2:30 pm

What does “stimulus” mean? Does it include tax cuts?

MJ May 14, 2012 at 2:55 pm

This is a joke, right? My intro Macroeconomics textbook–written by none other than Greg Mankiw–identifies “austerity” as contractionary fiscal and monetary policy. Any economics policy that takes more money out of the pockets of its citizens, be it through taxation or the reduction of services, qualifies as austerity.

Are we seriously parsing over the contextual interpretation of the word “and” given its placement within the text? Conjunctions are conjunctions. I, too, enjoy pivoting to Derrida when debating economics. Wait, when I say “too,” how enthusiastic am I about deconstructionism and economics (given its placement in the beginning of the sentence instead of at the end)? Ugh, the epistemological and ontological conundrums are endless…

Andrew' May 14, 2012 at 3:48 pm

1. Then it might qualify as a part of austerity, but not as “austerity.” One leg of a three-legged stool is a very uncomfortable stool.

2. That’s seems outcome-based definition. Do we really know what policies cause contraction? Who is arguing for contraction? Isn’t almost everyone arguing for different strategies toward expansion? The argument for austerity is that it is needed to over time help to resume expansion by repairing balance sheets and cutting unprofitable expenses. The argument against is that you will cut the wrong things and balance sheets will get worse without cash flow. The problem is they are probably both right.

MJ May 14, 2012 at 4:55 pm

Yes, we know what causes contractionary pressures in a precarious economy: tax increases, spending cuts, and generally any gov’t policy that decreases the cost of services and amount of disposable income of its citizens. Gov’ts can engage in contraction-inducing cuts to its budget while they in reality balloon due to crippling unemployment rates and automatic stabilizers.

MJ May 14, 2012 at 5:02 pm

*increases the cost of services

JeffC May 15, 2012 at 5:43 pm

no, you don’t know that … you have alot of theories that claim that but you are very short of real world examples that “spending cuts, and generally any gov’t policy that decreases the cost of services” casues contractionary pressures … try pointing to one …

JeffC May 15, 2012 at 5:39 pm

“contractionary fiscal and monetary policy” does not equal “Any economics policy that takes more money out of the pockets of its citizens”

nice try though …

MJ May 15, 2012 at 7:02 pm

Contractionary fiscal policies that reduces discretionary income: tax raises; slashing spending in education and healthcare, which means the consumer pays more for the bill.

Contractionary monetary policy that reduces discretionary income: reducing the money base, mandating an increase in reserve requirements, and raising the federal funds rate all dissuade banks from lending to borrowers–again, something that would reduce consumer spending power.

RPLong May 14, 2012 at 3:01 pm

I was going to post something dismissive and condescending about all of this, and then I read the comments above me. It seems a lot of people understand “austerity” far differently than I do.

And here I thought the economics community was basically unanimous in the view that fiscal policy was a terrible waste of economic resources stolen from the hands of private citizens, and that the only real debate centered on the extent and type of monetary stimulus to be applied.

But then again, I was naive enough to also believe that people understood simple arithmetic: there isn’t enough money in the tax base, no matter how much we increase that base, to fund the growth in government budgets. Nope, plenty of MR’s commenters don’t get that one…

So now I don’t know what to say. The whole world is topsy-turvy.

TallDave May 14, 2012 at 10:37 pm

Amazingly, you could have seized every dollar of taxable income over $100K and not closed the deficit in 2009.

Michael May 15, 2012 at 6:51 pm

“And here I thought the economics community was basically unanimous in the view that fiscal policy was a terrible waste of economic resources stolen from the hands of private citizens, and that the only real debate centered on the extent and type of monetary stimulus to be applied.”

For the most part, that’s actually pretty true. The problem is what to do when a fairly agreed upon action is impossible (for examples, some sort of Taylor Rule that dictates that the nominal interest rate set by the Fed should be negative). You can still talk “monetary policy” in it’s more exotic forms like quantitative easing, but you may also have to turn to the much inferior method of doing things through fiscal policy.

Brian May 14, 2012 at 3:17 pm

The LAST thing that Krugman wants is a clear definition of the term “austerity.” This gives him maximum latitude and flexibility for disagreeing with any policy in its general vicinity. Don’t look for a definition from him.

Perhaps Tyler’s call for PK to do so is the equivalent of a congressional bill that everyone knows has no chance of passing, and its only purpose is to force the other side into an unpopular vote.

Forcing Krugman to define exactly what his enemy is would be a hard task for him since there are so many conservative economists who are apparently evil and stupid, and i don’t think it is in his interest to limit the size of that group.

Yancey Ward May 14, 2012 at 3:30 pm

I will take Political Double Speak for $1000, Tyler.

P.S. A pity that this post wasn’t written by Dr. Tabarrok.

Yancey Ward May 14, 2012 at 3:35 pm

Tax rises are austerity for tax payers- not for tax consumers.

Dredd May 14, 2012 at 3:36 pm

Interesting post.

We have all experienced “austerity” at some time.

But here we are talking about the institutionalization of austerity because of the failures of institutions.

Thus, the term “precariat” is probably best associated with austerity, at least they kind induced by failing institutions of government.

Ryan Cooper May 14, 2012 at 3:39 pm

Austerity is trying to improve the government’s budget position (either reducing debt or accumulating a surplus) by some combination of spending cuts and tax increases. Like any economics term, you could pull it apart and quibble with parts of the definition, but it seems like a useful term to me. I think Yglesias had the best take on this.

I’ll admit that the left has somewhat de-emphasized the role of tax increases in austerity, but even Krugman mentions them now and then. The fundamental point in any case isn’t the austerity per se, it’s when they’re doing it; i.e., in the midst of a huge depression. The basic point has always been that if we’re going to cut deficits, we should wait until the central bank can ease to offset the contractionary effect. If we had a different Fed or NGDP targeting, this might be different, but as it stands the Fed really only uses interest rate cuts to ease and has been utterly halfhearted about nontraditional easing.

On a side note, I think this series of posts shows the limits of Tyler’s Delphic Oracle style of blogging. If you think people have made basic conceptual errors, it’s often best to just clearly and simply explain one’s meaning, not cast aspersions about their lack of deep thought. That’s just going to piss them off, and they’re going to start to think (as I did when I read de Rugy’s paper) that this whole exercise has been an attempt to take the horribly negative associations “austerity” is developing, and push them onto “tax increases” for political or psychological reasons.

Andrew' May 14, 2012 at 4:29 pm

The point is to point out how the same people can argue against austerity but for the Greeks to increase tax enforcement, and then say that austerity failed when all that was really tried was tax increases, meaning austerity was never really tried and that’s certainly not what people like me had in mind anyway.

Long-term budget solvency.

David Wright May 14, 2012 at 8:00 pm

Thank you for starting with a clear definition of austerity as a reduction of deficit. I’m afraid you make an error, though, when you claim that governments are exercising austerity under your definition. Essentially no industrialized nation is running a lower budget deficit now than before the onset of the great recession. (Data at http://stats.oecd.org/index.aspx; compare, say, 2010 vs. 2006 to ensure data availability.) Certainly not the US, the UK, Ireland, or Germany and I’m pretty sure not Greece, although there the accounting is murky. (Data at http://stats.oecd.org/index.aspx). You will either need to change your definition of austerity or grant that austerity isn’t happening.

(Actually, you wrote “debt” instead of “deficit”, which sets an even higher bar for a country to be doing austerity: it would not only have to reduce its deficit, but have to reduce it below zero.)

Bryan Willman May 14, 2012 at 3:44 pm

The textbook meaning(s) of “austere” and “austerity” are irrelevent.

The real debate is between “my favorite cronys are getting less money than they would have” versus “my favorite cronys are getting robbed more than they would have.”

What the word has come to mean politically is “we will slow down the rate of spending directed to privileged groups, and perhaps try to claw some of it back, at least relative to what it would have been.” Raising taxes without a much larger boost in spending is also austere, since it means people have less disposable income to spend on the groups not ennumerated below.

In other words, without austerity, the members of your { public service union, welfare recipients, defense contractors, general cronys, benefits of wealth transfers to the middle and upper classes via the tax code, past and present extorters from government } will get less than they would have gotten. (Also applies to { devoted public servents, the “truly needy”, providers of essential defense goods, friends of The Nation, the backbones of the economy, and so forth} and no real political figure wants to be too clear about who is which, when, or why.

It often appears to me that the Krugmans of the world don’t actually grok that there are substantial numbers of people whose world view is profoundly different from theirs.

@Jonathan – there is in fact a substantial number of people in the US, who to one degree or another perceive taxes and government regulation as “evil”. How many of them there are, and how strongly they hold these views, will be on hard to interpret display in November. There appears to be another group who are in fact communists or one sort or another. The majority is probably waffling in between. To all of these groups the technical or even plain sense meanings of “austerity” are irrelevent – they care about what is taken from whom and what is given to whom.

Bender Bending Rodriguez May 14, 2012 at 5:09 pm

It often appears to me that the Krugmans of the world don’t actually grok that there are substantial numbers of people whose world view is profoundly different from theirs.

Not different, just wrong.

FE May 14, 2012 at 3:57 pm

Austerity was never a good term because in ordinary usage the term implies qualities such as severity of manner, sternness, asceticism, etc. (these are the dictionary.com definitions) that do not lend themselves to useful descriptions of economic policy. It would be better to drop the term altogether.

Thor May 14, 2012 at 11:01 pm

You ought to see the “stern” and “severe” look I get from my wife when I propose that we get more fiscally “ascetic”. Maybe I should have used the term “austere”? You tell me.

Once, I proposed we try doing it the “Greek” way and she hit me. Having learned, now I won’t attempt to propose that we do it the “Austrian” way.

chuck martel May 14, 2012 at 4:21 pm

Does anyone think that a high level of redistribution is “austerity”? Nobody seems to think that there’s austerity when there’s a confiscatory level of taxes as long as the proceeds are meted out. Ergo, austerity is a reduction, for whatever reason, in government spending–on employee wages & benefits, contractors, supplies, etc. In fact, the man on the street is unaware of austerity unless he loses his job or pension because of a reduction in government spending. Governments can and do tax their populations and then divvy up the proceeds to stash in Swiss bank accounts. But nobody calls that austerity.

MJ May 14, 2012 at 5:01 pm

You’re assuming the income “confiscated” by high marginal tax rates isn’t acquired through rent-seeking and/or captured from lower-income workers.

MD May 14, 2012 at 10:15 pm

I think the important part is “as long as the proceeds are meted out.” If my taxes are raised, and the streets I drive on to work are repaired, I don’t think of it as austerity. If my taxes are raised in order to fix a gaping budget deficit, and the roads get worse, I think of it as austerity. If taxes are raised, the roads get worse, and a gaping budget deficit remains, I think of it as Los Angeles.

Bill May 14, 2012 at 4:36 pm

Grover Nordquist has not now, or ever been, for austerity, I guess.

If by raising taxes you mean austerity.

Rico May 14, 2012 at 4:41 pm

Since people are piping in willy-nilly, I’ll join the fray and say that “austerity,” to me, very clearly implies cutting back, and nothing else.

If I find myself hemorraging money, and as a result I stop eating in restaurants and taking fancy vacations, that’s austerity.

If I find myself hemorraging money, and as a result I go out and get a higher paying job, that’s not austerity.

If I find myself hemorraging money, and as a result I take some equity out of my home, that’s not austerity.

If I find myself hemorraging money, and as a result I convince my neighbor to give me more of his money, that’s not austerity.

Steven Kopits May 14, 2012 at 5:07 pm

Ah, but if you take away your neighbor’s money, that’s austerity. Just not for you.

Thor May 14, 2012 at 11:05 pm

First they came for your neighbour’s money, then they … etc.

GiT May 14, 2012 at 11:39 pm

Gave it to me and I lived happily ever after?

Steven Kopits May 15, 2012 at 8:01 am

So now you’re asking me for a dynamic analysis? Well, here it is:

1. Take away neighbor’s money.

2. Reduce neighbors investing and incentive to work.

3. Economy grows slowly.

4. Come back and ask for more money.

5. Go to Step 1. Repeat cycle twice, then skip step 5.

6. Neighbor refuses to give you any more money. Votes for austerity version of “austerity”.

7. Politicians realize that high taxes and deficit spending are not helping, debt levels are becoming unsupportable.

8. Begin process of real austerity (or massive inflation).

I’m sure there are more steps, and certainly more dysfunctional ones. But that’s a start.

Andrew' May 14, 2012 at 4:48 pm

I’d also ask how much spending reduction is something that was decided versus “there just ain’t no money.” If the bond market has imposed the austerity on Greece for example, you can talk about the German austerity, but not so much the Greek austerity.

It seems like whether we are in surplus or in deficit we are going to do it wrong because we are talking about the money rather than what we should be doing with the money. For example, why can’t we have a discussion on this here internet and satellite communications about what the Post Office should or shouldn’t be doing in the 21st century?

Bender Bending Rodriguez May 14, 2012 at 5:20 pm

Did anyone else see the title and imagine PK as a Butabi brother, wearing a shiny purple suit, and bobbing his head to Haddaway?

What is austerity?
Oh baby, don’t hurt me
Don’t hurt me no more.
Oh, baby don’t hurt me
Don’t hurt me no more.

For those of you who aren’t American, or for those who are American but aren’t hip, here’s a Butabi brother classic: http://www.youtube.com/watch?v=SpwK3vFGJp0
The Jack Nicholson/Helen Hunt one is better, but searching YouTube is a PITA here at work.

Bill May 14, 2012 at 5:30 pm

So, if a tax rise is austerity,

I used the web antonym finder to determine that

a tax cut is gluttonous

Becky Hargrove May 14, 2012 at 5:31 pm

Other than a meditation on meanings, what was the meaning of this post?

Nessuno May 14, 2012 at 6:13 pm

Economists and politicians have been arguing about the effects of “austerity”. But since austerity means both tax increases and spending increases, and various countries have introduced various mixes of the two, an argument framed as the singular “austerity” is not enlightening. Additionally, tax increases and spending cuts each have their own effects on the economy so lumping them together to the benefit or harm of “austerity” is fruitless.

Thor May 14, 2012 at 11:24 pm

Some economists want to claim that austerity measures HAVE been tried, and, since we’re still in a recession / depression, austerity is therefore a failed “research program” / economic practice.

Other economists say that it is only by changing what we typically mean by the term “austerity” that anyone (the economists mentioned above) can argue that we’ve tried austerity.

Bill May 15, 2012 at 2:19 am

Becky,

the purpose of this post is what every word magician does: draw your attention from something so you do not look at something else which you are now attempting to hide.

In this case, it is the failure of austerity to stimulate Europe.

So, if we debate the definition of austerity, we can claim we never had it, or that others, and not us, are the austere ones.

Now my own view is more pragmatic, and points to why the term austere is not a mood affiliating term as Tyler uses it–a term evoking mood without a context. To illustrate: being austere (raising taxes or cutting spending) during full employment is good and evokes a positive response, and cutting spending during a severe recession is just stupid as a way to stimulate.

Woj May 14, 2012 at 5:43 pm

Krugman continues to argue against austerity but this time makes his distinction of the term a bit clearer. Basically, in his perspective, government spending that counts is limited to funds used for consumption and investment. All that government spending on “capital transfers” (bank bailouts) and “social transfers” (e.g. unemployment benefits and food stamps) doesn’t count as an expansion of government. While I certainly don’t oppose some “social transfers”, this separation of government spending strikes me as odd.

As I understand the situation, the purpose of governments increasing spending (or the deficit) is to add income to the private sector, alleviating the deflationary effects of private sector deleveraging. Whether spending money on bank bailouts or investment, both sources add income in the current period to the private sector. This is not to suggest that the longer-term effects of the two policies is the same or that I don’t prefer the latter to the former. The point is that either form of spending is the choice of (generally) elected political leaders. If the Spanish government decides tomorrow to spend a few hundred billion euros to recapitalise its banks, then in my mind it is electing not to pursue austerity.

The real issue here seems to be that government spending is not being directed to the types of uses that are favored by proponents of Keynesian stimulus (presumably because those uses have a larger multiplier). This may very well be true (bank bailouts, as structured, were an awful idea) but that is an argument against the current political institutional framework by which those decisions are made. Arguing simply for more government spending in no way guarantees, or even implies, that governments will choose to direct funds towards consumption or investment and away from “capital transfers” or “social transfers”.

http://bubblesandbusts.blogspot.com/2012/05/krugman-reveals-new-flawed-definition.html

Andre May 14, 2012 at 11:29 pm

This is most likely the definition that Krugman is going to go with and I think it is correct. Different types of government spending are different. If the Government gives money to the banks and forces them to hold it (so everyone doesn’t think their are insolvent) that is fundamentally different than money spent on bridges or digging ditches or whatever. Money that has to sit on the banks balance sheets to stop a run isn’t getting paid out to anyone, isn’t buying goods and services, isn’t doing anything. With demand for loans low there isn’t anywhere for it to go anyway. Why would we lump all the spending together and pretend people aren’t losing their jobs left and right?

Even with that Krugman’s point has always been spending cuts and taxes increases to achieve budget balance in a time of negative real interest rates is counter productive. No matter how Austerity gets defined or redefined the point still holds.

RN May 14, 2012 at 5:46 pm

More disingenuous tripe from Tyler.

Trying to pretend a definition is some kind of a big deal, in an effort to distract from the reality that the cause of our problems is that WHAT WE’RE DOING ISN’T WORKING.

Doc Merlin May 15, 2012 at 12:19 am

“Trying to pretend a definition is some kind of a big deal, in an effort to distract from the reality that the cause of our problems is that WHAT WE’RE DOING ISN’T WORKING.”

But, what we are doing is roughly what Krugman suggested, only not quite as massive.

Now he is lying and trying to paint what we are doing as what his opponents suggested, which they didn’t.

Yancey Ward May 15, 2012 at 12:26 am

So, what are we doing? What have we done? There seems to be actual disagreement on that.

Wimivo May 14, 2012 at 5:55 pm

I would not refer to tight money as “austerity,” in spite of the mood affiliation.

Eh, if the contractionary effects of fiscal austerity are not being sufficiently offset by accommodating monetary policy, then I consider it appropriate to include it in the general definition of “austerity”. This, of course, is just a fancy way of saying level targeting.

Jason May 14, 2012 at 6:11 pm

TC: “Notice that is mostly about spending, and notice the word ‘and.’ I find this definition confusing, especially if one interprets the ‘and’ strictly.”

I don’t see what is confusing about the Wikipedia definition. The first item is “deficit cutting”, which means tax hikes and/or spending cuts. The “and” brings in benefit cuts which is what makes austerity different from e.g. “deficit hawkery” or “budget balancing” … or “deficit cutting”.

I really don’t get what Tyler is on about. Tax hikes aren’t part of austerity in the US because Republicans won’t raise taxes and Democrats may want tax hikes but don’t want austerity.

http://www.google.com/trends/?q=austerity

The first big spike was:
http://thesun.mobi/sol/homepage/news/2962285/Greek-austerity-bill-passed.html?mob=1
And here “austerity” refers to raising taxes and cutting pensions and salaries.

Austerity was also commonly used term before 9/11 (to pick a time when things were politically different) … are we to believe Tyler made it this far in economics reading the news and not noticing “austerity” as a description of economic policy that has been around since at least the 1950s? In nearly all of the cases I spot checked it includes tax hikes, too!

https://www.google.com/search?rlz=1C1GPCK_enUS377US377&sourceid=chrome&ie=UTF-8&q=congress+austerity#q=austerity&hl=en&safe=off&rlz=1C1GPCK_enUS377US377&sa=X&ei=MYGxT6-hJq-K6QHS8ZSbCQ&ved=0CBUQpwUoCQ&source=lnt&tbs=cdr:1%2Ccd_min%3A%2Ccd_max%3A9%2F11%2F2001&tbm=nws&bav=on.2,or.r_gc.r_pw.r_cp.r_qf.,cf.osb&fp=ba24dbadd3e6a49d&biw=1207&bih=743

Nessuno May 14, 2012 at 6:20 pm

“Tax hikes aren’t part of austerity in the US because Republicans won’t raise taxes and Democrats may want tax hikes but don’t want austerity.”
This is circular logic and not valid.

Also, if austerity is only budget cuts, then a lot of the nations that are used as examples of failed austerity never actually implemented austerity measures, as measured by ngdp.

Benny Lava May 14, 2012 at 7:19 pm

A tenured economist looks to Wikipedia and Webster for a technical definition to an economics term? Instead of pointing to, you know, an Econ textbook? Not sheriff cereal or just trolling, but certainly dishonest of Tyler who is most definitely butthurt about being wrong on austerity and suffering from mood affiliation.

David Wright May 14, 2012 at 7:37 pm

“Austerity” isn’t a technical economics term. The most obvious definitions would be a reduction in government spending or budget deficit, or perhaps a reduction of those quantities in real per-capita terms or as a fraction of GDP. Under those obvious definitions most industrialized nations are not practicing austerity, as Cowen & Taberrock have pointed out in previous posts. Since they are not “wrong on austerity” under the obvious definitions, could you perhaps clarify under what definition of austerity they are wrong?

Benny Lava May 15, 2012 at 8:46 am

Well Ireland practiced “austerity” no matter how you define it and Tyler predicted good things for it (just search this site) and was terribly wrong.

Ireland raised taxes, cut spending, and saw GDP shrink. No matter if you measure nominal or real dollars Ireland cut spending and failed to grow. Now children and people suffering from “mood affiliation” like Tyler get mad when you point out that they are wrong and write petulant things like this post and crab about people not thinking deeply and calling names.

Adults could look at the data and ask what conclusions we can draw. Some nations raised spending, some cut spending, some raised taxes, some cut taxes. What looks most successful here? Looking at a graph in nominal dollars that omits the most recent fiscal year shows the budget cutters did the worst. Now maybe this is the short term and long term growth will look different. But then again Tyler already criticized that view for being imprecise so let us quantify “in five years which nation will do better”?

JWatts May 15, 2012 at 1:30 pm

And Iceland “raised taxes, cut spending” and is seeing GDP grow. So the picture is far from straightforward.

David Wright May 15, 2012 at 2:50 pm

If you define austerity as reducing government spending, and look at the chart at Paul Krugman’s linked post, you will see that Ireland did not practice austerity (although I will certainly grant that they came closer than most). Again, please define austerity. You seem to be mixing arguments about whether austerity would be a good idea in with arguments about if and where austerity is happening.

Benny Lava May 15, 2012 at 7:24 pm

Or, if you read the Telegraph, Ireland cut spending.
http://www.telegraph.co.uk/finance/financialcrisis/8937461/Ireland-follows-spending-cuts-with-tax-rises.html

In this debate I find it telling that the pro austerity crowd feels the need to lie about basic facts I can google in 15 seconds. You lied, Tall Dave lied, Doc Merlin lied. I would call that “mood affiliation”.

There is no austerity because there were no cuts, say the lying austerians. Once I provide evidence of cuts suddenly the austerians try and shout me down and with names and mood affiliation. Suddenly we have to play childish games about the definition of the word austerity. Face facts, you were wrong! Own it like a man. This is starting to sound like an argument with a snake handler.

DLM May 15, 2012 at 8:33 pm

That article from the Telegraph is less than 6 months old and in it, Ireland is only to ‘consider’ raising taxes. Any tax increases following this would have been implemented even more recently.

Benny Lava May 16, 2012 at 12:22 am

So what you are saying is that the CBC was lying in 2010?
http://www.cbc.ca/news/business/story/2010/11/24/ireland-debt-crisis-aid-amount.html

What evidence do you have that they lied?

David Wright May 16, 2012 at 2:20 am

Again, look at the chart labeled “Ireland: Total Government Spending” in the linked Paul Krugman’s linked post (http://krugman.blogs.nytimes.com/2012/05/11/austerity-safety-nets-and-spending/#more-30756). The 2011 number is larger than the 2007 number, indicating that Irish government spending has risen over the course of the recession. It is true that it fell from 2010 to 2011, although not enough to negate the previous rise. If you want to claim, on that basis, that the Irish started practicing austerity in 2011, I will grant that. Will you grant that they were not practicing austerity from 2007 to 2010?

David Wright May 16, 2012 at 2:51 am

Suppose a person suffers a severe financial setback; say he looses his job. Over the next three years, he continues to increase his spending. Finally in the fourth year, he reduces it below the previous year’s level, although not to or below the level it was at before he lost his job. On the basis of this reduction, he claims that he has now implemented fiscal austerity. Are you skeptical, or do you agree with his characterization?

I emphasize that the question at hand is not whether or not austerity is a good idea for a country in a severe recession. The question is whether this particular spending pattern constitutes austerity.

Benny Lava May 16, 2012 at 8:45 am

So you are conceding that Ireland has implemented austerity once I did a short google search and proved that they did cut spending? Nope! Just as I predicted above you try to change the debate from “they never cut spending” to “spending cuts are not austerity”. So there we have it. You are an economic snake handler and no longer worth my time.

Doc Merlin May 15, 2012 at 12:20 am

“Instead of pointing to, you know, an Econ textbook”

…because the word isn’t found in econ texts.

Benny Lava May 15, 2012 at 8:50 am

So you are saying MJ is a liar when he wrote:

This is a joke, right? My intro Macroeconomics textbook–written by none other than Greg Mankiw–identifies “austerity” as contractionary fiscal and monetary policy.

David Wright May 14, 2012 at 7:26 pm

Krugman may often be wrong, but rarely is his argument as poor as in the linked post. He begins with the undisputed fact that Irish government spending has increased slightly over the course of the recession. He then disagregates that spending into three parts. One of these has fallen slightly. The other two have gone up slightly but he says they should have gone up more. He mentions the revenue side only in one short sub-clause and doesn’t give any data on it.

The mental model of austerity underlying this argument is that (i) austerity is not increasing spending to maintain rates of growth in living standards and (ii) taxation isn’t very relevent to austerity. Given (i), one wonders if it would be austerity for a government not to cover a new and expensive medical breakthrough for it’s citizens, even holding all other aspects of the society constant. (ii) presumably arises because Krugman supports tax increases but opposes austerity, so tax increases counting as austerity could be cognitively dissonant.

Steve May 14, 2012 at 8:07 pm

You and several others on here seem to be missing a simple point about what Tyler calls “automatic stabilizer-driven spending increases” and you call “increasing spending to maintain rates of growth in living standards”. Those increases are due to the growing number of unemployed. We would expect those unemployed people’s previous wages were greater than what the government is giving them (otherwise why work?). So even with this increase in gov’t spending we have a net decrease in nominal GDP. You don’t call a net decrease “stimulus”. I agree “austerity” is not a great term for what we are talking about but these theatrics about defining it are just obfuscation.

David Wright May 15, 2012 at 3:00 pm

If I understand correctly, you are saying we are practicing austerity (or, if you prefer to reject that confusing word, bad fiscal policy) when NGDP falls? In the US, NGDP has been rising since 2009 and since 2010 it’s back above it’s pre-recession peak, so according to that definition our fiscal policy is fine now and indeed has been for pretty much the entire time we have been having the “austerity” debate. I’ve gotta say that seems a strange definition of austerity, since it’s not directly tied to government action and seems to imply that with the right fiscal policy, government could prevent any recession from happening, ever.

GiT May 14, 2012 at 9:08 pm

Things austerity might be:

Economic contraction (in general, not necessarily as a matter of policy)
Increased State frugality
Increased individual frugality
Contractionary Fiscal policy
? kind of monetary policy, insofar as your theory says it does something to the “real economy”
Deficit reducing policy
Debt reducing policy
G as a % of GDP reducing policy
Spending cuts
Tax Hikes
-SCs and THs on those whose lives can actually be made austere (the poor)
-SCs and THs on everyone
-SCs and THs on the rich
-SCs for public goods and public welfare

-relative to previous years
-relative to previously projected budgets
-relative to previous market expectations of government policy
-relative to the levels
-relative to the trends
-relative to holding policy constant and excluding shortfalls due to the new policy environment (lower tax receipts, increased UI and other automatic stabilizers, &etc)
-in real terms
-in nominal terms
-per capita
-gross

I’m sure there are more possibilities.

GiT May 14, 2012 at 9:11 pm

Format fail… Hopefully this shows up right. Curse no edit and no preview.

Things austerity might be:

Economic contraction (in general, not necessarily as a matter of policy)

Increased State frugality

Increased individual frugality

Contractionary Fiscal policy

? kind of monetary policy, insofar as your theory says it does something to the “real economy”

Deficit reducing policy

Debt reducing policy

G as a % of GDP reducing policy

Spending cuts

Tax Hikes

-SCs and THs on those whose lives can actually be made austere (the poor)

-SCs and THs on everyone

-SCs and THs on the rich

-SCs for public goods and public welfare

———

-relative to previous years

-relative to previously projected budgets

-relative to previous market expectations of government policy

-relative to the levels

-relative to the trends

-relative to holding policy constant and excluding shortfalls due to the new policy environment (lower tax receipts, increased UI and other automatic stabilizers, &etc)

-in real terms

-in nominal terms

-per capita

-gross

I’m sure there are more possibilities.

Edward Burke May 14, 2012 at 9:49 pm

I am no economist but can’t help but watch. If 85% of the Greek economy represents its service sector (where its tourist industry resides), and only 12% is taken up with industry proper (like shipping, which can hardly come to any complete standstill, ostensibly), with the other 3% given to agriculture (which boasts at least modest exports): and if the survival and continuity of this economy is as desperately tied as it is to the Eurozone, how is it that the Greek tourist industry cannot support ONLY temporarily a tourist tariff for non-Greeks travelers in order to stimulate local cashflow? Is any kind of tourist tariff permitted in the Eurozone? (I’m guessing not.) Non-Greek Europeans (Americans, too) could find great travel deals this summer even with the imposition of a modest tourist tariff, I’m supposing, and smiling faces all along the way if they were but to dutifully vacation in beautiful stunning Greece. Tourist tariff collections for Greece could be set to end in three or five years. And be prepared to offer temporary tourist tariffs in Ireland, Portugal, and Spain beginning this summer, with Italian and French candidacy postponed until autumn at least. This is only mid-May right now, after all, tourist season is barely underway or hasn’t properly started. Maybe the UK as non-Euro member could throw slices (two to five percent) of Olympic proceeds in deference to history (or pay rent in return for keeping the Elgin Marbles). ???

Willitts May 14, 2012 at 9:58 pm

I was about to say that taxes have nothing to do with austerity. Austerity, in its plain meaning, refers only to spending cuts.

Then I considered the inevitable false analogy to the household budget. No, getting a second job is NOT part of austerity although it may be part of a broader effort to reduce deficits or debt.

But governments don’t “earn” their income and can’t get a second job. They raise revenue through taxes which reduce disposable income and hence consumption and imports. There may be an adverse revenue response to raising taxes, but there is a net reduction in domestic consumption. Consumers might, in response, increase their marginal propensity to consume and not increase their private savings rate.

Raising taxes, if used to reduce the deficit or debt, reduces future debt service payments and hence can be an austerity measure.

Alas, the problem with politicians is that as soon as revenues recover, they begin spending again – long before they have brought spending growth well within normal revenue swings.

So while it is technically correct to say that tax hikes are an austerity measure, in practice they are anti-austerity in the long term, public choice world of reality.

GiT May 14, 2012 at 10:28 pm

I’m not sure why you’re using austerity to refer to long term debt reduction. If you want to say tax hikes don’t bring about deficit/debt reduction, say that. That was, after all, Cowen’s point:

“In any case, austerity is a misleading and often misunderstood word. It is better if we describe policies more concretely, and in fact that is not hard to do.”

Willitts May 14, 2012 at 11:49 pm

I’m not using austerity to refer to long term debt reduction. I said “austerity” refers to reducing expenditures. To put it more plainly, it means having expenditures at a minimally sufficient level – no unnecessary extravagances.

Austerity is a state or condition. But if your initial state includes past and present prodigious spending, austerity measures are actions taken to achieve a state or condition closer to austerity. The words “measures” or “actions” are often omitted for brevity, perhaps with a loss of clarity, but you should know what we mean from common parlance.

Deficits/debt are used to finance consumption, imports, government spending, or investment. Investment is generally well-regarded for income growth potential, and debt for the purpose of investment is not anathema to austerity provided the debt service payments are not onerous. Government expenditures are not inaustere when they address market failures such as public goods, externalities, natural monopolies, asymmetric information, etc.

But when debt/deficits are used to finance consumption/imports/government spending above that which is considered minimally necessary, then debt/deficit reduction is consistent with austerity measures.

Debt incurs interest payments, and reducing debt reduces those outflows. Now, suppose we consider our prior prodigality a sunk cost, and we determine that an austere lifestyle involves consumption higher than full payment of our debt would allow. We can continue to amortize our debt, slowly paying down principle, and not feel guilty about it.

If we continually roll over debt without amortizing the principal, eventually interest rates will rise and our debt service payments will rise along with it, causing us to reduce consumption. We can, in theory, grow our way out of debt but that usually has not worked well from a political-economic standpoint.

So austerity measures are often forced upon the prodigal nations which cannot service their debt at minimally sufficient consumption levels, cannot pay fully-amortizing debt service payments, or cannot achieve adequate economic growth to perpetually reduce debt service as a percentage of income. The alternative is bankruptcy/default which has long-term consequences for debt finance.

I do not, by the way, believe in a debt-free government or household. A certain amount of debt is often optimal. I also don’t believe we must live a spartan lifestyle – life is too short not to enjoy hard-earned extravagances. For government, that is another matter. Prudence is the better part of extravagance.

GiT May 15, 2012 at 1:19 am

I’m not sure where you acquired the idea I don’t know the difference between austerity and austerity measures. And I’m not sure what the point of your response is. It’s given me a decent idea of what austerity means for you, but not of what it means for the many groups which use the word austerity, uses which are disparate and diverse, and yet all connected to a dictionary definition of “austerity”.

TallDave May 14, 2012 at 10:31 pm

Probably a better analogy is a thug with a protection racket who takes more of your money. Usually we call that “greed.”

Willitts May 14, 2012 at 11:20 pm

Dave, I can certainly sympathize with that point, living here in Chicago, but you can’t really mean that ALL taxes are associated with evil intentions. There are such things as public goods and externalities, and people do not voluntarily contribute to public goods as efficiently as they should. Society needs a coercive force to preserve order.

I’m sure that you and I could agree on a minimally sufficient level of that coercive force. The problem is that we live around people for whom coercive force is both a means and an end, and we have a democracy where we often get outvoted.

Rico May 15, 2012 at 10:41 am

Okay; not ALL taxes are associated with evil intentions. So the percentage of evil is not 100%. But is it closer to 20% or to 80%? How could we measure it?

TallDave May 15, 2012 at 4:00 pm

Well, careful there — the thug has a wife and little thuglings at home, and maybe a mother with cancer, heck he probably even gives to the poor. His intent is not (necessarily) evil, his means are.

Don’t get me wrong though — I’m all for public goods. My ideal government provides nothing but the nonexcludable, nonrivalrous goods that are the proper province of gov’t.

I just found the thug (well or ill intentioned) a better analogy for gov’t than a household, since they both derive income coercively.

Charlie May 14, 2012 at 10:13 pm

Krugman gave an austerity measure here on slide 7. Change in the structural balance measured as a percent of GDP.

TallDave May 14, 2012 at 10:29 pm

austere 2.(of living conditions or a way of life) Having no comforts or luxuries; harsh or ascetic.

The Macmillan definition is correct, the others mislead by connotation. Raising taxes isn’t the gov’t being “austere,” it’s a coercive effort to reduce property rights.

GiT May 14, 2012 at 11:36 pm

Which are anti-austerity protests?

Tea partiers complaining about the debt or the Irish/Greek/Spanish/Californian/etc. left complaining about VAT increases?

“Government being austere” is an equivocation.

Is an austere state

A. a state that practices austerity upon its government

B. a state that practices austerity upon its people

“Coercive efforts to reduce property rights” can both increase and decrease austerity, for people or for states, depending on what you do with what is redistributed.

(Though it’s a little funny to see the typically methodologically individualist applying the word ‘austerity’ to a state. States cannot sense harsh conditions, they cannot luxuriate (in the relevant sense of the word), they cannot feel comfort, and they have no self to deny as part of an ascetic practice. They can be indebted, however).

Willitts May 15, 2012 at 12:06 am

In the US, austerity means A.

In China, austerity means B.

In Ireland, austerity means A and B.

In Spain and Greece, austerity means neither A nor B.

GiT May 15, 2012 at 1:53 am

I’m not especially concerned with what your opinion is. I’m concerned with the opinions that it is salient for individuals to hold on the basis of their experience of government policy decisions. Austerity can be shorthand for a lot. So it’s better not to use short hand.

Excepting China, where I don’t know what’s going on, all these countries are cutting public sector pay and employment and raising sales taxes. Those are austerity measures – both with respect to government and with respect to individuals.

Willitts May 15, 2012 at 10:59 pm

Just having fun with you on the A and B thing.

On the surface you seem to be saying that the definition isn’t clear, but then you say nearly exactly what I said earlier. I said that reducing public sector expenditures (as in pay and employment) is an austerity measure. I also stated conditions under which raising taxes is an austerity measure, i.e. when it reduces debt service payments. If a country had no debt and raised taxes, the tax increase wouldn’t be called an “austerity measure” under any circumstances I can imagine. Austerity measures are not necessary unless the initial state is one of excessive debt-fueled consumption.

I don’t agree with your distinction between government and the people. The word “austere” can apply to any person or group of people, but context matters. In this context “austerity” absolutely refers to government fiscal policy. That some people were the beneficiaries of prodigious government spending is irrelevant. Whether that spending paid for a new bridge, an aircraft carrier, an oil company subsidy, or welfare checks is immaterial.

My response with respect to China was only half tongue-in-cheek. China’s export-promotion policies intentionally suppress domestic consumption, so their domestic savings rate is high. China has forced austerity onto its people. China’s government is clearly not austere, since it engages in massive public works projects as well as headlong forays into what would normally be provided by the private sector. Their government is closely tied to all of the large corporations operating on market principles. The Party members are set for life.

TallDave May 14, 2012 at 10:48 pm

I wonder if some Keynesians have in mind the baseline of “the expansionary policies which I think would be appropriate,”

The Greek baseline seems to have been a 10% increase per year. Note that interest rates were low when they borrowed– people are not thinking about that enough.

Greece’s subsequent collapse offers some evidence on the efficacy of Keynesian spending beyond the initial accounting identity. Krugman likes to throw up little 2- or 3-year charts that prove austerity failed yet ignore how they got into trouble in the first place over the previous twenty or thirty. Bond markets exist, solvency matters!

MD May 14, 2012 at 11:45 pm

Greece makes California look like Germany.

Doc Merlin May 15, 2012 at 12:23 am

“The Greek baseline seems to have been a 10% increase per year. Note that interest rates were low when they borrowed– people are not thinking about that enough.”

Yep, its a textbook Austrian Business Cycle. Excessively low rates caused a bubble in the housing and government sectors.

Andre May 15, 2012 at 1:04 am

I think they have the idea that if the government stops buying goods and services at the same time everyone in the private sector stops buying good and services it makes things worse.

TallDave May 15, 2012 at 3:53 pm

That only holds until the government is insolvent.

somethingblue May 14, 2012 at 10:57 pm

I think this deck chair would look better over there, next to the orange one by the rail. No, no, not there. Over by the shuffleboard table. Yes, that’s right.

Blades May 14, 2012 at 11:31 pm

I listened to Krugman’s On Point interview. He acts like his recommendations are like an answer to an engineering problem and that anyone who disagrees is easily led or a mendacious right winger. His historical proof that big fiscal spending works is that “World War II ended the Depression.” So it’s an incredibly weak basis for what is supposed to be like a physical law to “the majority of economists, at least the ones I talk to.” And I find it very interesting that he doesn’t claim that Roosevelt’s peactime programs had anything to do with ending the Depression. So I guess the conclusion is that if we establish a command economy on the scale of a world war we can get to full employment. It’s simple.

Willitts May 15, 2012 at 12:03 am

Having our worldwide competitors’ production centers reduced to rubble didn’t hurt our chances.

The US production and consumption possibilities curves were shifted inward by massive destruction of resources, price controls and rationing, and destruction of trade opportunities during the war. The PPF simultaneously expanded by bringing women and minorities into the labour force and trading with our allies. After the war, what we lost was more than made up for by advances in technology, access to new markets, post-war monopolies, and consumption ebullience. The inadvertent gains paid off the crushing debt incurred during the war.

Somehow I don’t think Krugman meant that thriving off of wartime technological advances is a Keynesian solution for business cycles. Lord Keynes didn’t model a bomber becoming a passenger aircraft or radar heating his dinner.

derek May 15, 2012 at 12:14 am

By Krugman’s logic the reason the Iraq war wasn’t stimulative is because they were ineffective at shooting back.

Go 88′s.

Larry May 15, 2012 at 12:27 am

What I take from Krugman is that stimulus and austerity are two sides of the spending coin. Stimulus is needed when private growth falters.It (after multiplier of 1.6) should equal the growth shortfall. Austerity is when stimulus is too small (it could be negative if spending is cut.) In particular, it’s not about how you finance that spending, because the Keynesian notion is that growth is missing because people aren’t spending/investing.

Raising taxes is austerity only if spending fails to rise along with taxes.

Of course under an NGDP level targeting monetary regime, income grows steadily, meaning that cutting spending (say to reduce debt) is offset by monetary policy. In that world, government spending cuts are generally offset by monetary easing and don’t directly affect growth. Side effects from reduced debt/interest payments, etc., might be positive.

Saturos May 15, 2012 at 12:49 am

Scott Sumner would say that according to Tyler’s definition, there is no such thing as austerity – because any impact of fiscal policy on the path of NGDP is fully offset by the central bank. So the government cannot alter the path of NGDP – Scott refuses to “hold money constant”, he claims there’s no such thing. The monetary policy reaction function is part of the fiscal multiplier, and not a multiplier in its own right.

8 May 15, 2012 at 2:12 am

Great Britain: 1976 IMF crisis

Very Serious Sam May 15, 2012 at 2:29 am

I am a German, english is not my native language. And I am also not an economist. Maybe that’s why I seem to have a different understanding of ‘austerity’ than Krugmann, or you.

For me, it means, not to spend any money one doesn’t have. For you (and the political ‘elite’) it seems to be to spend less of the money one doesn’t have.

So in my understanding, austerity means to deleverage debt or even build up savings. In yours (and the political ‘elite’) it apparently still means to increase debt, just by a lesser rate.

GiT May 15, 2012 at 4:56 am

So, Hannelore Kraft’s victory is being trumpeted as a referendum against Merkel’s austerity policy (when Germany has been running deficits) for what reason?

Very Serious Sam May 15, 2012 at 6:50 am

There is no apparent context between my post and your reply. You should ask whoever ‘trumpets’ such thing, not me.

GiT May 15, 2012 at 12:38 pm

The connection: Your being “German” is no excuse for your inability to understand the multiple competing meanings “austerity” has.

Rich Berger May 15, 2012 at 1:54 pm

English may not be VSS’s native language, but he shot you down pretty effectively.

GiT May 15, 2012 at 2:40 pm

VSS’s comment was a non-sequitor. It shoots itself down.

Bernardo May 15, 2012 at 4:18 am

As a portuguese, feeling the austerity or “austerity”, I don’t care about the definition of austerity, and I can tell you that in Portugal, people are feeling it. To make the argument that “austerity” isn’t really austerity if you count it as tax increases, seems like an empty argument. If you have taxes on your revenue, electricity, water, sales, gas, etc increase by 50% and your income stays the same, I bet if you experienced that you would call it austerity. Don’t try to mud the debate by getting into ridiculous arguments about the definition of a word, and focus on policy.

By the way, everyone knows the problem in Europe isn’t a debt problem with an inbalanced current account within the eurozone, so these austerity or “austerity” measures aren’t going to solve the problem. What Europe needs is stimulus and investment, aka spending and, guess what, tax reduction.

Carlos May 15, 2012 at 9:17 pm

I find it very disturbing the following lines from Krugman, in a recent blog-post ["Austerity, Safety Nets, and Spending", May 11]:
“some people who should know better are conceding the point that maybe there haven’t been big spending cuts. Yes, there have.
“For the fact is that you can’t just look at spending levels to ask what is happening to spending programs. Here in the United States spending on unemployment insurance and food stamps has risen sharply, not because the welfare state has expanded, but because a lot more people are unemployed and poor. Similar effects are at work in European countries, which have stronger safety nets than we do. Also, some spending represents banking bailouts, not exactly what people have in mind when they talk about big government.”

What is it that he is saying? If spending INCREASES because more people got fired we should NOT actually count it as INCREASES IN SPENDING, is that it ?!? I don’t get it…

Larry May 17, 2012 at 12:01 am

Not to defend PK, but he’s saying that state and local spending have declined as federal spending has risen. S&L cut 15k jobs just in April…

CPV May 16, 2012 at 9:27 am

The problem is the baseline. If all the countries under discussion were running balanced books prior to the crisis, then cut spending and raised taxes during or after the crisis, then the use of the descriptive adjective “austerity” might be justified, and concerns about the wisdom of the policy also justified.

In fact all these countries were running large deficits before the crisis, so the adjustment of fiscal policies to a more balanced state does not deserve this same qualitative tone. If spending is running far ahead of sustainable levels, and reduction in spending growth is curtailed, defining this action as “savage” spending cuts is another form of misdirection.

Admittedly these are all qualitative terms. I think TC has it about right when he describes austerity as any fiscal policy not sufficiently expansionist for Paul Krugman and his band of merry followers.

Yasmine Wilson May 18, 2012 at 1:44 am

Hi,

I am Yasmine, a member of some financial communities. I came across your website:http://marginalrevolution.com and found it very informative and helpful. I would like to send you an article as a guest post (relevant to your site).

It will be my pleasure if I can contribute some quality content. Please kindly let me know

how and where should I send you the article.

Waiting for your quick response.

Comments on this entry are closed.

Previous post:

Next post: