Friday, April 27, 2012

What is Austerity?

Anyone watching, listening or reading the news over the past few years has certainly heard the term “austerity” used more frequently than they probably imagined possible. In our minds, each of us likely has a particular interpretation of what “austerity” means and applies that view broadly across different instances. Unfortunately, if you pay close attention to the word’s usage it becomes clear that many very intelligent people are using the term with distinctly different meanings.
Earlier today, Peter Tchir of TF Market Advisors posed the question “When Did Austerity Become A 4 Letter Word?“ Tchir notes that:

In the rush to avoid supporting anything that could be viewed as “austerity” we have lost sight of what austerity is, and how it can impact the economy.
Although the latter topic is certainly worthwhile, answering the former question is more pressing issue (IMO).

Quoting from the Wikipedia page on Austerity :
In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided.
This definition conflicts with several ways I’ve seen and interpreted the term being used recently.

Jeff Madrick at TripleCrisis describes “austerity economics” as (No Mysteries in Eurozone Crisis) “higher taxes and reduced spending.”

Separately, in a post titled American Austerity, Paul Krugman points to “de facto austerity” under Obama in “an era of huge cuts in public employment compared with previous experience.” Krugman suggests that austerity is simply reducing the public workforce. He may be assuming that this lowers spending or the deficit, however data doesn’t support that view. In fact, US federal spending and deficits (in nominal terms) were higher in 2011 than in 2010 and are expected to increase again in 2012. (OMB Historical Table 1.1)

Before even attempting to discern the impact of “austerity” on an economy, it seems imperative to formulate a consistent meaning for the term. Must “austerity” include all the characteristics listed by Wikipedia? Is providing more public services and benefits for less money “austerity”? How about cutting the deficit without lowering spending (increasing taxes)? Does deficit-cutting and lower spending refer to nominal values or a percentage of GDP? What about a reduction in public employment?

My own personal view has been that “austerity” refers to attempts at reducing the deficit, regardless of the method. What are your views? How should we interpret “austerity”?

Update: On Friday I posed this question to Cullen Roche over at Pragmatic Capitalism in his new Q&A (which I highly recommend). Here is his response:
WOJ:  Speaking either for yourself or MMR (or both), how would you define austerity? Are there specific measures involved or is it simply a policy goal?
CR:  To me, austerity is an insufficient budget deficit.  That depends on specifics in each nation, but in the USA for instance, austerity might involve a budget deficit that is not in excess of the current account deficit.  That would result in a net drag on the country.  We’re not imposing austerity in the USA though.

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