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Fascinating how the meaning of the word 'austerity' has drifted away from the meaning of 'austere'. A balanced budget doesn't seem very 'austere' to me. Many

• toyg 11y ago
  > But it's a false dichotomy that these are the only choices. I agree. Unfortunately, these are the only choices that are typically envisioned by people advocating balanced budgets, so they are automatically associated to the concept. It's the responsibility of such advocates to come up with alternative choices; alas, as we've just seen, they don't seem willing to entertain the possible existence of alternative paths. > The problem with most macroeconomic theories is that they ignore too many important details. So for example [...] you can come to completely different conclusions as to the effectiveness of government spending. Among the many important details these theories ignore is the actual identity of people responsible for such spending.
  • mohawk 11y ago
    A politicians' goal is to get reelected. If not, their party will quickly replace them with someone who has that goal. Budget cuts, when they are made, are done in the places where they will minimise the political damage to the party making the cuts. It's not that nobody can come up with saving money in the bureaucracy, military&secret services, government subsidies, etc. It's just that they are costly in terms of political power and therefore not discussed at all. And the easiest things to slash are things your own voters don't care about and the easiest taxes to increase those that your voters don't pay. I doubt that any kind of economic thinking goes into these decisions.
• rbehrends 11y ago
  > A balanced budget doesn't seem very 'austere' to me. Except that that's not what it means. Norway has been running a budget surplus for years (because of oil), but is not engaging in austerity; the UK was running a deficit and engaging in austerity at the same time. Austerity is generally understood to mean a reduction of the structural deficit in a time when the economy is struggling or contracting. It is considered counterproductive because it typically makes the economy even worse by killing domestic demand (directly and through cascading effects). See also the paradox of thrift [1]. [1] https://en.wikipedia.org/wiki/Paradox_of_thrift https://en.wikipedia.org/wiki/Paradox_of_thrift
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  • Ntrails 11y ago
    Except the UK economy has been expanding for a long time now and it's still described as using austerity. Austerity now simply means reduction in spending on "social security" of pretty much any form. Spending your way out of recession [in the midst of large pre-existing debt] has its own supporters and detractors. I've generally come to the conclusion that whatever your budgetary preference you can find an macro-economist to agree with you.
    • rbehrends 11y ago
      > Except the UK economy has been expanding for a long time now and it's still described as using austerity. That's why I wrote that the UK was engaging in austerity. Past tense. Osborne abandoned austerity in 2012 (though the Cameron government's economic policymaking still does not show a clear strategy and the UK's economy is still pretty fragile [1]). That the term "austerity" is sometimes used imprecisely (especially in colloquial speech) is not something I disagree with; however, austerity is not synonymous with having a balanced budget, as the OP claimed. > Spending your way out of recession [in the midst of large pre-existing debt] has its own supporters and detractors. I've generally come to the conclusion that whatever your budgetary preference you can find an macro-economist to agree with you. First, these are not the only two alternatives (fallacy of the excluded middle and all that). Second, critics of austerity do not rely on "finding a macro-economist to agree with them" but on the pretty clear evidence that at least for the ongoing crisis, austerity has been unsuccessful (change in government spending has been correlated with change in GDP; i.e., less government spending => less or negative GDP growth). In short, the hypothesis that austerity leads to GDP growth has so far been falsified by the evidence we have. [1] Loss of real GDP and lower real wages compared to pre-crisis levels; a recovery largely fueled by consumption (in part, ironically, because of increased net migration to Britain) and rising housing prices, which is not sustainable in the long term.
• dmichulke 11y ago
  Even the distinction between macroeconomics and microeconomics is not scientific. If I have a model that doesn't work in smaller AND larger (whatever that means) contexts, it's a bad model. Physicists admit it, economists might, politicians don't. My own "religion" is that you should build a reward function for every actor in a system (be it state, politician, company, CEO, consumer, ...) and see how they react to different events (legislation, appearance and disappearance of new services/products, ...). If you follow that line, you'll end up with a very pessimistic view and an Austrian mindset. IMO game theory is the foundation of economics and it explains how it could look like, what's happening right now, why central banks collude and why any monopoly on violence and/or the issuance of money will degrade into what we currently have. In the end, the budgets are irrelevant, politicians don't want to balance them and even if for some reason one does, his successors won't.
  • quonn 11y ago
    > If I have a model that doesn't work in smaller AND larger (whatever that means) contexts, it's a bad model. That seems like a very strange remark. First, macroeconomics va. microeconomics is not about large and small, but about the whole vs. parts of it. And that indeed makes a huge difference. Second, we use different models all the time, pretty much everywhere. So in engineering small local systems you would use classical mechanics. In physics, not. There are similar examples in computer science.
    • rbehrends 11y ago
      > That seems like a very strange remark. First, macroeconomics va. microeconomics is not about large and small, but about the whole vs. parts of it. And that indeed makes a huge difference. To expand on that: A sovereign nation state has the power to tax, to legislate, and to regulate trade with other nations; outside the Eurozone, to issue its own currency. Households and businesses can do none of the above, but are subject to the decisions that their governments make on their behalf.
    • yummyfajitas 11y ago
      In physics, we view it as a bad thing and a deep flaw when the macro model (GR) and the micro model (QM) don't agree. Large amounts of effort in physics are devoted to deriving macro models from micro models - this is the entire purpose of statistical mechanics, for example.
• atmosx 11y ago
  Austerity is a religion in Europe and it's strongly supported by Germany, which is the leading economic powerhouse and major EU creditor. If you look at the surplus it works well for their exports but the salaries are at the same level they were in the 90s. So although unemployment is low and exports were going strong (hence corporations like BMW and Mercedes are making huge profits) the salaries were largely at the same levels. The German government decide to keep the surplus instead of spending money in local and foreign investment which keeps virtually the EUR low. It's a policy heavily criticized by both USA and European economists. One might argue that these choices worked very well for Germany. Not very well for the rest of the Eurozone, especially the Mediterranean countries, which found themselves having huge deficits. The EU has structural problems which the German model speed up.
  • Retric 11y ago
    It's important to note GDP is far from independent of underlying demographics. A stable population ends up older than post WWII countries where used to which requires an older retirement age and a lower percentage of workers to support spending levels. This shift feels like austerity, but countries have no choice long term.
    • luch 11y ago
      Exactly, government-managed retirement funds were created after WWII, at a time when there was few retirees and a massive young workforce. Now it's the other way around : the demographic transition is hitting the retirement age all over Europe and it is an alarming problems for many countries including France and Germany.
  • jackgavigan 11y ago
    It's also worth remembering that the asset bubbles in Portugal, Ireland, Greece and Spain were inflated by the Eurozone's low interest rates. The reason those interest rates were set so low was to boost the German economy, which was in the doldrums, post-reunification.
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• parasubvert 11y ago
  "Fascinating how the meaning of the word 'austerity' has drifted away from the meaning of 'austere'. A balanced budget doesn't seem very 'austere' to me." But it is. Money is used to do productive things. Money is created when a bank issues debt. If no one is spending money, and paying down their old debts due previously reckless lending and borrowing, you have a depression, where lots of people want to work, but can't, because no one is buying anything. The only people making money are the lenders - until people start defaulting. Who is to kick start the engine? Well, you've got four choices; - the government, which works well if it is quality spending, ie. it's channeled towards infrastructure and/or consumption (see the U.S. vs Europe). but it is politically unpopular among the rich because it is theoretically inflationary. - Or the central bank can buy up debt on the market (quantitative easing), but with everyone paying down their debts, this doesn't actually help the economy as much. Also not popular with the rich because it's inflationary. - Wait it out, ie. Stop spending money and make everyone pay down their debts. This is the "austerity" plan, where a generation of people will be unemployed because of the supposed sins of the past - a cleansing ritual approach to the economy. Popular with the rich because they can afford to sit back and wait. - Option four is a debt jubilee where creditors get a haircut and we all feel spurred to spend money again because we aren't so far in debt. This is popular with the masses and (obviously) unpopular with the rich. This is what happened to some degree in Iceland. And this is in effect what Greece is asking Europe to do as the most realistic outcome from the 2008 crash. "But it's a false dichotomy that these are the only choices" Actually, no, it's a real dichotomy. Either you believe in balanced budgets at all times, or you believe that deficit spending is justified sometimes. Similarly for occasional debt jubilees vs the sanctity of the bond holder. These are stark choices as they have major implications on entitlements like medical and social insurance in a crisis. "Then there's the economists, who will pull out some toy model and claim xyz is good/bad. Too me it seems more like religions (being a Keynesian, Austrian, etc), where people search for facts that confirm their positions." A model is just a consistent logical argument. Because economics is so tied to politics, the logical arguments get religious fast. That's kind of human nature. Searching for facts to confirm (or contradict!) your position is usually a good thing - we call that empiricism. I'd note that not all economic traditions believe in empiricism (the Austrians do not, for example - they believe their system is axiomatic). "The problem with most macroeconomic theories is that they ignore too many important details." The point of a model is to have predictive power without being so complicated that it's impossible to use. There's some subjectivity as to what is "important" in making an argument. "So for example, you can borrow money to invest in the future which is usually good in the long run, or you can spend it on things you don't need ..... In the words of Warren Buffet, we don't talk about 'quality' of GDP enough." That would be because we are still stuck in debating whether government spending helps at all, which is anathema to a large number of property holders. Among those that want stimulus - look at the Econ blogosphere! - there have been endless debates circa 2008-2009 about quality stimulus vs. pork spending stimulus. Those discussions have ceased because austerity has become the political rule in Europe (and to a lesser degree but still strong in a polarized US electorate). No point debating what to spend money on if there's nothing to spend. So debates have turned to QE and debt writeoffs - two of the other four tools left that I mentioned above.
• tiatia 11y ago
  "things you don't need such as hosting international sports competitions" I am skeptical of all the highly corrupt organizations (FIFA, Olympics) that are private companies, often tax exempt, externalize costs and privatize profits. But in case of Munich, I think the Olympic games in 1972 and the heavily investment in infrastructure for this games, has actually more than paid off for Munich.
• pitt1980 11y ago
  Where Has All the Education Gone? Lant Pritchett + Author Affiliations The Kennedy School of Government. e-mail: lant_pritchett@harvard.edu Abstract Cross‐national data show no association between increases in human capital attributable to the rising educational attainment of the labor force and the rate of growth of output per worker. This implies that the association of educational capital growth with conventional measures of total factor production is large, strongly statistically significant, and negative. These are “on average” results, derived from imposing a constant coefficient. However, the development impact of education varied widely across countries and has fallen short of expectations for three possible reasons. First, the institutional/governance environment could have been sufficiently perverse that the accumulation of educational capital lowered economic growth. Second, marginal returns to education could have fallen rapidly as the supply of educated labor expanded while demand remained stagnant. Third, educational quality could have been so low that years of schooling created no human capital. The extent and mix of these three phenomena vary from country to country in explaining the actual economic impact of education, or the lack thereof. Copyright Oxford University Press 2001 http://wber.oxfordjournals.org/content/15/3/367.abstract http://wber.oxfordjournals.org/content/15/3/367.abstract