Austerity  

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Austerity is a political-economic term referring to policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both.

Etymology

From Ancient Greek αὐστηρός (austērós, “bitter, harsh”), having the specific meaning "making the tongue dry" (originally used of fruits, wines), related to αὔω (aúō, “to singe”), αὖος (aûos, “dry”).

Theoretical considerations

In the 1930s during the Great Depression, anti-austerity arguments gained more prominence. John Maynard Keynes became a well known anti-austerity economist, arguing that "The boom, not the slump, is the right time for austerity at the Treasury."

Contemporary Keynesian economists argue that budget deficits are appropriate when an economy is in recession, to reduce unemployment and help spur GDP growth. According to Paul Krugman, since a government is not like a household, reductions in government spending during economic downturns worsen the crisis.

Across an economy, one person's spending is another person's income. In other words, if everyone is trying to reduce their spending, the economy can be trapped in what economists call the paradox of thrift, worsening the recession as GDP falls. In the past this has been offset by encouraging consumerism to rely on debt, but after the 2008 crisis, this is looking like a less and less viable option for sustainable economics.

Krugman argues that, if the private sector is unable or unwilling to consume at a level that increases GDP and employment sufficiently, then the government should be spending more in order to offset the decline in private spending. Keynesian theory has generally been shown as responsible for post-war boom years, before the 1970s, and when public sector investment was at its highest across Europe, partially encouraged by the Marshall Plan.

An important component of economic output is business investment, but there is no reason to expect it to stabilize at full utilization of the economy's resources. High business profits do not necessarily lead to increased economic growth. (When businesses and banks have a disincentive to spend accumulated capital, such as cash repatriation taxes from profits in overseas tax havens and interest on excess reserves paid to banks, increased profits can lead to decreasing growth.)

Economists Kenneth Rogoff and Carmen Reinhart wrote in April 2013, "Austerity seldom works without structural reforms – for example, changes in taxes, regulations and labor market policies – and if poorly designed, can disproportionately hit the poor and middle class. Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position identical to that of most mainstream economists."

Other Economists go even further, with Hermann suggesting in 2014 that Austerity politics are primarily driven by "the role of ideology and class interests [...] even if this solution causes widespread misery and fails to restore growth."

To help improve the U.S. economy, they (Rogoff and Reinhart) advocated reductions in mortgage principal for 'underwater homes'—those whose negative equity (where the value of the asset is less than the mortgage principal) can lead to a stagnant housing market with no realistic opportunity to reduce private debts).

Wiktionary

1. Sourness and harshness to the taste.
2. Severity of manners or life; extreme rigor or strictness; harsh discipline.
3. Freedom from adornment; plainness; severe simplicity.
4. Grim or severe in manner or appearance

   The headmistress was an austere old woman.

5. Lacking trivial decoration; not extravagant or gaudy

   The interior of the church was as austere as the parishioners were dour.

See also

• Anti-austerity movement
• Asceticism
• Functional finance
• Planned shrinkage
• Programme commun - French reform programme cancelled by 'Austerity turn'
• Trickle-down economics