Social Europe

politics, economy and employment & labour

  • Themes
    • Global cities
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter
  • Membership

Austerity Past And Future

Simon Wren-Lewis 11th March 2016

Simon Wren-Lewis

Simon Wren-Lewis

It is tempting for journalists in particular to treat arguments against fiscal consolidation (austerity) during the depth of the recession as the same as arguments against fiscal consolidation now. Of course there are connections, but there are also important differences.

Austerity during a recession

Case against

The case against austerity in the depth of the recession is that it makes the recession worse. Because interest rates have hit their lower bound, monetary policy can no longer solve the recession problem on its own and fiscal policy needs to help. That is what the world agreed in 2009. There are two legitimate economic arguments which, if true, would override this view.

Counterargument 1

The interest rate lower bound is not a problem, because we have unconventional monetary policies like QE. This argument’s flaw is that the reliability of unconventional monetary policy (knowing how much is required to achieve a particular result) is of an order smaller than both interest rate changes and fiscal policy.


Become part of our Community of Thought Leaders


Get fresh perspectives delivered straight to your inbox. Sign up for our newsletter to receive thought-provoking opinion articles and expert analysis on the most pressing political, economic and social issues of our time. Join our community of engaged readers and be a part of the conversation.

Sign up here

Counterargument 2

If governments continued to borrow in order to end the recession, the markets would stop buying government debt. This argument normally appeals to the Eurozone crisis as evidence, but we now know that – before OMT at least – Eurozone governments were uniquely vulnerable because the ECB would not be a sovereign lender of last resort. Other evidence suggests the markets were totally unworried about the size of UK, US or Japanese deficits.

Austerity now

Here I will focus on the UK, because planned fiscal consolidation in the UK over the next five years is greater than in other major countries. During the recession, George Osborne had a target of current balance, which excludes spending on public investment. He now has a much tougher target of a surplus on the total budget balance, which includes investment spending.

Case against

There is a specific problem with Osborne’s current fiscal charter, which is that by targeting a surplus each year from 2020 it fails the basic test of a good fiscal rule, which is that debt and deficits should be shock absorbers. But in terms of the path of fiscal policy until 2020, there are three additional problems:

  1. The policy restricts public investment at just the time that public investment should be high because borrowing and labour are cheap. It is a near universal view among economists that now is the time for higher public investment.

  2. It will bring debt down too fast, penalising the current working generation who have already suffered from the Great Recession.

  3. Continuing fiscal austerity is keeping interest rates low, which means central banks are short of reliable ammunition if another recession happens.
I discuss these arguments, and the last in particular, in yesterday’s The Independent. The point I want to stress in this post is that of the two arguments in favour of past austerity outlined above, only one – the lower bound is not a problem – is relevant here, and then only for the third criticism above. With debt now falling the argument about a potential funding crisis is not even remotely plausible.

You could say that the market panic argument is still relevant to Osborne’s justification for reducing debt fast, which is to prepare for the next global crisis. I think one way to show the silliness of this argument is to adapt a point I made in The Independent article. Imagine a firm which had lots of promising projects it could invest in, all of which would turn a handsome profit. Banks were knocking on the door of the CEO to offer the firm interest free loans to invest in these projects. But the CEO said no, because someday – maybe in 20 years time – there might be a credit crunch and the firm might get into difficulties if it took on more debt. As a result of the firm’s ‘prudence’, its sales stop growing and its profits fell. I wonder what the firm’s shareholders would think about their CEO’s decision?


Support Progressive Ideas: Become a Social Europe Member!


Support independent publishing and progressive ideas by becoming a Social Europe member for less than 5 Euro per month. You can help us create more high-quality articles, podcasts and videos that challenge conventional thinking and foster a more informed and democratic society. Join us in our mission - your support makes all the difference!

Become a Social Europe Member

This post was first published on Mainly Macro

Simon Wren-Lewis

Simon Wren-Lewis is Professor of Economics at Oxford University.

You are here: Home / Economy / Austerity Past And Future

Most Popular Posts

Russia,information war Russia is winning the information warAiste Merfeldaite
Nanterre,police Nanterre and the suburbs: the lid comes offJoseph Downing
Russia,nuclear Russia’s dangerous nuclear consensusAna Palacio
Belarus,Lithuania A tale of two countries: Belarus and LithuaniaThorvaldur Gylfason and Eduard Hochreiter
retirement,Finland,ageing,pension,reform Late retirement: possible for many, not for allKati Kuitto

Most Recent Posts

OECD,inflation,monetary The OECD and the Great Monetary RestrictionRonald Janssen
prostitution,Europe,abolition Prostitution is not a free choice for womenLina Gálvez Muñoz
Abuse,work,workplace,violence Abuse at work: who bears the brunt?Agnès Parent-Thirion and Viginta Ivaskaite-Tamosiune
Ukraine,fatigue Ukraine’s cause: momentum is diminishingStefan Wolff and Tetyana Malyarenko
Vienna,social housing Vienna social-housing model: celebrated but misusedGabu Heindl

Other Social Europe Publications

strategic autonomy Strategic autonomy
Bildschirmfoto 2023 05 08 um 21.36.25 scaled 1 RE No. 13: Failed Market Approaches to Long-Term Care
front cover Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship

ETUI advertisement

The future of remote work

The 12 chapters collected in this volume provide a multidisciplinary perspective on the impact and the future trajectories of remote work, from the nexus between the location from where work is performed and how it is performed to how remote locations may affect the way work is managed and organised, as well as the applicability of existing legislation. Additional questions concern remote work’s environmental and social impact and the rapidly changing nature of the relationship between work and life.


AVAILABLE HERE

Eurofound advertisement

Eurofound Talks: does Europe have the skills it needs for a changing economy?

In this episode of the Eurofound Talks podcast, Mary McCaughey speaks with Eurofound’s research manager, Tina Weber, its senior research manager, Gijs van Houten, and Giovanni Russo, senior expert at CEDEFOP (The European Centre for the Development of Vocational Training), about Europe’s skills challenges and what can be done to help workers and businesses adapt to future skills demands.

Listen where you get your podcasts, or for free, by clicking on the link below


LISTEN HERE

Foundation for European Progressive Studies Advertisement

The summer issue of the Progressive Post magazine by FEPS is out!

The Special Coverage of this new edition is dedicated to the importance of biodiversity, not only as a good in itself but also for the very existence of humankind. We need a paradigm change in the mostly utilitarian relation humans have with nature.

In this issue, we also look at the hazards of unregulated artificial intelligence, explore the shortcomings of the EU's approach to migration and asylum management, and analyse the social downside of the EU's current ethnically-focused Roma policy.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

WSI European Collective Bargaining Report 2022 / 2023

With real wages falling by 4 per cent in 2022, workers in the European Union suffered an unprecedented loss in purchasing power. The reason for this was the rapid increase in consumer prices, behind which nominal wage growth fell significantly. Meanwhile, inflation is no longer driven by energy import prices, but by domestic factors. The increased profit margins of companies are a major reason for persistent inflation. In this difficult environment, trade unions are faced with the challenge of securing real wages—and companies have the responsibility of making their contribution to returning to the path of political stability by reducing excess profits.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube