Arguments Against Austerity Analysis
What are the arguments against and in favor of “austerity” in the policy debate? The word austerity in economic meaning describes policies and ways used by central government to reduce budget deficits while crisis, depression, recession or other economic turndowns occur in a country. Main effects: economic development projects, social security and other social programs are the first that are affected by cuts. Austerity is expressed primarily in cuts in salaries and social package of public sector employees, reducing pensions and other socially oriented programs in addition to a parallel increase in tax revenue as well as retirement age may be raised. Generally, austerity is always associated by critics as a drop in living standards and leads …show more content…
John Maynard Keynes became well known as an anti-austerity economist. He stated that “the boom, not the slump” is the appropriate time for austerity at the Treasury. The modern adherents of John Maynard Keynes (Keynesian economists) argue that budget deficits are appropriate when the economy is in a recession to reduce unemployment and help to stimulate the growth of GDP. Economist Paul Krugman said that a government is not like a household, de-escalations in government spending during economic downswing will aggravate the crisis. Across an economy, one person's expenditure is another person's earnings.If everyone is attempting to reduce their expenditures, the economy can be caught in what economists call the paradox of thrift, worsening the crisis as GDP …show more content…
Without any hesitation austerity does cause economic activity to slow or contract in the short-run. Actually it might worsen the fiscal situation since a drop in GDP increases the debt-to-GDP ratio, everything else equal. Moreover, the drop in activity can counteract the effects of fiscal consolidation by increasing mandated social spending and causing a decline in tax collections. While these effects are certainly a concern, they miss the crucial long-run benefits of austerity through maintaining intertemporal budget balance, which could outweigh the short-run costs. The effects of austerity may create tradeoffs between the short and long runs, and how individual households value such tradeoff is important to determining whether or not austerity is
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