Oct 23, 2012

In Defense of Austerity as a Concept

Tyler Cowen posted this aside yesterday:
Now I am all for the UK trying ngdp targeting, or for that matter well-targeted fiscal policy, or both. I never favored their *tax increases*, often misleadingly labeled “austerity” for political reasons.
We then had a short Twitter conversation where I failed to convince him that even though he just doesn't like tax increases going into the austerity box, he should run with it anyway because ain't no way you're dislodging that one from the discourse.

But I chewed it over a bit more, and I really do not see where he's coming from. I would define austerity as "some combination of tax increases and spending cuts with the object of improving a government's balance sheet—meaning reducing debt or accumulating a surplus." And the reason everyone has been dumping on austerity for the last few years is that in a depressed economy (especially one in the Eurozone where the periphery has no control over monetary policy) reducing government spending reduces aggregate demand, worsening the depression, while increasing taxes takes money out of people's pockets, reducing aggregate demand and worsening the recession. Austerity seems like a good basin for these statements.

There are some more complicated explanations I've read but none more convincing than that kind of crude Keynesianism, and the latest evidence seems to support it quite strongly. Am I missing something?

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