Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 7 December 2015

Defining austerity

In my recent talk in Dublin, I defined fiscal austerity in a way that is not generally applied, but which I think makes sense. The most common usage is simply an attempt to reduce the budget deficit by cutting spending or raising taxes. The problem with that, as I remember Nick Rowe complaining, is that it becomes identical to the term fiscal consolidation. We could say that austerity is just lots of fiscal consolidation, but that seems weak.

Common usage tends to assume that austerity does some harm: not just to the individuals affected by any cuts or tax increases but for the economy as a whole. Indeed if you look at what google says when you ask for a definition, we get:
difficult economic conditions created by government measures to reduce public expenditure”

That is different from fiscal consolidation, because consolidation in itself need not lead to ‘difficult economic conditions’. If fiscal consolidation is offset by monetary expansion, there is no reason for the economy as a whole to experience any difficulties.

What I suggest is making this definition a little more precise. I want to define austerity as
“fiscal consolidation that leads to a significant increase in involuntary unemployment, or perhaps more formally but less colloquially as leading to a noticeably more negative output gap.”

If you think this is what most economists mean in practice, I would agree. But they do not always define it this way, even when they should know better. In addition, under my definition the term ‘expansionary austerity’ would make no logical sense, but the term is widely used. Last and probably least, Wikipedia define it as fiscal consolidation rather than the way I suggest.

The advantage of my definition is that I am able to make two clear statements. First, for the global economy or for an economy with its own central bank and floating exchange rate, austerity is generally completely unnecessary, because fiscal consolidation can be delayed until a time when monetary policy is capable of offsetting it. This means that austerity could have been completely avoided over the last five years in the UK, US and the Euro area as a whole. Second, for a member of a monetary union which requires more fiscal consolidation than union members on average, austerity will follow fiscal consolidation, but only to the extent that it enables the internal devaluation necessary to bring about the real depreciation required to offset that consolidation. Austerity will only be limited in this way if the union’s central bank follows appropriate policies. It seems highly likely that excessive austerity occurred in the Eurozone periphery because the ECB delayed introducing these appropriate policies.

To see me give chapter and verse justifying these statements, you will have to wait until I write up the paper!

33 comments:

  1. Suppose that the government really believed that cutting spending in 2010-12 wouldn't have had an effect on output, as they believed unconventional monetary policy was perfectly effective. By your definition, at the outset they would have believed that they were doing fiscal consolidation, but ex post (might) have realised it was austerity. This is confusing, to say the least, for the public (which is presumably why you want to settle on a definition, as economists have more precise terms than "austerity" in papers).

    This confusion is why any definition of austerity (or indeed any policy) should focus on the actions (e.g. cutting spending, or reducing the cyclically adjusted primary deficit) not the consequences of those actions - which are uncertain, given our limited understanding of macroeconomics.

    The distinction of actions and consequences is important. Remember the Alesina/Ardagna "expansionary austerity" idea? That was challenged by the IMF and others, but on the grounds that it didn't hold in the data, not because it doesn't hold by definition. If instead people had said - "austerity is defined as contractionary" that would have confused the public discussion considerably and perhaps given this theory cover from being interrogated by careful empirical work.

    I am reminded a bit of the Austrian economists who define a rise in the Money Supply as inflation, even if there is no effect on prices. It makes arguing with an "Austrian" that QE hasn't caused hyperinflation pointless/frustrating, as they go: "but the money supply has risen, so by definition inflation has". Krugman has written on this, and it doesn't help the state of public economics discourse one bit.

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    1. Actually it is economists usage that I'm talking about, as my links make clear. I do not see any problem with having austerity as a state of affairs, while fiscal consolidation is an action. So fiscal consolidation either does or does not lead to austerity.

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  2. I see one problem with this definition, which is that many people don't believe fiscal consolidation is contractionary. Here, you define it as such, which in many policy debates would mean getting entangled in circular reasoning.

    Would it work to simply define it as "fiscal consolidation at the zero lower bound"?

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    1. Where do I define fiscal consolidation as contractionary? My whole point is that it may or may not be.

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    2. .. but you are suspected of calling every fiscal consolidation austere, circular reasoning once again.

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    3. I'm only suspected of this by those who ignore what I write

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    4. Sorry, I should have been clearer. I messed up the wording.

      I read your definition as implying that *austerity* is contractionary fiscal consolidation. There's a huge debate over whether fiscal consolidation at the zero lower bound is contractionary or not, so to me it seems potentially confusing to define austerity as contractionary fiscal consolidation.

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    5. I think you are getting confused. Think of fiscal consolidation as an action and austerity as a state. Logically fiscal consolidation may or may not lead to austerity. So those who do not think fiscal consolidation is not contractionary at the ZLB would say that fiscal contraction at the ZLB does not lead to austerity. What is confusing about that?

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  3. SWL says, "First, for the global economy or for an economy with its own central bank and floating exchange rate, austerity is generally completely unnecessary."

    Agreed, but can I suggest the central bank is not the primary agent in austerity, it is the Treasury. Only the Treasury can increase or reduce the "net financial assets" in a sovereign floating fiat currency economy. That is, operate fiscal consolidation or fiscal contraction / expansion.

    The central bank can SWAP Treasury "debt" instruments, back into the original government spending; (that is, the Treasury creation out of thin air of "units of account" called "reserves"), that bought that "debt" in the first instance. When this is done in more than the usual daily amounts, we call it QE or liquidity re-injection.

    The central bank can LEND, like any other commercial bank, against an asset used as collateral. In this mode, like commercial banks, the assets balance out the liabilities to zero, with no net increase in "financial assets". Reserves are not a prerequisite of any bank lending. Commercial banks are capital constrained not reserve constrained; the central bank is unconstrained.

    BTW. As far as I remember, the Bank of Canada does not operate a “reserves” system as such. It monetises government bonds in a primary debt market. The BoE and the FED are restricted to secondary market purchases. This makes QE difficult to operate in Canada; but, it wants to change to the BoE system. The Eurosystem nineteen Treasuries, spend bonds and are forced to monetise this debt in secondary markets, to get some Euro to pay the milkman etc.

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    1. Simon, we just came up with this one ;-)
      Austerity (definition).

      An outdated neo-liberal ideological concept, that does not accept the fundamental difference between a currency ISSUER and a currency USER in a fiat currency economy. An ideology that perpetuates the myth that a currency issuing government, has the same spending constraints as a private sector household or firm; when no such restriction exists.

      The myth requires the proletariat to believe that the government has to “tax and/or borrow” money before it can spend. Hence, the government issues debt instruments to match its “budget deficit” to reinforce the “debt” myth in the minds of the proletariat, when there is no operational requirement to do so.

      Such a concept allows the application of “domestic (internal) devaluation” of household wages and public welfare goods and services; with a gradual shift of national income from 99% of such households to corporate profits and the 1% elite class and their tethered politicians, regardless of productivity increases.

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  4. It would, I think, be nice to have a modicum of consistency amongst those polemicists who use the term. See for excellent criticism of the hopelessly inconsistent use

    http://www.progressonline.org.uk/2015/09/24/labours-austerity-bind/

    The word does of course have an actual meaning. To live austerely is to live with no comforts or luxuries. To speak of the 1940s as an 'age of austerity' makes sense. Domestic consumption was deliberately suppressed (partly to improve the balance of payments position) through rationing and other means.

    The more modern usage makes no sense, which is why you are having to produce a definition by fiat that bears little to no relation to the meaning in English.

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    1. So when I look it up in google or online dictionaries, which give something like the meaning I suggest, that is not proper English?!

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    2. You are, of course, free to use any idiosyncratic definition you like. My understanding however is that the word started to be used in an economic context in the 40s to refer to measures to reduce consumption. First to help the UK war effort, and then to improve the balance of payments post war. Rationing was its most obvious form.

      That is what the OED says as well.

      In the actual period of 1940s 'austerity' it certainly did not mean "fiscal consolidation that leads to a significant increase in involuntary unemployment" as that was the opposite of government policy from 1940 onwards.

      I do know it is nowadays loosely used as a term of abuse for "policies that do harm" (see above). Used like that it is about as useful as the term 'neo-liberal' (save for what it tells us about the speaker).

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    3. @SH. That's nonsense. The 1940s was obviously not an age of austerity because they had houses and shops.

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    4. @SH Idiosyncratic?

      Cambridge online: a ​difficult ​economic ​situation ​caused by a ​government ​reducing the ​amount of ​money it ​spends.
      Collins: reduced availability of luxuries and consumer goods, esp when brought about by government policy

      Sometimes I really wonder why you bother to do this.

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    5. "Collins: reduced availability of luxuries and consumer goods, esp when brought about by government policy"

      You think that is the same as your definition?

      I think it is completely accurate, and fits with the what I said above.

      The Collins definition is what the OED says too.

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    6. Its not the same, but the point is its a state brought about by government action. Fiscal consolidation is an action. Unless you want austerity to just mean the same action (when most people have in mind a state), you need something like my definition. I do not see why you have a problem with that.

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    7. Hugo: "I do know it is nowadays loosely used as a term of abuse for "policies that do harm" (see above)."

      No it isn't. As the Progress article says, when most non-economists say austerity they basically mean "ideologically driven spending cuts". People are quite consistent about it. Even people who disagree with the bombing of Syria obviously wouldn't call it "austerity".

      I don't understand the purpose of your references to the 1940s. It was used differently then to how it is used now. So what?

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  5. The term has a strong connotation of straitened consumption, as in the 'Age' of post-War austerity. The Conservatives relied heavily on the mythology of a national emergency and the need for (ahem) everyone to tighten their belts. To this end they traded on the public awareness of hard times which arose from the recession (and this meant that not only was restoring growth not a priority but in fact prolonging the recession was actively useful to them).

    A technical definition of austerity in terms of macroeconomics may not be able to capture this important propaganda aspect of the term. The famous Keynes 'boom/slump' quote refers specifically to austerity *at the Treasury*.

    As with any heavily politicised term, it tends to be used with shifting meanings and connotations. Such terms are a very useful way to disguise specious arguments.

    A useful illustrative example of such a term might be 'conspiracy theory', in which what me might call the 'stereotypic' and 'definitional' meanings come apart. The former is fixed by classic examples of 'paranoid' confabulation* involving a heady mix of anti-semitism, aliens, witch-hunts, giant lizards etc. etc. But the literal, 'definitional' meaning is just (roughly) 'a factual hypothesis or claim which posits hidden collusion in wrongdoing' - and thus the term can be applied to even rather humdrum or obviously true claims (such as, memorably, Iraq/WMD).

    This kind of bifircation in meaning enables dogwhistling, smuggled presuppositions, and all manner of propagandistic high-jinks. How this kind of analysis applies to the term 'austerity', I'm not yet quite sure, but it seems worth bearing in mind since vocabulary in this area is almost certain to be politicised, whether by design, subconscious bias or something in between.

    *This is itself a much more complex area than one might suppose: I could, but will not, go on at length about Hofstadter, Popper et al.

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    1. Further to para 1 above, the FT has just published an article by Rupert Harrison, Osborne's chief of staff from 2006 until June this year:

      "...Before 2008 the UK’s fiscal rules — intended to guarantee that the government would spend prudently, failed to prevent a deficit so big that it put economic stability at risk. The result has been the biggest fiscal consolidation of any leading economy and a series of reforms aimed at preventing a recurrence...

      "But the past month has shown how hard it will be to keep up this discipline. “The end of austerity” is an overstatement, but even Mr Osborne agrees there is light at the end of the tunnel. After five years of painful restraint, and with a budget deficit that no longer poses an immediate threat to economic stability, it is harder to maintain support for difficult decisions...

      "The test now is whether we can create a lasting cross-party consensus for balanced budgets and debt reduction...

      "One side effect of the crisis was to create political space for structural reforms. Whitehall, universities, planning, schools, welfare, pensions and local government have all undergone radical change unthinkable before the crisis. More is on the way, notably in infrastructure and city governance — but here too it will be hard to keep up the pace of reform in better times..."

      http://next.ft.com/content/03a7a5b6-9e8c-11e5-8ce1-f6219b685d74

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  6. Given that there has been extensive building on flood plains, flooding will occur unless huge expenditures are devoted to protection. Does this make any kind of sense?

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  7. To the public austerity just means cutting spending with out cutting taxes to compensate. In economics speak - fiscal consolidation that focuses on cuts. That's perhaps just because that's the way it's been done this time round, so perhaps simply any fiscal consolidation, but I suspect if it had been tax rises instead of cuts it would've been called something else.

    Defining it as you suggest might be useful for debate among economists and other policy folks, but I don't think it'll do anything but add confusion to public debate. Better, for the public to understand at least, to just argue about whether austerity (fiscal consolidation) is a good idea just now.

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  8. As an American, I first heard of austerity in general terms regarding the UK and Europe in the 1950s after the war, where people and government had to cut back because of the costs of the war and rebuilding. (Although that's a bit at odds with the coming of national health care, but I guess people were on rations.)

    I think of it in terms of cutting the budget when there is an output gap; inflation is under target; and monetary policy is loose and not "normal."

    One shouldn't reduce the deficit, I believe, unless the economy as at full employment with rising wages. Otherwise, it's a waste.

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  9. I see the term 'fiscal consolidation' being used to mean the reduction in debt / GDP, however achieved. Austerity surely means simply 'a tightening in the fiscal stance', meaning an ex ante lower _propensity_ to run a budget deficit.

    This has the advantage of being silent on what the ex post impact of austerity on the budget deficit will be (since it depends on the non-govt sector's propensity to run a surplus). With this definition it's clear that austerity won't necessarily achieve fiscal consolidation.

    What's wrong with this?

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    1. The common usage of fiscal consolidation is some combination of spending cuts or tax increases. Few people would talk about economic growth that raised Y faster than D as fiscal consolidation. To the extent that people do distinguish between austerity and fiscal consolidation, it is to link it to a state, akin to post war austerity. So my definition seems straightforward.

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    2. Fiscal consolidation was a nonsense phrase originated by the IMF / OECD. It was designed to camouflage internal devaluation, known as structural reform, which was/is in reality, wage reduction.

      Consolidation was a word they borrowed from the Accountants, to give some gravitas to the scam. Westminster types were vaguely familiar with "Consolidated Group Accounts" for large corporates and multinationals.

      There was loads of NK cods-wallop macroeconomic papers around at the time. The following was one of my favourites, published just before the GFC and currently being enacted by the UK government. Along with the enactment of the Canadian model of swapping government debt for household debt, to get a Osborne budget surplus by 2018/19. (Mark Carney at the BoE ... geddit).

      http://www.imf.org/external/pubs/ft/wp/2006/wp0689.pdf

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  10. Maybe you should first clarify what kind of definition you are seeking:
    http://plato.stanford.edu/entries/definitions/

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  11. 'Austerity' seems to mean increasing indebtedness less quickly than previously.

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  12. Isn't 'austerity' generally taken to mean simply cuts in government spending? and won't this definition suffice, since 'fiscal consolidation' can then refer to any effort on the part of the government to reduce its deficit, or to run a surplus? Ideally, this will only need to be done at times when increased tax receipts mean that it can be done without cuts in government spending. There may on occasion be times when spending cuts are also required. In those cases we can still call it austerity but grant that the austerity is required. The removal of public services, I think, will generally be experienced as a privation by some, and so deserves the name austerity, even when there are good economic justifications for it.

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  13. I first came to this blog after reading your article on the lrb.co.uk website called "The Austerity Con". My concern with this post and the comments that follow it is that you're concentrating too much on the 'austerity' side of things and not enough on the 'con' part. The key question of course is 'who is really being conned?'

    Lacanian psychoanalysts have coined a term called 'the big Other'. This is a fictional person whose opinions, though obviously non-existent, are always more important than any actual person's opinions. For example, in an 'elephant in the room' situation, everyone in the room knows about the elephant and they also know that everyone else knows about it too, but they are all acting as if they don't know about it. The act they are all putting on is a performance that is designed to fool the big Other, rather than each other. The upshot is that this fairly non-sensical act is then able to have an actual effect on people's decisions and actions.

    So in the austerity con, we find ourselves in such a similarly absurd situation: we all know that Osbourne's policies are a con, we also know that everyone else knows that they are a con, but we keep acting as if the big Other (in the form of the collective population) doesn't know about the con, and this allows Osbourne to keep acting too, and hence the act ends up having a huge effect on policy and on people's lives.

    Obviously there will be people who will claim that no such con is taking place, but these people are just going along with the performance since they have something (either financial or emotionally masochistic) to gain from the situation.

    The problem with the discussion on definitions that is currently going on in this comment section is that most of you are still behaving as if the big Other exists, and that its opinion of what is the absolutely definitive definition of the word 'austerity' also exists, when clear it doesn't and it can't.

    Freud knew very well that definitions and usages of words change over time, and some words can effectively end up becoming to mean the opposite of themselves (e.g. 'heimlich/unheimlich' and 'canny/uncanny').

    It seems to me that 'austerity' is a word whose meaning has changed slightly with time and usage, but the meaning of 'con' has remained much more static, and so you'll probably have a lot more success by focussing on the definition of the latter than the former.

    (Apologies if this comment comes across as a bit snobby and pretentious - no conscious offense is intended.)

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  14. Is there not a fundamental problem with defining a state of affairs in terms of its consequences or causes, because wrapping up the two in one definition proscribes discussion about how the two are connected and rules out the possibility that they may not be? My favourite candidate for this critique is Attention Deficit Hyperactivity Disorder, a syndrome brought about through a deficit of attention in early years thus wrapping in an implied behaviour judgement with a retrospective judgement about parenting into the diagnosis.

    Wikipedia is social media it is only as good as the people who contribute i.e. all of us. Despite its manifest shortcomings, I never cease to be shocked by the very high quality of some of the articles donated freely. One of the big weaknesses is that it has lost momentum. Many of the articles are very old and far too many people are using them as sources without revising them. Some obvious errors are uncorrected though many years old. Editing a couple of sentences in Wikipedia should be sufficient to steer the world towards you view.

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  15. I hate austerity but I hate toxic loans as well. How can I get out of this no man's land, Simon?

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  16. Your definition is logical and an improvement on current usage. However, there is a problem with defining austerity in terms of its effects. Proponents of fiscal consolidation could claim that it is not austerity because the results will not be deleterious. Better, I think, to define austerity in terms of when it is undertaken. Austerity is not eating supper when you are hungry. Perhaps economic austerity is better defined as pro-cyclical fiscal consolidation, or the like.

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