The Cambridge Journal of Economics special issue for January 2012 covers austerity. One should really at least read the full lead story, "
Making the same mistake again—or is this time different?", by Lawrence King, Michael Kitson, Sue Konzelmann, and Frank Wilkinson. A few highlights thereof follow.
"Since the comparative and historical economic evidence strongly supports the Keynesianism over the Treasury view, austerity is not easily interpreted as a rational response to deficits. It is far more explicable as a class project that seeks to roll back the welfare state."
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"In reality, the historical record provides very little evidence that austerity measures will be effective, particularly in a context of recession. Whilst austerity proponents have argued that the 1920–21 depression in the USA provides confirmation of the positive impact of deflationary policies, Kuehn (2012, this issue) argues that using 1920–21 to justify austerity during a Keynesian downturn is inappropriate because that depression was preceded—and no doubt caused—by austerity. With reference to the current downturn, Pollin (2012, this issue) demonstrates how neoliberal claims—that the 2009 economic stimulus programme in the USA led to rising interest rates and inflation as well as an excessive government debt burden—are unsupported by the facts. Federal government interest payments are, in fact, at near historic lows, and the reason why the stimulus programme did not lead immediately to a strong recovery was because of the severity of the financial crisis and resulting recession, which led to the collapse of household wealth and the seizing up of credit markets for smaller businesses. Further, Taylor et al. (2012, this issue) show that over the last 50 years in the USA, fiscal expansion has repeatedly resulted in higher economic growth, especially during recessions."
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"Reducing public expenditures during a recession, in contrast, can be expected to increase the national debt as increasing unemployment and falling incomes lower tax revenues and increase social welfare payments."
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"In the debate about austerity it is important to note that the currently rising fiscal deficits are not a result of increasing entitlement programmes. Rather, they are a consequence of the combined effect of (i) rescue packages to bail out failing financial institutions; (ii) temporary emergency stimulus packages; (iii) global recession (resulting in reduced tax revenues and increased public sector expenditures on automatic stabilisers); and (iv) risk premia on the sovereign debt of weaker countries."
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"In short, the global economy is stuck in a recession-focussed vicious cycle, which can only be made worse by austerity."
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"Despite millions remaining jobless and poverty rates rising, governments around the world have claimed that there is no alternative but to impose austerity and cut budget deficits in response to a burgeoning ‘sovereign debt crisis’. ... But austerity is not the only alternative. The world faces deeply structural problems, and the key to recovery lies in encouraging economic growth and moving beyond a single-minded focus on fiscal discipline."
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"The current financial crisis is the culmination of the progressive freeing-up of the banking sector following the switch from Keynesianism to neoliberalism during the 1970s."
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