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Defining austerity redux

This is a rather dull post about definitions

In a previous pieceI talked about how there is no clear definition of what we mean by austerity, and how different people mean different things. In the context of my ‘General Theory’ paper, I attempted a definition which made precise one strand of common usage. However, if you look at the comments to that post, others were not convinced.

Some recent exchanges on twitter have convinced me that we still need a clear definition, but that my own earlier attempt could be improved. In that earlier post I argued that equating austerity with one type fiscal consolidation - public spending cuts - was inadequate for two reasons. First, why not use ‘public spending cuts'! But second and more important, it would equate such consolidation taken at the height of a boom that did no damage to the economy with cuts in the depth of a recession.

The definition (call it Def A) I suggested was
“fiscal consolidation that leads to a significant increase in involuntary unemployment, or pwerhaps more formally but less colloquially as leading to a noticeably more negative output gap”.
If people wanted to restrict the definition to spending cuts, simply replace ‘fiscal consolidation’ with ‘cuts to government spending’.

One minor change I would now want to make is to remove the reference to involuntary unemployment. For a start unemployment may lag output, and conceivably unemployment could be avoided by workers pricing themselves into jobs, but this does not negate the fact that fiscal consolidation has reduced output and wasted aggregate resources.

However rephrasing the definition (Def B) to
“Fiscal consolidation/cuts to public spending that leads to a significantly more negative output gap”
still involves the problem that the output gap is poorly measured. For example, some think the UK output gap is currently zero, but I would want to apply the term austerity to the current fiscal consolidation. Replacing ‘negative output gap’ by ‘economic downturn’ does not help, and saying ‘in a recession’ actually makes it very restrictive given the formal definition of a recession. Another possibility would be to simply say (Def C) that austerity was
“Fiscal consolidation/cuts to public spending that leads to a significant fall in output”
The trouble with this is it allows austerity to be in some cases entirely appropriate: for example if spending was too high in a boom. Indeed that is the obvious problem with simply denoting austerity as cuts in public spending. There should I think be some connection with the other meaning of austerity i.e. hard times. Reducing spending in a boom is hardly that.

Let me go back to why I had a problem with definition B i.e. why would I want to apply the term austerity to current cuts in spending. The answer is that interest rates are at their lower bound. That suggests an alternative definition (Def D):
“fiscal consolidation/spending cuts that have a negative impact on aggregate demand which monetary policy is unable to offset.”
I prefer definition D to B because it gets to the heart of why austerity is a problem. The key idea is not that fiscal consolidation in some form is always bad or inappropriate, but that it should not take place when monetary policy is unable to offset its impact on output.

One of the criticisms of my original definition B, which also applies to D, is that it rules out the possibility of ‘expansionary austerity’. Instead we would have to call it expansionary fiscal consolidation. Once again, if we want this meaning of austerity to have some connection to hard times, then expansionary austerity seems a misnomer anyway.

I did warn you it was dull, but I really would be interested in comments on all this. Perhaps I should end on one reason why I think it is important. Suppose I asked what part of Labour's 2017 manifesto was anti-austerity? I think many would say the proposed increases in current government spending, but if you take the manifesto at its word that is not anti-austerity, because the spending increases are tax financed. What is anti-austerity, if you accept my definition, are the increases in public investment and the fiscal credibility rule.




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