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Deficit reduction, the age of austerity, and the paradox of insolvency

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  • Yiannis Kitromilides
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    Abstract

    The European debt crisis in 2010 resulted in the adoption of fiscal austerity measures in many European economies, and produced demands for the adoption of similar policies in the United States. This paper examines whether the implementation of immediate fiscal austerity during a fragile economic recovery is justified and whether it is the best means of achieving deficit reduction. The paper points out that although the austerity strategy can lead to deficit reduction and prevent insolvency in the case of an indebted individual, this may not necessarily be the outcome in the case of national indebtedness. The problem is accentuated when austerity measures are replicated in many interdependent economies. The paradox is in general valid when it is assumed that fiscal policy is effective and that fiscal multipliers are positive, assumptions that the New Consensus Macroeconomics theoretical framework that underpins the austerity strategy, inappropriately, rejects. The overall conclusion is that "synchronized" fiscal austerity cannot solve the problem of ballooning public debts that need to be tackled in conjunction with attempts to reform the international banking and financial system.

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    Bibliographic Info

    Article provided by M.E. Sharpe, Inc. in its journal Journal of Post Keynesian Economics.

    Volume (Year): 33 (2011)
    Issue (Month): 3 (April)
    Pages: 517-536

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    Handle: RePEc:mes:postke:v:33:y:2011:i:3:p:517-536

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    Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=109348

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    Keywords: austerity; deficit reduction; fiscal policy; insolvency; public debt;

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    Cited by:
    1. Jesús Ferreiro & Carmen Gómez & Felipe Serrano, 2013. "Mistakes in the Fiscal Policy in Spain before the Crisis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(5), pages 577-592, September.

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