Deficit reduction, the age of austerity, and the paradox of insolvency
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 33 (2011)
Issue (Month): 3 (April)
|Contact details of provider:|| Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=109348|
When requesting a correction, please mention this item's handle: RePEc:mes:postke:v:33:y:2011:i:3:p:517-536. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Nguyen)
If references are entirely missing, you can add them using this form.