Wordconomic #1: AUSTERITY

source: Wikipedia

In economics, austerity is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to try to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt. “Austerity” was named the word of the year by Merriam-Webster in 2010. Critics argue that, in periods of high unemployment, austerity policies are counter-productive, because deficit cutting reduces GDP (which typically means less tax revenue to pay off the debt); and that short-term stimulus is necessary to deal with deficits in the long-term.

The Expansionary fiscal contraction (EFC) hypothesis predicts that, under certain limited circumstances, a major reduction in government spending that changes future expectations about taxes and government spending will expand private consumption, resulting in overall economic expansion.

Austerity measures are typically taken if there is a threat that a government cannot honor its debt liabilities. Such a situation may arise if a government has borrowed in foreign currencies that they have no right to issue or they have been legally forbidden from issuing their own currency. In such a situation, banks may lose trust in a government’s ability and/or willingness to pay and either refuse to roll over existing debts or demand extremely high interest rates. In such situations, inter-governmental institutions such as the International Monetary Fund (IMF) may demand austerity measures in exchange for functioning as a lender of last resort. When the IMF requires such a policy, the terms are known as ‘IMF conditionalities‘. Reasons for undertaking austerity measures

Typical effects

Development projects, welfare, and other social spending are common programs that are targeted for cuts: Taxes, port and airport fees, train and bus fares are common sources of increased user fees.

In many cases, austerity measures have been associated with protest movements claiming significant decline in standard of living. A case in point is the nation of Greece. The financial crisis—particularly the austerity package put forth by the EU and the IMF— was met with great anger by the Greek public, leading to riots and social unrest. On 27 June 2011, trade union organizations commenced a forty-eight hour labor strike in advance of a parliamentary vote on the austerity package, the first such strike since 1974. Massive demonstrations were organized throughout Greece, intended to pressure parliament members into voting against the package. The second set of austerity measures was approved on 29 June 2011, with 155 out of 300 members of parliament voting in favor. However, one United Nations official warned that the second package of austerity measures in Greece could pose a violation of human rights.

Controversy

Main article: Anti-austerity protests

Austerity programs can be controversial. In the Overseas Development Institute briefing paper “The IMF and the Third World” the ODI addresses five major complaints against the IMF’s austerity ‘conditionalities’. These complaints include these measures being “anti-developmental”, “self-defeating”, and “they tend to have an adverse impact on the poorest segments of the population”. In many situations, austerity programs are implemented by countries that were previously under dictatorial regimes, leading to criticism that the citizens are forced to repay the debts of their oppressors.

Economist Richard D. Wolff has stated that instead of cutting government programs and raising taxes, austerity should be attained by collecting (taxes) from non-profit multinational corporations, churches, and private tax-exempt institutions such as universities, which currently pay no taxes at all.

In 2009, 2010, and 2011, workers and students in Greece and other European countries demonstrated against cuts to pensions, public services and education spending as a result of government austerity measures.^[11][12] Following the announcement of plans to introduce austerity measures in Greece, massive demonstrations were witnessed throughout the country, aimed at pressing parliamentarians to vote against the austerity package. In Athens alone 19 arrests were made while 46 civilians and 38 policemen had been injured by June 29, 2011. The third round austerity has been approved by the Greece parliament on February 12, 2012 and has met strong opposition especially in the cities of Athens and Thessaloniki where the police have clashed with demonstrators.

Opponents argue that austerity measures tend to depress economic growth, which ultimately causes governments to lose more money in tax revenues. In countries with already anemic economic growth, austerity can engender deflation which inflates existing debt. This can also cause the country to fall into a liquidity trap, causing credit markets to freeze up and unemployment to increase. Opponents point to cases in Ireland and Spain in which austerity measures instituted in response to financial crises in 2009 proved ineffective in combating public debt, and placing those countries at risk of defaulting in late 2010.

The “Age of Austerity”

The term “Age of austerity” was popularized by British Conservative leader David Cameron in his keynote speech to the Conservative party forum in Cheltenham on April 26, 2009, when he committed to put an end to what he called years of excessive government spending.

Word of the year

Merriam-Webster’s Dictionary named the word “austerity” as its “Word of the Year” for 2010 because of the number of web searches this word generated that year. According to the president and publisher of the dictionary, “austerity had more than 250,000 searches on the dictionary’s free online [website] tool” and the spike in searches “came with more coverage of the debt crisis”.