Essays on the Great Recession and the Austerity (original) (raw)

Austerity in the Aftermath of the Great Recession

2017

Crosscountry differences in austerity, defined as government purchases below forecast, account for 75 percent of the observed cross-sectional variation in GDP in advanced economies during 2010-2014. Statistically, austerity is associated with lower GDP, lower inflation and higher net exports. A multi-country DSGE model calibrated to 29 advanced economies generates effects of austerity consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity was so contractionary that debt-to-GDP ratios in some countries increased as a result of endogenous reductions in GDP and tax revenue.

COMMENTARY Contradictions of austerity

The global economic and financial crisis has been marked by the following paradox. A much more severe depression than the global slump of 2008-09 was prevented by determined state intervention in the form of bank bailouts and fiscal stimuli. Yet this bout of apparently successful Keynesianism has been followed by a turn to fiscal austerity justified in terms reminiscent of the Treasury View against which Keynes relentlessly polemicised in the 1930s. This article explores the sources of this policy shift. Among the factors considered are the ideology of neoliberalism, the economic and political power of the banks, and the relative weight of finance in individual economies. The broader context of financialisation is also considered. The conclusion is reached that an oscillation between bouts of austerity and laxer policies encouraging the development of asset bubbles may be built into neoliberalism as an economic policy regime. The implication is that alternatives to austerity must embrace broad institutional transformation.

Austerity Versus Stimulus: An Introduction to the Special Issue

2014

The Great Recession or Global Financial Crisis of 20072008 began with the collapse of several major financial institutions in both Europe and the United States. This crisis had a major impact on the well-being of citizens around the world, including the U.S. and Europe, where unemployment soared, many thriving but marginal small businesses were shuttered, and homelessness skyrocketed as highly indebted families were unable to meet their mortgage obligations. Small investors lost heavily, and as savings and pension funds dramatically declined in value, the incomes of many older people fell. Throughout Europe and the U.S., new housing developments were frozen, public spending was severely cut with negative implications for health care and education, and credit became virtually unavailable after having been plentiful in the 1990s and early 2000s. In the U.S., approximately $700 billion was authorized by the Bush administration to prevent a collapse of more financial institutions after ...

Economic Recession and the Need for Austerity Measures

China-CEE Institute, 2023

The economic development of the Czech Republic is characterised by several major phenomena which partially contradict each other. The economy has fallen into recession, consumption is decreasing and the sentiments throughout society have recently deteriorated. At the same time, unemployment remains extremely low and enterprises lack a labour force. Despite long-term galloping inflation and a decline in living standards, the social situation is far from crisis and social cohesion continues to be high. However, the reverse side is the rapid rise of state debt which makes the fulfilment of this year's state budget hardly feasible and requires austerity measures.

The Economic Crisis from a Neoclassical

2015

Kingdom. In the United States, lower output and income is exclusively due to a large decline in labor input. In contrast, lower output and income in many other U.S. recessions, and in the 2007–2009 recession in these other countries, are due to signifi cant productivity declines and much smaller declines in labor input. Figure 1 shows quarterly per capita hours worked in the United States between 1956-Q1 and 2009-Q2, with shading indicating recessions according to the dates assigned by the National Bureau of Economic Research. The fi gure highlights the abnormally large labor decline in the 2007–2009 recession relative to earlier recession dates. The analysis presented here indicates that the 2007–2009 recession is not well-understood within current classes of economic models, including both standard real business cycle models and, perhaps surprisingly, also including models in which fi nancial distress reduces economic activity. Specifi cally, the 2007–2009 U.S. recession and its a...

Austerity or Fiscal Stimulus: On Modern Macro and Importance of Context Part 2

In what follows, I try to address the concerns raised by Jaydev and Mason in their extremely civilized and professional criticism (pun intended), "A Response to Waknis" in November 2, 2013 issue of the Economic and Political Weekly! You can find the text of their criticism towards the end of this note. Optimizing agents and the EU debt: Financial markets not being able to price the EU debt correctly prior to the crisis does not contradict the rational optimizing framework really. It only reflects the ambiguity that comes with a monetary union that is not a fiscal union. Hence, even though the default probability might not have been same across members, absence of a severe shock, investors may have perceived it as so. Despite the significantly different fiscal situations of member countries, convergence of inflation across the EU members might have supported such valuation. But a shock as severe as the US financial crisis can force investors to reevaluate their portfolio positions in order to minimize risk and that is what seems to have happened. Given that asset prices are conditional variables and that pricing being a discovery process, this response of investors actually seems reasonable and not so off the mark from the optimizing benchmark. Microfoundations: I am not arguing for only one kind of microfundaions. A rational optimizing agent is a useful benchmark in macroeconomic modeling but may not be appropriate for answering all the questions macroeconomists ask. Several alternative avenues of modeling expectations have been explored in the literature and sometimes confrontations with data have helped explain the disagreement between reality and the theoretical benchmark (See Sargent (1999)). Macroeconomists face special problems in terms of evaluating a policy as they only have model economies at their disposal. Then search has to be for policies that are robust to several different model environments. Hansen and Sargent (2008) develop an agenda along these lines. In short, there is substantial heterogeneity in macroeconomics and there are enough examples of how macroeconomists have pushed forward the research agenda to address basic methodological issues and limitations. Concentrating ones critique on certain frameworks that gain primacy and generalizing it to the whole field at best betrays ignorance or at worst belies an ideologically motivated critique! 1 This note is a response to the Jaydev and Mason's response to my critique of their article. Apparently, the Economic and Political Weekly does not think it is important enough to continue conversation. The point is that we should know why aggregate spending is falling short, if at all, in order to see what government policy might work. If the national income was just an identity, then it might have worked to spend and plug the hole. However, there are actual people taking economic decisions and hence the effect of a policy on structure of incentives in the economy matters. Otherwise why not argue for infinite government spending?